New Zealand electricity market

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The New Zealand electricity market is the market for wholesale trading of electricity in New Zealand. It is administered by the Electricity Commission. Market participants include state-owned enterprises, trust owned companies and public companies.

Contents 1 Overview 2 Current Design 3 History of reform 4 Current structure 4.1 Retail companies 4.2 Generation companies 5 See also 6 References 7 External links

[edit] Overview

Until 1987, New Zealand had a centrally run system of providers of generation, transmission, distribution, and retailing. Since then, a step-by-step process of industry reform has led to the separation of the monopoly elements from the contestable elements to create competitive markets in energy generation and electricity retailing, while imposing regulation on the natural monopolies of transmission and distribution.^[1] Currently the market is split into the following areas: administration and market clearing, regulation, generation, transmission, distribution, and retailing.

The wholesale market for electricity operates under the formal Electricity Rules and Regulations,^[2] and is overseen by the market regulator, the Electricity Commission. Trade takes place at each of 220 pricing nodes across New Zealand.^[3] Generators can make offers to supply electricity at grid injection points, while retailers and some major industrial users make bids to withdraw "offtake" electricity at grid exit points. The market uses a locational marginal pricing auction which takes generators’ offers and retailers’ bids, and computes final prices and quantities at each node. The auction is re-run every half hour.

The Commission contracts out the services required to run the electricity market. The Reconciliation Manager, who reconciles all metered quantities, Pricing Manager, who determines the final prices at each node, and Clearing and Settlement Manager, who pays generators for their generation at the market clearing price and invoices all retailers for their offtake, are all contracted to M-co, a private company. The grid operator is Transpower, a state-owned enterprise responsible for ensuring electricity supply security and quality. Transpower also takes on the roles of scheduler, predicting likely demand to help generators make bids, and dispatcher, in charge of matching demand and supply in real time.^[4]

Distribution of electricity from the grid exit points to the end consumers' premises is the responsibility of 28 distributors who have monopoly control of the lines services on their networks. Ownership of distributors, also known as lines companies, is through trust-owned companies and public companies. Some major industrial users are directly connected to the grid, such as New Zealand Steel and the Tiwai Point Aluminium Smelter.

As of October 2009, there are five major generators in New Zealand: Meridian, Genesis, Mighty River Power, Contact, and TrustPower. These five together produce about 95% of New Zealand’s electricity. The first three are state-owned enterprises; the others publicly traded companies. An important feature of the New Zealand market is that all the major generators also own retailing arms. The companies are thus commonly known as "gentailers". Retailers purchase electricity from the wholesale market, and on-sell it to consumers. There are currently twelve retailers: Bay of Plenty Electricity, Bosco Connect, Contact Energy, Energy Direct NZ, Genesis Energy, King Country Energy, Mercury Energy, Meridian Energy, Nova Energy, Powershop, Simply Energy, and TrustPower.^[5] Mercury Energy is owned by the generator Mighty River Power. Not all retailers supply to all locations, for instance Bosco Connect only supplies to Auckland inner-city apartments. Competition for retail customers varies across the country but since 1999, when full retail competition was introduced, customers have switched at a rate between 9% and 14% per annum.^[6].

[edit] Current Design

The New Zealand electricity market is an energy only market exchange with prices set through a process similar to a uniform price auction. Locational pricing is another key feature of the market design. It has the virtue of being relatively simple and transparent. All electricity is required to be traded through a central pool, with the exception of small generating stations of less than 10MW.^[7] Bilateral and other hedge arrangements are possible, but function as separate financial contracts. Trading develops by bids (purchaser/demand) and offers (generator/supply) for 48 half hour periods over 220 pricing nodes on the national grid.

Bids and offers start 36 hours before the actual real-time consumption or `trading period'. Up to 4 hours (pre-dispatch) before the `trading period' starts a new `forecast price' is calculated to guide participants in the market. From four hours to the start of the trading period every half hour a `dispatch price' is calculated and communicated. Two hours before the start of the `trading period' bids and offers can no longer be revised (with some exceptions) and the new prices reflect Transpower's adjustments in load forecasts and system availability.

During each half hour period Transpower publishes a new real-time price every five minutes, and a time-weighted 30-minute average price. The real-time prices are used by some large direct-connect consumers to adapt demand. The above prices are all guiding only as the `final prices' are calculated ex-post (normally noon the following day, unless there are irregularities or disputes) using the offer prices as established two hours before the `trading period' and volumes as established during the `trading period'. Differences between forecast, dispatch, real-time and final prices can be significant.

