Meeting energy needs beyond 2013

Catherine Ross looks at The Electricity (Continuance of Supply) Amendment Bill and asks the question will it deliver optimal outcomes for consumers and New Zealand Inc in the future?

The provision of electricity services has undergone many changes over the last 120 years yet,  while we now expect an uninterrupted and on-demand supply of electricity, service levels are not consistent across locations and rural consumers generally experience more interruptions than urban ones.

New Zealand has a history of subsidising investment in rural infrastructure. The Rural Electrical Reticulation Council (RERC) administered a fund to subsidise lines construction, mainly to farmers in remote areas. This was an explicit subsidy of a social externality that came to an end in 1997.

Today’s so-called ‘uneconomic’ lines are largely those which were built in the 1950s and 60s with the RERC subsidy. Many of the lines built under this scheme are now coming to the end of their asset lives and replacement options need to be considered and costs could run to hundreds of millions of dollars. 

The current approach of keeping rural and urban line charges in line (as per the Government Policy Statement on Electricity Governance, May 2009) is a different form of subsidy. Cross subsidy occurs within lines businesses, rather than at national level, which means that the burden of cross subsidisation is not spread evenly across consumers and the subsidy is not transparent to consumers. 

Investment in electricity infrastructure is an expensive and long-term game. Line assets have lives of 45 to 60 years. It is important that optimal investment decisions are made which efficiently meet the needs of today’s and tomorrow’s consumers. 

The Electricity (Continuance of Supply) Amendment Bill

Section 62 of the Electricity Act 1992 contains an obligation to maintain lines services to connections established as at April 1, 1993. This obligation expires on March 31, 2013. Lines built after April 1, 1993 are not covered by the obligation.

Unless section 62 is amended, consumers connected to lines which are uneconomic – i.e.  remote consumers – face uncertainty about continuity of supply at affordable prices. The government has made a commitment to protect the supply of electricity to rural communities beyond 2013, so my question is, “What will the obligation to supply electricity look like?”

The Ministry of Economic Development started a review of the section 62 obligation in 2005 with the outcome that the Electricity (Continuity of Supply) Amendment Bill was introduced to Parliament in September 2008. The Bill has been carried over by the new government and is currently before the Select Committee. 

The Bill amends the obligation so that lines businesses will, “have an ongoing obligation to continue to supply places supplied as at April 1, 1993, using either line function services or electricity supplied by alternative means”.

In brief, the revised obligation enables lines businesses to determine (with limited consultation with end users) whether they will supply electricity through line function services or by alternative means. There is a requirement for the means of alternative supply to have the same reliability and quality as line function services.

The Bill provides little guidance on pricing except to the extent that the Electricity Act 1992 is amended to provide the Minister of Electricity with a further regulation-making power to require electricity supplied by alternative means to be subject to a specified pricing methodology. The GPS continues to require alignment of rural and urban pricing. 

The questions remain – what does this mean? Is this the right answer? Will it deliver optimal outcomes for consumers and New Zealand Inc?

Other energy sources not considered

The Bill as drafted creates an obligation to supply electricity but does not provide for energy needs (currently serviced by electricity) to be serviced through any other means.

For example, water can be heated through solar panels or through the use of LPG cylinders, but as the Bill is drafted neither of these would meet the obligation, as they do not provide electricity by alternative means.

Electricity is an important part of the mix, but it does not need to be the only energy source and in many instances it is not the most efficient way of servicing energy needs.  

If the provisions of the Bill remain unchanged the net result is likely to be that alternatives can only be supplied by distributed generation. Far from increasing the market potential for those with expertise in alternative supply methods (as is claimed in the Explanatory Note to the Bill), the Bill is likely to limit market development to distributed generation. However, the stringent reliability and quality requirements of the obligation will make even this development unlikely. 

A code of supply for alternatives?

The obligation in the Bill to ensure that existing arrangements relating to reliability and quality of electricity supply also apply to supply of electricity by alternative means is problematic. It is not easy to compare the levels of quality and reliability achieved through line function services with the levels of quality and reliability achieved through supply by alternative means. Supply by alternatives – electricity or other energy sources – will result in different levels of reliability and quality from supply by line function services. Some aspects of reliability and quality may be enhanced while others may be less favourable.

For example, where supply is provided by alternatives there may be more frequent outages but they may be of much shorter duration than an outage caused by storm damage to a line. It is not uncommon for remote rural lines damaged by storms to take up to a week to repair. 

What is needed is guidance, perhaps in the form of a code, as to the acceptable levels of quality and reliability provided by alternatives. 

Such a code could also provide guidance as to the pricing of alternatives. This would ensure lines businesses were developing pricing within a known framework, rather than operating with the threat of regulation if they get it wrong. This would also provide a much greater degree of certainty and confidence for consumers and lines businesses.

A way forward?

New Zealanders need access to secure, affordable and reliable energy supply and we need a regulatory framework that enables lines businesses and consumers to discover the optimal arrangements to best service energy needs over the long term. 

Getting the regulatory arrangements “right” is not easy. It is worth taking the time now to come to an enduring medium-to-long-term solution which recognises both the need for secure, affordable and reliable energy for all consumers and the ability of changing technology to service energy needs differently. 

New Zealand Inc would be better served by extending the obligation for a few years in order to get the regulatory framework right for the next 50.

• Catherine Ross is a senior associate at Minter Ellison Rudd Watts. She has worked in the electricity sector for over 10 years including as legal and regulatory manager for Transpower. She specialises in electricity, energy and environmental matters.