American Bar Association - International Section Conference Washington DC April 13-16 2005 Changing Market Models in the Electricity Sector

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American Bar Association - International Section
ConferenceWashington DC April 13-16 2005
Changing Market Models in the Electricity
Sector A New Zealand Perspective

• Denis McNamara
• Partner, Simpson Grierson
• Director, Genesis Power Ltd

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Location of New Zealand
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New Zealand A System Overview
North Island
South Island

• An island nation located in the South Pacific
• Population of 4m (North Island 3m South Island
  1m) 30 of population live in Auckland
• Hydro based system (65) subject to significant
  dry-year risk
• A long and stringy transmission system
  transferring power from south to north
• Kyoto Protocol signatory

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NZ Sources of Generation
NZ Power Generators Genesis, MRP,
Contact Meridian, Todd Energy, TrustPower
Other (Geothermal Wind)
Hydro
Thermal
Mean Year Hydro 65
1999-2000 Hydro 60
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NZ Generation Power Energy Margin
Generation Margin Expected Inflow, Medium Demand
Growth Generation Margin 1/20 Dry Inflow, Medium
Demand Growth Generation Margin 1/20 Dry Inflow,
High Demand Growth
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Energy Reforms 1985 to 2001

• April 1987 ECNZ formed from NZED
• April 1988 Transpower est. as ECNZ subsidiary
• July 1994 Transpower est. as separate SOE
• Feb 1996 Contact Energy separated from ECNZ
• Oct 1996 NZEM commences trading
• March - May 1999 Contact Energy privatised
• April 1999 ECNZ divided into Genesis Power
  Mighty River Power and Meridian Energy
• April 1999 Ownership separation of lines
  companies and generation/retail activities
• April 1999 Full retail competition introduced
• June 2000 Report of Ministerial Inquiry into
  the Electricity Industry

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Energy Reforms 2001 Present Day

• Winter 2001 Severe price spikes in wholesale
  market due to dry-year
• January 2002 Electricity Complaints Commission
  established
• May 2003 Referendum on industry self-regulation
  fails
• Winter 2003 Severe price spikes in wholesale
  market due to dry-year
• August 2003 Electricity Commission established
• March 2004 Electricity Commission commences
  regulation of transmission, generation, and
  retail markets. Price regulation of lines
  companies remains with Commerce Commission
• Competition law regulation remains with Commerce
  Commission

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New Investment

• Generation
• e3p 385MW CCGT under construction (meets approx.
  3 years demand growth)
• Further CCGTs constrained by fuel situation
• Wind (approx. 250MW under construction and
  recently constructed) but likely only to occupy
  c.10 of the generation mix
• Planning consent for coal plants being pursued
  but Kyoto and fuel costs make them expensive
• Limited opportunity for large scale hydro
• Natural gas shortfalls a major issue LNG as a
  backstop

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New Investment Cont

• Transmission
• Major investment mooted
• No significant investment in grid for 40 years
• Significant NIMBY opposition

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New Zealand Spot Price 1999-2004
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Generation Market Share

• New Zealand Energy Required 35,000 GWH (1999
  2000)

• New Zealand Energy Required 38,000 GWH (2003
  2004)

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Competition in NZ retail electricity market

• Source M-Co

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Retail electricity customers
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Electricity Commission - Background

• Six Commissioners chaired by Roy Hemmingway (ex.
  Chair Public Utility Commission of Oregon)
• Staff of approx. 30
• Maintains contestable service provider contracts
  with System Operator (real time operation) and
  Market Operator (trading, pricing and settlement)
• Required to meet policy outcomes specified by
  Government
• Controls market rule change process but rule
  changes ultimately approved by Minister of Energy
  (to whom the Commission is accountable)
• Industry concerns about Commissions lack of
  independence from Government contrast Commerce
  Commission (competition law regulator) which is
  independent of Government direction
• Funded by levy on industry participants (c.60m
  p.a.)

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Electricity Commission Work Programme

• Transmission
• Approves Transpowers Grid Upgrade Proposals
• Sets grid reliability standards, pricing
  methodology and benchmark contractual
  arrangements
• Work in train but under tight timelines to
  deliver by end 2005
• Wholesale market
• Nodal pricing spot market continued but
  compulsory gross pool introduced
• No significant changes mooted at this time
• Retail market
• Concerned about degree of competition in retail
  markets and lack of hedge liquidity
• Problem attributed (incorrectly) to vertical
  integration
• In fact healthy levels of retail switching are
  occurring
• Expansion of retail bases is limited by available
  generation capacity

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Electricity Commission Work Programme Cont

• Hedge Markets
• Linked to retail market work
• Chief focus is determining whether the lack of
  liquidity is a problem
• Transmission hedges being considered
• Security of Supply
• Assesses whether further ring-fenced reserve
  generation capacity (i.e. non-market investment)
  should be centrally procured and funded by levy
• Commissions judgment is that sufficient capacity
  exists for 2005 and 2006
• Energy efficiency
• Key focus of Government in the light of capacity
  constraints and Kyoto