Meridian and Electricity Commission biggest losers

Wednesday 12th August 2009

Meridian Energy faces a fight to preserve its green branding following recommendations that it be made to own a North Island natural gas-fired power station.

Meridian and the Electricity Commission emerge as the biggest potential losers from the Ministerial Electricity Market Review, released this morning for five weeks' public consultation by the Minister of Energy, Gerry Brownlee.

While Brownlee says the Government would "need to be convinced" that it should split the Manapouri power station from Meridian and give it to North Island generator Genesis Energy in exchange for the jewel in Genesis's thermal generating crown, the e3p combined cycle gas turbine plant next door to the ageing Huntly power station.

The recommendation reflects a desire to increase competitive tensions in the electricity market, which are lacking because the SOE generators currently only generate in either the North Island (Genesis and MightyRiverPower) or the South Island (Meridian).

Meridian has built its corporate and retail brands on its "renewables-only" vision, despite requiring coverage for periods of low hydro storage from thermal power stations. Genesis may also not welcome the proposal, as it has been seeking to quit the Huntly power station if possible.

Such an outcome would create complex issues that could see mass switching by customers from one power provider to another, and would have impacts on Meridian's contract for continuous electricity supply to the Rio Tinto aluminium smelter at Bluff, which is largely backed by the Manapouri power station.

Rio Tinto could expect some advantages from more competitive behaviour between the North and South Island electricity suppliers, since part of the smelter contract is tied to wholesale market spot prices, the review panel suggests.

More radical SOE restructuring options, such as giving Huntly to Solid Energy or creating a new electricity SOE using North and South Island power stations, have already been rejected, Brownlee says.

The review proposes gutting the Electricity Commission, with its electricity market oversight powers shifting to a new Electricity Market Authority; its responsibilities for security of supply sitting with the national grid operator, Transpower; grid upgrade projects being audited by the Commerce Commission; and its energy efficiency activities shifting to the Energy Efficiency and Conservation Authority.

Also recommended is the abolition of the reserve energy scheme and the sale or vesting with an SOE of the Whirinaki emergency reserve plant, built by the Crown and operated by Contact Energy after the dry winter scare in 2003.

Instead, the review panel recommends a raft of measures that would put the acid on both power generators and major electricity users to manage their supply risks far more actively than in the past.

For a start, the panel says power generators should have to compensate customers at a rate of, say, $10 a week, if they force the Minister of Energy to trigger an emergency savings campaign.

"This idea creates a big incentive for generators to manage their resource and ensure conservations campaigns are a last resort," Brownlee said.

Secondly, the panel proposes a minimum wholesale electricity market spot price of $500 per Megawatt hour during emergencies, rising to between $1,000 and $1,500 per MWh if and when forced power cuts emerge.

Such moves would "remove the incentive for some market participants to push for public conservation campaigns which shift costs onto consumers and create a sense of crisis," said the report from the six-person review panel, chaired by economist Dr Brent Layton.

The panel also recommends the introduction of better real-time price information, a duty on SOE's to report generation risks publicly in the same way as public listed players Contact and TrustPower, and the urgent resolution of long-stalled efforts to create effective transmission hedging mechanisms, which many industry observers believe is fundamental to improved wholesale market arrangements.

Local monopoly lines companies would also be further encouraged to become competitive retailers. This could be achieved by lifting current restrictions that prevent them retailing more than they can generate from their own renewable energy projects.

However, lines companies also face substantial new work to standardise and simplify their tariffs and business rules, which currently create large, unseen barriers to regional competition by electricity retailers.

To encourage retail competition further, a $5 million contestable fund is advocated for upgrading and marketing information on switching between power companies.

Businesswire.co.nz

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