[edit] History of reform

Regulation of the electricity market started in a light-handed fashion but there has been an increasing trend towards more heavy-handed regulation. Light-handed regulation is based on the threat of regulation providing an incentive on companies with market power to exercise self-regulation. The normal regulatory legislation such as the Companies Act, Electricity Act, Resource Management Act 1991, the Commerce Act 1986, and the Fair Trading Act 1986 provide the framework for regulating normal commercial and environmental transactions.

The government has increased the extent of intervention through the Electricity Industry Reform Act 1998, which forced power companies to divest either their energy or their lines business, and the Electricity Amendment Act 2001. The latter led to another round of industry reform concentrating on achieving better governance of the electricity market and tighter control of monopoly functions. The "threat of regulation" was extended to the production of a set of regulations that would be brought into effect if the industry's self-regulation did not meet the Government's criteria.

On May 16, 2003 the result of a referendum by industry participants and customer representatives on a proposed set of self-regulating rules was announced:

Consumers voted 4.4% for the proposal

Traders voted 66.2% for the proposal (traders = generating companies and retailers)

Transporters voted 47.4% for the proposal (transporters = distributors and Transpower)

As there was not a substantial majority of all classes in favour of the proposal it was not implemented.

The result put paid to the prospect of a multilateral agreement on the governance and operational arrangements for the electricity market. The New Zealand government invoked the regulations already prepared to meet this contingency. The "threat of regulation" had been insufficient to stave off regulation.

On 2 July 2003 a draft set of Electricity Governance Regulations and Rules was issued on behalf of the Minister of Energy by the Electricity Commission Establishment Unit (ECEU). This set was for consultation purposes and after submissions were received and reviewed, a set of regulations and rules was recommended to the Governor-General.

In September 2003 a revised set of draft rules and regulations was issued by the ECEU for submissions by the end of October. The set did not include proposed transmission regulations, which were still being drafted. Also in September the Minister of Energy announced the chair and members of the Electricity Commission. Roy Hemmingway, whose most recent position was chairperson of the Oregon Public Utility Commission in the USA, took on the role as chairperson of the Commission.

The final set of Electricity Governance Regulations and Rules (excluding rules for transmission) became effective on 1 March 2004. The final chapter of the Electricity Governance Rules, on transmission, was gazetted on April 28 to become effective on 28 May 2004.

The major milestones in the reform process in New Zealand between 1993 and 2004 were:

• October 2004 - The Electricity Act was amended to increase the powers of the Electricity Commission.

• March 1st 2004 - The Electricity Commission took over control of the New Zealand electricity market from the self regulating bodies, the MARIA Governance Board (MGB) and the Rules Committee of the NZEM.

• September 2003 - As a result of submissions received, revised rules and regulations were issued for further consultation. A revised Government Policy Statement was issued for submissions and the Electricity Commission was appointed

• July 2003 - A draft set of regulations and rules was issued for consultation.

• May 2003 - The rules developed by EGEP fail to gain sufficient support in the referendum to avoid government regulation.

• April 2003 - An industry referendum on the outcomes of the Electricity Governance Establishment Project (EGEP).

• December 2000 - Government Policy Statement published.

• November 2000 - Electricity Governance Establishment Project set up as a result of the government's review of the report of the Ministerial Inquiry.

• June 2000 - The report of the Ministerial Inquiry is published
• February 2000 - The Ministerial Inquiry into the electricity industry begins

• May 1999 - Contact Energy shares listed for trading on the New Zealand and Australian Stock Exchanges from 11 May 1999^[8].

• April 1999
  • Electricity Corporation of New Zealand (ECNZ) disbanded, establishment of 3 separate competing spin-off generating companies ie Mighty River Power Limited, Genesis Power Limited and Meridian Energy Limited.
  • Low-cost system for customer switching established allowing every consumer to choose their electricity retailer.

• April 1998 - Government announced the Electricity Industry Reform Act^[9], which included:
  • Privatising Contact Energy
  • Splitting ECNZ into three competing state-owned enterprises
  • Instructions to all energy companies to split their retail and lines businesses and sell one or other within a set time period

• October 1996 - The reformed wholesale electricity market (NZEM) began trading

• April 1996 - Contact Energy commenced operations

• February 1996 - An interim wholesale market is put in place allowing ECNZ and Contact to begin competing.

• June 1995 - After an exhaustive policy debate, the Government announced significant reform of the electricity industry including a framework for buying and selling electricity through a wholesale pool

• July 1994 - NZEM commences trading as a secondary market for ECNZ hedges. An independent market surveillance committee was formed.

• April 1994 - Transpower separated from ECNZ and established as a stand-alone state - owned enterprise.

