New Zealand electricity market
New Zealand's electricity market is regulated by the Electricity Industry Participation Code administered by the Electricity Authority. The Authority was established in November 2010 to replace the Electricity Commission.
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. Currently the market is split into the following areas: regulation, generation, administration and market clearing, transmission, distribution, metering and retailing.
The wholesale market for electricity operates under the Electricity Industry Participation Code, and is overseen by the market regulator, the Electricity Authority. Trade takes place at more than 200 pricing nodes across New Zealand. 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 held every half hour.
The Authority 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 New Zealand Exchange (the NZX), who acquired the previous service provider M-Co in June 2009.
The owner of the national transmission grid is Transpower, a state-owned enterprise. Transpower is also the System Operator, responsible for ensuring real time electricity supply security and quality. Transpower is the market scheduler, predicting likely demand to help generators make bids, and the dispatcher, in charge of matching demand and supply in real time.
Distribution of electricity from the grid exit points to the end consumers' premises is the responsibility of about 30 distributors, also known as lines companies, who have monopoly control of the lines services on their networks. Ownership of distributors 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.
There are five major generators: Meridian Energy, Genesis Energy, Mighty River Power, Contact Energy, and TrustPower. These five together produce about 95% of New Zealand's electricity. The first three are majority or completely government owned, and Contact and TrustPower are 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" (generator–retailers).
Retailers purchase electricity from the wholesale market, and on-sell it to consumers. 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. Consumer NZ, with support from the Ministry of Consumer Affairs, provides a website called Powerswitch that enables consumers to compare electricity prices from different retailers and to switch suppliers.
Wholesale spot market
Electricity is traded at a wholesale level in a spot market. The market operation is managed by several service providers under agreements with the Electricity Authority. The physical operation of the market is managed by Transpower in its role as system operator.
Generators submit offers (bids) through a Wholesale Information and Trading System (WITS). Each offer covers a future half-hour period (called a trading period) and is an offer to generate a specified quantity at that time in return for a nominated price. The System Operator (Transpower) uses a scheduling, pricing and dispatch (SPD) system to rank offers, submitted through WITS, in order of price, and selects the lowest-cost combination of offers (bids) to satisfy demand.
The market pricing principle is known as bid-based security-constrained economic dispatch with nodal prices.
The highest-priced bid offered by a generator required to meet demand for a given half-hour sets the spot price for that trading period.
Electricity spot prices can vary significantly across trading periods, reflecting factors such as changing demand (e.g. lower prices in summer when demand is subdued) and supply (e.g. higher prices when hydro lakes and inflows are below average). Spot prices can also vary significantly across locations, reflecting electrical losses and constraints on the transmission system (e.g. higher prices in locations further from generating stations).
Trades take place at approximately 285 nodes (grid injection points and grid exit points) across New Zealand every half-hour. Generators make offers to supply electricity at 59 grid injection points (GIPs) at power stations, while retailers and major users make bids to buy electricity at 226 grid exit points (GXPs) on the national grid.
Final prices at each node, taking account of grid losses and constraints, are processed and confirmed the following day.
All electricity generated is required to be traded through the central pool, with the exception of small generating stations of less than 10MW. 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 for each 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 their demand. The above prices are however guidelines 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.
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, Commerce Act 1986, and 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.
- 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 28 April to become effective on 28 May 2004.
A Ministerial Review of Electricity Market Performance was initiated on 1 April 2009 and led by an independent Electricity Technical Advisory Group, appointed by the Minister for Energy and Resources, with assistance from officials from the Ministry of Economic Development. There were 29 recommendations arising from the review. 
One of the key recommendations approved by Cabinet was the transfer of ownership and operation of some power stations between Genesis Energy and Meridian Energy in order to increase retailer competition in both islands and to give Genesis a South Island generating base. It was decided that Genesis would receive the Tekapo A and Tekapo B hydroelectric power stations from Meridian, and Meridian would receive the Whirinaki Power Station from the government (although Meridian eventually declined to accept). The transfer of Tekapo A and B was completed on 1 June 2011. 
