Electricity Commission will deliver supply security

Tuesday 20th May 2003

A new Electricity Commission will secure reserve generation to ensure New Zealand's electricity needs can be met even in very dry years without power savings campaigns.

Finance Minister Michael Cullen and Energy Minister Pete Hodgson today announced significant changes to the electricity sector designed to deliver long-term electricity supply security.

"Electricity supply security has become a serious concern to the Government, business and the wider community," said Dr Cullen. "For sustainable economic growth New Zealand needs a more reliable and fairly priced supply of electricity than the current electricity market arrangements have delivered.

"Our hydro dominated electricity system delivers cheap electricity but is vulnerable to very dry years. To improve supply security we will need more reserve generation to run in very dry years, but it has become clear that the current electricity market does not encourage generators to hold such reserve plant.

"A related concern is the extreme price volatility in the electricity spot market in dry years. This has had a significant impact on large industrial power consumers, causing production losses, putting jobs at risk and deterring investment."

The Government's solution begins with the establishment of a seven-member Electricity Commission to govern the electricity industry. Commissioners are due to be appointed within three months.

The Commission will be responsible for managing the electricity sector so that electricity demand can be met in a 1-in-60 dry year without the need for national power conservation campaigns.

It will do this by contracting with generators for the provision of dry year reserve generation capacity and fuel. These reserves will be withheld from the market until dry years, when they will be released into the market at a high price.

"This solution has been carefully designed to ensure that the wholesale electricity market will continue to deliver the price signals and opportunities it is designed to deliver," said Mr Hodgson.

"Withholding reserve generation from the market in normal years will allow the market to operate as usual. A high price on reserve generation in dry years will ensure that investment in other new generation to meet normal growth in electricity demand is not deterred. It will also significantly reduce spot market volatility in dry years, because prices above that of the reserve generation will be relatively rare."

The cost to electricity consumers of securing adequate reserve generation is estimated at well under half a cent per unit of electricity. The cost is low because reserve generation is expected to comprise new plant with relatively low capital costs, plus heavily depreciated old plant. The fuel, though costly, will be rarely used.

The Commission will have the power to recover the cost of reserve generation in the manner it judges to be most efficient, for example through a levy. The necessary portfolio of reserve generation is expected to be built up within about three years.

"This is the Government's preferred policy for electricity supply security and it will be open for comment for six weeks," Mr Hodgson said. "We expect to introduce legislation to implement these changes in August or September."

Other important changes included in the package are:

Ø The law will be amended to allow lines companies to own reserve generation without limit and ordinary generation up to 25 megawatts, or 10 percent of their load. Lines companies can already invest in new renewable generation without limit.
Ø To encourage the development of small generation projects connected to local lines, rather than the national grid, lines charges will be regulated to ensure such generators pay no more than is reasonable for connection.
Ø The Commission will be empowered to require generators to offer long-term electricity hedge contracts into the market, for a nominated proportion of their reliable capacity, if it decides this is necessary to safeguard against under-investment in ordinary generation. Related powers to require electricity retailers and major electricity users to hedge a set proportion of their consumption will also be provided for.
Ø The Commission will be responsible for improved modelling and forecasting of future electricity supply and demand. It will also have new powers to require disclosure of information from the industry that will improve the function of the wholesale market, including information on fossil fuel supplies and hedge contracts.
Ø The Commission will be responsible for establishing, as a high priority, a decision-making process and transmission pricing methodology that will enable necessary investment in the national grid to proceed.
Ø The Commission will be responsible for making demand side energy exchanges, which enable consumers to on-sell electricity they have contracted for but do not need, available nationwide. It will also be charged with improving the industry's ability to manage ripple control for water heating.

"It is important to note that the decisions announced today address specifically the provision of reserve generation for very dry years," Mr Hodgson said. "A lot of investment in new generation to meet normal growth in demand for electricity is being made now and is planned for the near future. Most of that generation will be based on renewable resources. The provision of reserve generation will not change that and New Zealand's electricity system will continue to make progress towards environmental sustainability."

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