Electricity Commission will deliver supply security
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
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:
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.
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. 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. 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. 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. 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."