Looking from the inside out

Since it took over control of the electricity market from self-regulating bodies in 2003, the Electricity Commission has a fundamental role in protecting security of supply and it has decided now is a good time to review its ability to do that job.  By Alan Titchall.

The Electricity Commission is a Crown agency with the task of refereeing our electricity market, from generation, transmission, and distribution through to consumption.

David Caygill, the commission chair, said at the 2008 Energy Conference that the agency is reviewing the events of the 2008 winter, including its own performance, so that the commission can draw on lessons for the future.

“Because it is obvious that a public body isn’t well-placed to review its own performance, two outside advisors will assist us: David Hunt, former CEO of Contact Energy, and John Isles, a company director and Commission Rulings Panel member.”

Driving the review was the South Island generation challenges this winter that threatened security of electricity supply. Among many other regulatory functions, the commission is charged with addressing the country’s reliance on hydroelectric power.

Caygill notes that both the generator sector and the commission have only limited tools when faced with supply issues.

“For example there is no power to require anyone to generate,” he says. “The commission does have the power (under the Electricity Act) to require generators to ‘hold or provide for reserve fuels (including water)’, but this power has not yet been used. Indeed the regulations that would be necessary have not yet been formulated.”

The EC does now have rolling cut regulations in place for the future, after it used emergency procedures in the Act to recommend them to the ministry.

The Whirinaki question

When the government set up the Electricity Commission one of its aims was to improve security of supply by contracting for reserve energy.

In July 2003 the Crown announced that it would purchase a new 155MW power plant to increase electricity security and the commission would be required to include this plant in its portfolio of reserve energy.

With the enactment of the amendments to the Electricity Act in October 2004, the commission became responsible for security of supply and concluded an agreement with the Crown, which came into effect in April 2005, for the generation at Whirinaki. In this agreement there is provision for the commission to “instruct” the Crown as to how the generation is to be offered into the wholesale electricity market.

A key aspect of the review includes the commission’s decision-making in relation to the plant at Whirinaki, particularly its offer price, which lead to sharply conflicting views.

“Setting the price for this plant puts the commission in an awkward position,” says Caygill. “In this one respect we become a participant in a market that otherwise we are supervising. And, for a plant which arguably is too small to have much impact or, as occurred later in the season just gone, in the wrong place to be useful.”

Caygill also notes that the past winter’s supply threat was nothing new – that for the fourth time in a short span of years consumers were asked to ‘be prudent’ in their use of electricity.

“For the record, the pattern of recent years looks hard to discern. In the last decade we have had very dry years, dry ones, ‘normal’, wet and very wet. Those who argue we haven’t built enough need to consider: ‘enough for what’?”

An important fact about the situation faced this past winter, that arguably may be faced again, is that neither the commission nor the government (nor anyone else for that matter) has the power to command generators to invest in new plant, says Caygill.

“Nor do we have the power to stop them doing so. The only significant approval that is usually needed to generate electricity is in terms of the Resource Management Act. So any shortfall in generating capacity is not necessarily easily remedied. Those who promise to ensure that more capacity is built may also care to explain how they will do so.”

The commission has begun to monitor the public record in relation to generation projects. Currently the total of plant under construction, plant approved but not yet being built, approved but under appeal, and awaiting approval, exceeds 4000MW, says Caygill.

“If built, that would amount to a 40 percent expansion in current generating capacity.

Even allowing for some retirement of existing plant, this is an improbably large expansion. Yet it counts only what is on the public record – not the many other possibilities of which the commission is aware.”

The reality, of course, is more complicated, he adds. “Generators frequently take a project through to its planning consent, then wait ‘til the time seems most opportune to invest, bearing in mind their forecasts of likely demand and the actions of their competitors.

“Understandably they are unlikely deliberately to build so much ahead of likely demand as to collapse wholesale prices. Which means that we do indeed have only limited competition. But then we knew that already.”

Some see this limit as an inherent flaw in the electricity ‘market’, along with the fact that, as both generators and retailers, the resulting “gentailers” are essentially self-hedged, says Caygill.

“Worse, some argue, many end-customers are protected from the impact of events like dry winters either by the hedging contracts they have purchased or by the fact that they have long-term contracts that do not adjust with wholesale prices.

“Most residential customers are in this position, perhaps by choice, but also because until recently there was no means of recording the amount they used at any particular time. In future, smarter meters may well affect the approach that retailers adopt to periods of water (or any other form of) shortage.

“Instead of using television commercials to urge viewers to save electricity in future it will be rational for generators exposed to high spot prices to offer customers a tariff that rewarded them for using less – as in California last year.”

In the end the key choice is not between a market or regulation (or even between light and heavy-handed regulation), but rather the appropriate balance between market and regulation, he says.

“That is, what regulation do we need to support as much market as we can achieve given New Zealand’s circumstances? What most

distinguishes New Zealand from other countries is not the philosophical or governance choices we have made, but the physical characteristics of our system: its still dominant hydro nature, the limited volume of storage available, the long transmission system, and the limited number of generators and retailers.”