On 1 November 2010, the Electricity Authority commenced operations, taking over from the Electricity Commission.
In April 2013, the Labour Party and the Green Party said if they were to win the 2014 election, they would introduce a single buyer for electricity, in order to cut retail costs. The Government responded by calling it "economic vandalism", comparing it to the Soviet Union, but Greens co-leader Russel Norman said it would boost the economy and create jobs. By the following day, shares in privately owned power company Contact Energy had fallen by more than 10 percent.
Milestones in the reform process
Major milestones in electricity market reform in New Zealand from 1987 were:
- Prior to 1987, the New Zealand Electricity Department (NZED), a government department, controlled and operated almost all electricity generation and operated the electricity transmission grid
- April 1987 - The New Zealand Government corporatised the NZED and formed a state-owned enterprise – the Electricity Corporation of New Zealand (ECNZ)
- April 1993
- Electricity Market Company (later called 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 1994 - Transpower separated from ECNZ and established as a stand-alone state-owned enterprise.
- July 1994 - NZEM commences trading as a secondary market for ECNZ hedges. An independent market surveillance committee was formed.
- 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
- February 1996 - An interim wholesale market is put in place allowing ECNZ and Contact to begin competing.
- April 1996 - Contact Energy commenced operations
- October 1996 - The reformed wholesale electricity market (NZEM) began trading
- April 1998 - Government announced the Electricity Reform Act 1998, 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
- April 1999
- May 1999 - Contact Energy shares listed for trading on the New Zealand and Australian Stock Exchanges from 11 May 1999.
- February 2000 - The Ministerial Inquiry into the electricity industry begins.
- June 2000 - The report of the Ministerial Inquiry is published
- November 2000 - Electricity Governance Establishment Project set up as a result of the government's review of the report of the Ministerial Inquiry.
- December 2000 - Government Policy Statement published.
- April 2003 - An industry referendum on the outcomes of the Electricity Governance Establishment Project (EGEP).
- May 2003 - The rules developed by EGEP fail to gain sufficient support in the referendum to avoid government regulation.
- July 2003 - A draft set of regulations and rules was issued for consultation.
- 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
- 1 March 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.
- October 2004 - The Electricity Act was amended to increase the powers of the Electricity Commission.
- April 2009 – Ministerial review of Electricity Market Performance commences.
- 9 December 2009 – Minister announces outcomes of market review, including 29 new measures.
- 1 November 2010 – Electricity Authority takes over from Electricity Commission, and the Electricity Industry Participation Code comes into effect.
The current legislation (Electricity Industry Reform Act 1998) prevents the ownership of cross-sector investment (that is energy and lines functions). 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.
The retailers are Bosco Connect, Budgie Power, Contact Energy, Energy Direct, Energy Online, Genesis Energy, Just Energy, King Country Energy, Mercury Energy, Meridian Energy, Nova Energy, Opunake Hydro, Payless Energy, Powershop, Pulse Energy, Simply Energy, Tiny Mighty Power and TrustPower. Many of the retailers are owned by generating companies. For example, Powershop is owned by Meridian Energy, Energy Online is owned by Genesis Energy, Bosco Connect, Budgie Power and Mercury Energy are all owned by Mighty River Power, and Energy Direct is owned by TrustPower. Not all retailers supply to all locations, for instance Bosco Connect only supplies to Auckland inner-city apartments.
Genesis Energy has the largest market share.
|Retailer grouping based on ownership||Percentage of active installation control points|
|Contact Energy and Empower||27.5%||26.9%||24.9%||23.0%|
|Genesis Energy and Energy Online||29.0%||29.2%||27.1%||26.8%|
|Mercury Energy and Bosco Connect||17.6%||18.7%||21.7%||19.5%|
|Meridian Energy and Powershop||11.6%||11.5%||11.9%||14.8%|
|Nova Energy and Bay of Plenty Energy||1.3%||1.3%||1.8%||2.6%|
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.
|Company||Capacity MW||Generation GWh||Revenue||Employees||Customers||Ownership|
|Contact Energy||2,070||11,035||2,756m||1,000||650,000||public ownership|
|Genesis Energy||1,889||7,212||2,070m||990||650,000||mixed ownership model (public-private)|
|Meridian Energy||2,693||10,996||2,570m||806||mixed ownership model (public-private)|
|Mighty River Power||1,369||5,954||1,172m||752||391,000||mixed ownership model (public-private)|
The retail space is dominated by the 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.
