Brownlee delivers major electricity market shake-up

Wednesday 9th December 2009

Energy Minister Gerry Brownlee has adopted almost every major recommendation of the Electricity Technical Advisory Group, in a package of reforms for the electricity market that he describes as "putting the boot back on the consumer's foot".

Meridian Energy is the biggest loser in the electricity reforms announced today, ceding its two Tekapo hydro power stations to its North Island competitor, Genesis Energy, while being forced to pick up the diesel-fired Whirinaki power station, currently owned by the Crown and operated by Contact Energy.

The move will effectively end Meridian's claim that it generates electricity only from renewables resources, although Brownlee said he had no concerns about destroying value in the brand that Meridian has spent millions of dollars and many years building up.

"If it's as valuable as they claim, they should book it and pay a dividend against it," he said, referring to Meridian's recent lacklustre profit performance.

While Brownlee holds Meridian especially accountable for several winter power shortage scares since 2001, the larger purpose of the reforms is to stimulate more retail electricity competition in the North and South Islands by giving the state-owned power companies a greater mix of northern and southern assets.

Genesis and MightyRiverPower have no southern assets, with MRP only seeking southern customers in the last 12 to 18 months, and Genesis having none because of the potentially costly risk of having to supply customers in another island, away from either company's own power stations.

Under the shake-up announced today, Meridian, Genesis and MRP will also be required to make a "virtual asset swap" using a 15 year contract to ensure each company's ability to provide increased competition in the island where they currently have little to no generation capacity.

In a further change that electricity market players are likely to claim will raise power prices, Brownlee announced a new system to make it compulsory for every major electricity generator to offer 3000 Gigawatt hours of uncommitted electricity available on standardised, tradeable contracts into the future.

The system will include a compulsory "market maker" concept, which will require every player with more than 500 Megawatts of installed generation capacity - including privately owned Contact Energy and TrustPower - to participate. The Contact share price slipped 0.3% to $5.88 after the announcement, while TrustPower was unchanged at $7.30.

Similar mandatory hedging proposals from the ETAG, to try and force a more liquid and competitive wholesale electricity market, was widely opposed by electricity generators. They will now be under pressure to write their own rules for the new arrangement or have them imposed by the Minister.

In addition, electricity retailers will be required to compensate customers if they trigger an emergency savings campaign, such as occurred in the winters of 2001, 2003, and 2006, and was almost invoked in 2008.

The ETAG report recommended a weekly $10 per customer payment if an electricity savings campaign was ever required again - a move intended to sharpen electricity suppliers' focus on ensuring they have adequate supply arrangements in place ahead of any hydro shortages emerging.

Brownlee said he expected the reforms to moderate the galloping pace of electricity price rises, which rose by 72% in the last 10 years, against inflation over the same period of 28%. However, he did not expect prices to fall.

Electricity generators have warned previously that mandatory hedging requirements and penalties for invoking savings campaigns would lead to the electricity system being run more conservatively, creating extra price pressure as a result.

A further important move announced today is an instruction to the country's 39 monopoly electricity networks to standardise their tariffs and contracts, because their current complexity is stifling retail competition. Network companies will also have their current right to sell retail electricity widened.

The reforms will be introduced in an Electricity Industry Bill which will be tabled in Parliament tomorrow, for First Reading in Parliament next Tuesday. However, the Bill is not expected to be law until next September or October.

Brownlee also confirmed the abolition of the Electricity Commission, and its replacement by an Electricity Authority, with a Security and Reliability Council to monitor Transpower's performance and advise on security of supply.

The EC's responsibilities for energy efficiency will go to the Energy Efficiency and Conservation Authority, while the Commerce Commission will become the arbiter for Transpower's grid investment proposals.

The EC had "not been nimble and responsive enough to meet industry needs", said Brownlee. "The new Electricity Authority will have a clear mandate to get on with the job of ensuring the market runs efficiently."

Businesswire.co.nz

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