• April 1993
  • Electricity Market Company (now M-co) established as a joint venture by New Zealand electricity industry players to act as a focal point for the design of a wholesale electricity market.
  • The Metering and Reconciliation Information Agreement (MARIA) was set up as a multilateral arrangement to allow for retail competition for customers with half-hour interval meters.
  • Former local electricity supply authorities established as energy companies

• April 1987 - The New Zealand Government corporatised the NZED and formed the state-owned enterprise– The Electricity Corporation of New Zealand (ECNZ)

• Prior to 1987, a government department – the New Zealand Electricity Department (NZED) controlled and operated almost all New Zealand electricity generation and operated the New Zealand electricity transmission grid

[edit] Current structure

As mentioned above, the New Zealand electricity market is split into the following areas: administration and market clearing (M-co), regulation, generation, transmission, distribution and retailing.

The current legislation (Electricity Industry Reform Act) prevents the ownership of cross-sector, that is energy and lines functions, investment. This means a generation company cannot own or have an interest in a distribution company and a distribution company cannot retail electricity or deal in electricity hedges. There are two exceptions to the regulations: generation companies can own the lines required to transport electricity from their power stations to the grid or local distribution network; and distribution companies can own a small amount of conventional generation capacity within their network but are not limited in the level of renewable generation capacity. There is no barrier to vertical integration from generation to retail. The overall arrangement of the industry creates some very interesting market behaviour amongst the players.

First of all, generation is dominated by five companies: Meridian, Contact, Genesis, Mighty River, and TrustPower (see below).

[edit] Retail companies

The electricity retailers in New Zealand are Bay of Plenty Electricity, Bosco Connect, Contact Energy, Energy Direct, Genesis Energy, King Country Energy, Mercury Energy, Meridian Energy, Powershop, Todd Energy, Simply Energy, and TrustPower.

Of the electricity retailers, Contact Energy has the largest market share.^[10]

[edit] Generation companies

The electricity sector in New Zealand is dominated by five companies, which are Meridian Energy, Contact Energy, Genesis Energy, Mighty River Power and TrustPower. These are all active in generation, the wholesale market and retail sales of electricity. These five companies combined produce or control more than 95% of NZ's total electricity generation.

New Zealand Generating Companies

Company	Capacity MW	Generation GWh	Revenue	Employees	Customers	Ownership
Contact Energy	2,070[11]	11,035[11]	2,756m[11]	1,000[11]	650,000[11]	public ownership
Genesis Energy	1,977	9,126[12]	2,482m[12]		700,000	state-owned enterprise
Meridian Energy	2,601[13]	11,914[13]	2,604m[13]		183,000[13]	state-owned enterprise
Mighty River Power	1,369[14]	5,954[14]	1,172m[14]	752[14]	391,000[14]	state-owned enterprise
TrustPower	594[15]	2,018[15]	681m[15]	340[15]	222,000[15]	public ownership

There are a number of smaller companies in the electricity generation industry including WEL Networks, NZ Windfarms, Todd Energy, NZ Energy, MainPower and Top Energy.

The retail space is dominated by these five generating companies (Mighty River Power's retail arm is better known as Mercury Energy). The generation and retail companies use this vertical integration as a natural hedge to manage risks associated with volatility of the spot market. For example, during a dry year, the high prices in the wholesale market price benefit the generation arm but hurts the retailers who buy at wholesale prices and sell electricity to consumers at fixed prices; when prices are low, the loss of profits in the generation side is offset by the profits in the retail business.

These five companies have now extended their risk management strategy further by aligning their retail and generation businesses to the same geographic locations. For example, the majority of Meridian Energy's generation assets are in the South Island, and that's where their retail strongholds are. Mighty River Power's generation assets are exclusively in the North Island, and Mercury Energy's customer base is also exclusively in the North Island.

[edit] See also

• Electricity sector in New Zealand
• List of power stations in New Zealand
• Electricity Commission (NZ)
• Ministry of Economic Development (New Zealand)

[edit] References

[edit] External links

• The Ministry of Economic Development has a wealth of detail and statistics on the electricity industry, and other NZ energy matters.
• The Electricity Governance Establishment Committee documents reforms of the New Zealand Electricity Market.
• The Electricity Commission is now the regulator of the electricity market in New Zealand.
• Em6 and ComitFree provide current data on the NZ electricity market.
• Contact Energy
• Domestic Energy Users' Network
• Genesis Energy
• Meridian Energy
• Mighty River Power and Mercury Energy
• Trustpower
• Transpower
• M-co
• Aurora Energy is a distributor, which supplies network services to Dunedin and surrounding areas in the south of the South Island. Their web site has extensive links to the main parties involved in the New Zealand Electricity Market as well as statistics on the industry. It can be viewed at Dunedin Electricity
• Criticism of power privatisation and reforms Campaign Against Foreign Control of Aotearoa
• Marta Steeman, "Power sector 'lost its way'", Christchurch Press, 18 July 2006