- Electricity sector in New Zealand
- Energy in New Zealand
- Geothermal power in New Zealand
- Hydroelectric power in New Zealand
- List of power stations in New Zealand
- Ministry of Economic Development (New Zealand)
- National Grid (New Zealand)
- Renewable energy in New Zealand
- Renewable energy commercialization
- Wind power in New Zealand
- Evans, Lewis; Meade, Richard (2005). Alternating Currents or Counter-Revolution?. Victoria University Press. p. 138. ISBN 0-86473-525-1.
- "The Code". Electricity Authority. Retrieved 25 July 2013.
- "Connecting and Dispatching New Generation in New Zealand". Transpower. Retrieved 2009-05-04.
- Evans, Lewis; Meade, Richard (2005). Alternating Currents or Counter-Revolution?. Victoria University Press. pp. 73–4. ISBN 0-86473-525-1.
- New Zealand Electricity Commission (2009). "Retail Market Statistics".
- "Powerswitch". Electricity Authority. 22 October 2010. Retrieved 15 March 2014.
- "Market Operation Service Providers, Electricity Authority". Retrieved 2011-10-15.
- "Electricity in New Zealand, Electricity Authority". November 2010. Retrieved 2011-10-15.
- New Zealand Institute of Economic Research (2005). "Market Design Report".
- "Ministerial Review of Electricity Market Performance 2009, Ministry of Economic Development". Retrieved 2011-10-15.
- "Summary of Main Decisions - Ministerial Review into Electricity Market Performance". Ministry of Economic Development. 2009-12-07. Retrieved 2011-10-15.
- "Genesis Energy takes ownership of Tekapo Power Stations". New Zealand Stock Exchange. 1 June 2011. Retrieved 2011-10-15.
- "Labour's power plan 'political posturing'". 3 News NZ. 18 April 2013.
- "Opposition 'trying to disrupt share sales'". 3 News NZ. 19 April 2013.
- "Norman: Power plan will boost economy". 3 News NZ. 19 April 2013.
- "Norman: Contact shares continue to plummet". 3 News NZ. 19 April 2013.
- Ministry of Economic Development (2006). Investment in Electricity Generation by Lines Companies (PDF). Discussion Paper. Retrieved 2009-05-13.
- Contact Energy Half Year Report for Period to 31 March 1999
- "Ministerial Inquiry into the Electricity Industry 2000, Ministry of Economic Development". Retrieved 2011-10-15.
- "Government Policy Statement: Further Development of New Zealand's Electricity Industry [December 2000], Ministry of Economic Development". Retrieved 2011-10-15.
- "Initial Electricity Industry Participation Code, Ministry of Economic Development". Retrieved 2011-10-15.
- "The providers". Consumer Powerswitch. Consumer NZ. Retrieved 15 March 2014.
- "Electricity Supply Industry Aurora Energy". Retrieved 2011-10-19.
- "New Zealand Energy Data File 2012". Ministry of Economic Development. Retrieved 20 June 2012.
- Contact Annual Report 2008
- Genesis Energy Investment Statement 13 March 2014
- Genesis Energy Annual Report 2013
- "Meridian Annual Report 2012".
- MRP Annual Report 2008
- Trustpower Annual Report 2008
- Reilly, Helen (2008). Connecting the Country – New Zealand’s National Grid 1886 - 2007. Wellington: Steele Roberts. pp. 376 pages. ISBN 978-1-877448-40-9.
- Energy section of the Ministry of Business, Innovation & Employment site has a wealth of detail and statistics on the electricity industry, and other New Zealand energy matters.
- Em6 and ComitFree provide current data on the market.
- Domestic Energy Users' Network
- Powerswitch from Consumer NZ
- Criticism of power privatisation and reforms from Campaign Against Foreign Control of Aotearoa