Hon Gerry Brownlee
Minister of Energy and Resources

17 December 2010 Media Statement

Virtual asset swaps to benefit consumers

The government is continuing to implement its programme of improvements to New Zealand’s electricity sector, with Energy and Resources Minister Gerry Brownlee today announcing details of virtual asset swaps between the three state-owned electricity generator-retailers: Genesis Energy, Meridian Energy, and Mighty River Power.

“At present, Meridian Energy has little generation in the North Island and Genesis Energy and Mighty River Power have none in the South Island. This geographical imbalance has meant there is weaker competition between retailers than desirable,” Mr Brownlee said.

“This move will allow consumers greater choice and encourage the SOEs to compete more, as truly nation-wide suppliers, putting downward pressure on price increases.”

Each virtual asset swap contract involves Meridian Energy selling electricity by way of financial hedges, up to 450 GWh/year to Genesis Energy and 700 GWh/year to Mighty River Power in the South Island, and buying the same volumes of electricity from Genesis Energy and Mighty River Power in the North Island.

The virtual asset swaps will come into force on 1 January 2011 and will last for 15 years.

They are part of the package of measures agreed by Cabinet in December 2009 following the Ministerial Review of the Electricity Market. The measures are designed to improve competition in the industry, promote reliability of electricity supply and improve governance in the sector.

“These virtual asset swaps complement the transfer of Tekapo A and B power station from Meridian Energy to Genesis Energy, which are expected to occur in the first half of 2011,” Mr Brownlee said

“The changes are intended to address dissatisfaction with the sector’s performance – in particular with price increases above underlying increases in generation costs and insufficient generation to deal with dry years.

“This is about balancing the short-term impact of the change for the SOEs with the long term interests of the New Zealand economy.”

More information about the electricity reforms is available at www.med.govt.nz/electricity-market-review. Copies of the virtual asset swap agreements, excluding commercially confidential information, will be gazetted.

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Background

The 2009 Ministerial Review of the electricity market concluded that although a large part of the increase in electricity prices over the last decade was justified, prices to some customer groups (especially residential consumers) had risen faster than justified by underlying increases in generation costs.

The review noted residential margins were high, competition between retailers was weaker outside the main centres, particularly in the South Island, and some generators had market power in the wholesale market in dry years.

In December 2009 the government adopted a number of initiatives specifically designed to improve competition in the electricity industry. These included reallocating virtual and physical assets between the SOE generator-retailers Meridian Energy, Genesis Energy and Mighty River Power.

The asset swaps are made possible by the new Electricity Industry Act passed in October 2010, which gives the shareholding Ministers a specific and limited power to issue directions to Genesis Energy, Meridian Energy and Mighty River Power to implement these decisions.

What is the purpose of the virtual and physical asset swaps?

The SOE generator-retailers are not well-balanced geographically: Genesis Energy and Mighty River Power (MRP) have no generation in the South Island, and Meridian Energy has little generation in the North Island. This geographic concentration, combined with transmission constraints, means the SOEs have a regional focus in their retail businesses and competition between them is weaker than desirable. Rebalancing the SOE assets will increase competition for retail customers, putting downward pressure on price increases.

How do virtual asset swaps benefit competition?

The virtual asset swaps provide a more stable wholesale purchase price for retailers in the island where they have little or no generation, thereby encouraging additional retail competition in both islands. The virtual asset swaps have ramp-up and ramp-down volumes to avoid abrupt changes to retail portfolios.

Which physical assets will be swapped?

The virtual asset sales do not involve any physical assets being transferred or sold between SOEs. In a separate transaction, Tekapo A and B power stations will be transferred from Meridian Energy to Genesis Energy. This is expected to occur in the first half of 2011.

ENDS

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