Championing small generators

It’s easy to overlook the large number of power generators producing less than 10MW around the country unless you are Simply Energy, a company set up in 2005 as a service between small, independent generators and large electricity users.  By Alan Titchall.

Simply Energy hit the media spotlight last year when it struck a deal to broker the small amount of power from Solid Energy’s coal seam gas trial near Huntly. The company provided advisory, transaction and generation settlement services around the new 1MW generation asset, which is considered an important step in assessing commercial viability of coal seam gas potential in New Zealand.

Small generators already provide around 200MW of the 9500 megawatt generation capacity in the country, but this is growing. Until recently, these generators haven’t had a lot of choice when it comes to get their power into the market – usually one of the big five generator/retailers. Simply Energy is providing an alternative, says one of its directors, Murray Dyer, with connection agreements and electricity sales options.

The company headquarters are in Wellington, but Dyer works out of an office above a restaurant in Auckland’s Herne Bay. Explaining the background to setting up the company in 2005 as a New Zealand Electricity Market (NZEM) registered generation and retail supply business, Dyer’s story is a typical ‘return home after years in a bigger market and discover a fresh opportunity’. 

With a finance degree from Lincoln University, Dyer spent between 1994 and 2005 first working in London in banking analysis, then in Melbourne trading commodities. He returned to London in 1999, just before the overhaul of the UK electricity market which saw a move to direct trading between the generators and retailers. UK’s New Electricity Trading Arrangements (NETA), implemented in 2001, resulted in a number of reforms including setting up a new mechanism for trading electricity.

Dyer got involved in setting up one of the power exchanges, the PowerEx Group which, after nine months,  sold out to APX, the Amsterdam Power Exchange that ran the day-ahead spot market in the Netherlands and was looking for an entry point into the UK. Dyer stayed on with APX, buying other UK power and gas exchanges and amalgamating them within one company called the APX Group. The group now runs power and gas exchanges in The Netherlands, Belgium and the UK.

Dyer arrived home early 2005, around the same time as Stephen Peterson, who had worked in technology engineering in Asia, the UK and North America. His overseas experience included roles with Enron Energy Services and working on development of the Teesside Wind Farm and later for Invensys, the multi-national metering and data services company.

“We were both looking at similar opportunities in New Zealand. While my background was in wholesale commodity markets and business development, Stephen’s background more in energy retailing and engineering,” says Dyer.

Chris Seel, the third Kiwi director who had returned to New Zealand a year earlier, has an investment banking and energy sector background honed in Europe.

“We didn’t have any preconceived ideas,” Dyer recalls. “We said, ‘Let’s have a good fresh look at this market and see if we can identify where the opportunities are’.”     

Before setting up business in November 2005, the trio also spent time reading carefully through the electricity market rules.

“If we were really going to make a mark in this market, we needed to understand the market rules in detail and I don’t  think anyone had taken a hard look at those rules for a long time.”

Currently, Simply Energy has network agreements with 24 of the country’s 28 network distributors, and can deliver to about 97 percent of the meters around the country. The reception has been generally very positive, says Dyer. 

“I wouldn’t say it hasn’t been challenging – it’s not an easy market to get into – you have to prove you are worthy of securing customers and being taken seriously. There had been no fresh thinking or new entrants in the market for a long time. Once they realised we were in it for the long term, we started to get positive support and momentum behind the business.”

The decision was made not to become a trader. “Everything we do is on a back-to-back basis. We only sign a long-term supply contact if we have a long-term generation contract. This restricts what we can do in the market – but gives us far greater control over our risk profile. It’s probably not the fastest way into the market, but we believe it’s a sustainable business model that’s attractive to our clients. By not taking a trading position ourselves, it enables us to retain our independence and transparency on deal structures.”

The company is targeting the 200 megawatts of generation around the country generated by small, independent operators who have been potentially “undervalued” in their ability to optimise their energy sales.

“Traditionally, these small generators have had to go to one of the big retailers to sell their electricity into the market. We saw a very good opportunity to set up an independent generation retail business to put direct deals in place between those generators and end users.”

It doesn’t mean all that 200MW was available as many of these generators are locked into long-term contracts with the major generator retailers, Dyer concedes.

“But in many cases these small assets are of no real interest to the large generators. When you are managing your own 2000MW plus portfolio, how much time and effort are you going to put into someone else’s 2MW asset? So we see our role as complementary in the overall market.”

The company is currently managing eight small generation assets around the country, owned by private companies, farmers, lines companies and a state-owned enterprise, and involving hydro, wind, landfill gas and coal seam gas resources.

“With the way electricity prices have risen in the last few years, small generation projects are becoming more economic and we are seeing a lot of interest in the development of distributed independent generation. This is especially true with lines companies that are now able to own greater generation capacity and with more scope to retail this electricity under the amended Electricity Industry Reform Act.”

Last year, Simply Energy brokered a deal between Clearwater Hydro, set up by the King Country-based The Lines Company, and Charlie’s Trading Company in West Auckland.

“What we’re finding is there’s an appetite for independent generators to get together with regional customers and share in the benefit of putting in a deal directly,” says Dyer.

“One small South Island client had been locked into a fixed term contract with one of the big generators and receiving between $15,000 and $30,000 a month. Revenue soared to $200,000 a month by switching to ‘supply the spot market’ during last winter’s price spike.”

Dyer says his company often sees a $30 per MWh spread between what the independent generator is getting for their power and what someone was paying for the power within the same region.

“It’s about bringing those two together and we are obviously going to take a fee for doing that, but it is transparent. And both the independent generator and the energy consumer are getting a better deal and have more market choice.”

Dyer says because the industry is made up of many small companies mostly on fixed price, variable volume contracts, they are immune for responding to market prices. This has compounded some security of supply issues in dry years.

“When you buy a fixed price variable volume tariff for a fixed term, you pay a higher price, because you are paying the energy company an insurance premium to make sure you are never exposed to high spot prices. What we have seen is that even if energy spot prices blow out for a short period every year or so, many consumers are still better off with a wholesale market offering; even more so if they can control or shift some demand. If their energy cost is a manageable percentage of total operating cost then direct wholesale market access is best for them,” says Dyer.

“It’s also a more transparent way of buying energy. It encourages demand side management and, when combined with direct purchase from independent, renewable generation, is more cost effective. It also meets a number of the Government’s objectives of encouraging renewable generation and security of supply.”

A decade ago everyone thought distributed generation was the way forward but, says Dyer, it just didn’t happen because the technology wasn’t there and there was sufficient generation capacity at that time.

“However, I think the concept of very large generation projects is going to be more and more difficult, so more direct distributed generation makes a lot of sense. It’s far easier to consent, build and plug into the local network small hydro or wind projects than large-scale projects, and it fits into the way technology is developing and even how carbon trading is developing for the economics of renewable generation.”