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The Electricity Technical Advisory Group Ministry of Economic Development received 128 submissions from energy companies on its electricity review discussion paper called ‘Improving Electricity Market Performance’ – the first Government review of the market since 2001. Here’s a small taste of what some of those submissions said.
Electricity prices began rising above the CPI in 1996. In 2002 the gap began to widen significantly. As a result New Zealand has more expensive electricity prices than Canada, the US, a number of European countries and, more importantly, Australia whom we compete with for commercial and industrial business investment.
There is no other market in which such mistrust and suspicion of its operation is so palpable. Consumers – both large and small – have no confidence that the price of electricity they face is an efficient one. The use of competitive market tools to deliver more competitive market outcomes is the right response. A competitive market is likely to deliver sustained downward pressure on prices. However, Business New Zealand considers that these proposals should not be seen as the final tranche of improvements needed, but a further step in the governance and design of the electricity market. We agree [that the] proposal to review whether there are likely benefits associated with developing a National Environmental Standard for small-scale distributed generation (which draft NPS on renewable generation defines as less than 4MW) may have merit, though we strongly support broadening the review for the NES to also cover larger-scale DG (eg. 25MW), where relevant ...
While there is regulation pertaining to connection of distributed generation, there are still a number of line companies who abuse their monopoly power to extract a large part of the savings. The line companies collect large revenues by being put in a monopoly situation while not having to invest a cent. Transmission savings should automatically accrue to the generator as small scale generation will not have the funds to progress a connection/savings agreement with the line companies.
The review has been severely limited by the terms of reference in that clause seven of those terms determines the review will take the current market model as a starting point and build on it. Electricity is essential for the well being, and as we have seen, the very survival of people. It is also essential for the economic prosperity of the nation. Market forces have no social conscience and where possible are self serving, hence the conclusion by professor Wolak that no rules have been broken but $4.5 billion has potentially been unnecessarily redistributed ... we believe that neither the security of supply or the pricing issues will be resolved with market forces alone and that significant regulatory intervention will ultimately be required to achieve those goals.
What astounded us in 2008 was the continued mantra from politicians and officials that consumption cuts in the productive sector, in the face of rising electricity prices, were a sign that the market was working. Looked at in isolation, this seems a reasonable proposition and possibly acceptable if it happens, say, every 20–30 years. However, when it is happening every two to three years, then something is very broken and the market has clearly failed.
The rundown of our once world’s leading ripple control system has resulted in peak demands this winter being about 400MW greater than they needed to be. The system is not is used to shed load when the system is in trouble, or when the price spikes. Instead, we start the very expensive gas turbine station at Whirinaki ... this is seriously crazy. Especially as the consumers pay for running the gas turbine station and would not even notice if their hot water had been cut off for an hour or so.
Today lines companies can charge individual end users whatever they like as long as they remain within prescribed limits at a portfolio level as determined by the Commerce Commission. This means if lines companies can retail without limit within their network, they will be able to offer discounted lines pricing to a small number of end users, subject to the end user purchasing electricity from the lines company, and the discounted network costs shifted to other users across the network.
Our experience of many years in the industry tells us that if a market model is to be retained and changed to achieve the objectives of improved security of supply and control of rising prices at the domestic level, the single biggest improvement will be gained by introducing compulsory trading of all wholesale generation and consumption purchases on an independent hedge market that is both transparent and liquid. Anything less than this intervention will simply rearrange the chairs on the deck of an intrinsically unsuitable market.
The electricity market does not reward generators who own reserve plant even though this reserve plant is essential for security of supply. The designers of the ‘market’ have never seemed to recognise that, because we get dry years, which also appear to be windless as well, our power supply is unusually vulnerable to the weather. Years ago, one of the architects of the market is said to me “With the market, dry years will not be a problem – the price will go up and the demand will go down so everything will be okay.” Last winter, the price went up by 300 percent and the demand went down by about three percent. Need I say more?
Floor prices are arbitrary and don’t necessarily reflect the cost of providing energy security. The risk is they will push up forward market prices in excess of what is required that in turn increases prices to end users. As an alternative to spot price floors, we suggest a mechanism to facilitate the private sector developing a vast number of projects that can reduce energy consumption or increase generation during periods of scarcity. We propose that a party (for example the EC) creates a market in Asian style call options, offering to pay a fee for the right to purchase a fixed volume of electricity at a fixed price should the spot price exceed a threshold (or strike price).
We are not in support of the Government retaining the reserve energy scheme as it creates weak pricing signals by putting an artificial cap on spot prices in times of tight supply and presents a further uncertainty for potential investors in peaking generation plant. The responsibility must remain with the parties exposed to spot prices to ensure they are adequately hedged (and in turn will improve participation in the hedge market).
While the market delivers significant benefits in terms of profits it fails utterly to deliver on what was promised at its inception – lower prices for electricity, security of supply and a competitive market. We believe the path taken by successive New Zealand governments has been in error and that it is time to resile from the practice of re-examining and then re-legislating for improved performance. Why? Because after 16 bills, acts and amendments; 10 reports, reviews and a task force; 25 sets of rules, regulations, strategies and processes; the setting up of a regulator and regulatory structures within government departments; a number of government policies and the dismantling of the industry it is not delivering on the promised security of supply at fair and reasonable prices to consumers. It is time to stop. From our perspective, the regulatory and governance framework provided for the establishment of the Electricity Commission was flawed. These flaws weren’t something that only became apparent after several years of the Electricity Commission’s operations. Rather they were design flaws that were evident in the legislation being developed for the establishment of the Commission.
The electricity industry used to be a world leader in things such as the creation of a wholesale electricity market and nodal pricing, but development of the market rules have stagnated over the last few years.
Scarcity pricing is an interesting concept that if implemented should have the desired effect of driving the development of dry-year hedges for retailers. However, this will likely also drive up the general price level and we do not know by how much.
The business community looks to be assured that the changes proposed will deliver more than just a workably competitive electricity market. It will look for evidence that that the treadmill of price rises will cease. And that the Government’s strategic goals of maintaining high levels of employment and increasing New Zealand’s productivity growth are central to what the review seeks to deliver, and not peripheral to it. If this is not forthcoming, more aggressive regulatory action is likely to be warranted.
Recent analysis has led to the conclusion that Electricity Industry Reform Act (EIRA) and other electricity market reforms have not had their intended competition outcomes. The number of players in the electricity industry has decreased and concentration has increased. At the time of ownership separation of EDBs, nearly all the retail companies were acquired by generators. Five vertically integrated generator-retailer firms supply about 98 percent of all electricity consumed in New Zealand.
There has been much unsuccessful effort to date to deal with the negative complexities of nodal pricing. This is chiefly around trying to manage transmission basis risk. The inability to manage this is the single biggest impediment to a liquid hedge market and thus a vibrant and competitive retail market. It is time to seriously investigate whether or not the nodal price mechanism should be retained.
The transmission grid provides the marketplace over which energy supply companies compete. Years of underinvestment has often caused the wholesale market to constrain into regional markets. Contact believes that this also must be addressed as a priority. Further measures to streamline transmission investment approvals are important. But action is needed to improve competition and security by solving transmission pricing and devising a mechanism to address the high locational price risk that makes our market so risky. Mandatory hedging would not resolve this locational risk, so Contact does not support it. Years of expediency and inaction on such important issues must stop. A deadline should be set to resolve them within two years.
Energy NZ No.11 Summer 2009 |