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The generation and retailing segment began the 2009 year badly, facing the high profile claims of “a $4.3 billion rip-off” triggered by a worst case reading of the Commerce Commission’s ‘Wolak Report’1 and the subsequent Ministerial Review of the Electricity Market (chaired by Dr Brent Layton). Transmission saw a sea change as the prolonged period of investigative work by the Electricity Commission into Transpower’s upgrade plans gave way to a cascading series of approvals. And perhaps most notably, the Commerce Commission began the Herculean task of revising the regulatory regime controlling electricity distributors, as required by the Commerce Amendment Act of 2008. While imposed change has been an almost constant backdrop to developments in the electricity industry since the creation of Electricorp in 1987, in general the various reforms of the period through to 2008 aimed on the one hand to promote a robust market in energy trading, disciplined by active competition, and on the other to place downward pressures on prices by squeezing the so-called natural monopoly elements of the industry: distribution and transmission. The Electricity Commission churned out innumerable discussion documents on supply security, market rules and so forth while also checking for any signs of gold plating or premature investment in Transpower’s development plans. Paralleling this, the Commerce Commission was tasked specifically with maintaining a pricing oversight regime for Transpower and for electricity distributors, with the latter taking the form of compliance thresholds aimed at reducing costs without compromising supply quality – seemingly mutually opposed tasks. The changes the regime is now embarking on are part of the wider economic reform processes New Zealand is undergoing. The emphasis of regulation has shifted away from populist causes such as lowering prices and ‘sweating out the fat’ from infrastructure providers, and towards development fundamentals like new investment and new services. As the unfortunate pattern of transmission outages we’ve experienced demonstrates, this shift is well overdue. Our electricity supply infrastructure, no matter how well maintained, is on average around 25 to 30 years old, with many parts much older than that. In a windy, sea-bound environment the risks of equipment failure can be expected to become unacceptable some time well before the design life of critical systems such as the HVDC link from the South Island, as recent events demonstrate. Credit for the new focus on investment, rather than on reducing costs, lies with a number of parties. The Prime Minister’s department has put considerable effort into promoting a better understanding of the need for resilience in electricity supply (and other) infrastructures. The Treasury has contributed with a quiet but economically compelling argument against focussing regulators on wealth transfers rather than efficiency. However, the strongest pressure for change has come from public dissatisfaction with the outcomes of regulation, where any cost reductions achieved in transmission or distribution never seemed to reach consumers, and where the frequency of supposedly infrequent dry year events created valid concerns about supply security. Looking forward to 2010 we can expect a fairly confusing mix of welcome change and rising uncertainties. No matter how much spin is put on the adequacy of our generation system, it faces a challenging time over the next three to four years if winter lake levels drop too far. Basically the energy market has not provided strong incentives to maintain back-up capacity, as shown by the controversial requirement for the Electricity Commission to rebuild a diesel-fired plant at Whirinaki, after Contact Energy had sold the old one to South Australia. Furthermore Genesis Energy has announced that it plans to close 500MW of capacity at Huntly, the geothermal workhorse at Wairakei is on its last legs and question marks hang over the future of other plant. Disturbingly, while there has been a significant expansion of other geothermal options and of wind capacity, the average hydro output of the past five years has been only slightly higher than for the five years to 2001 (i.e. the period leading up to the 2002 Electricorp crisis) despite the subsequent contributions of the Clyde Dam and the Manapouri tailrace. Whether this fall-off reflects fundamental changes in hydrology or just random weather variations doesn’t seem to have received much attention. Transpower is building up a head of steam to move into the construction phase of its upgrade into Auckland, and has done well in terms of rolling back what it saw as unnecessary regulatory pressures from the Electricity Commission while benefitting from a National Policy Statement on Electricity Transmission and other Resource Management Act reforms. It faces the challenge of repairing the HVDC link however, a task that will leave us especially vulnerable to hydro shortages or system failures until it is completed in 2012. In distribution, the Commerce Commission has completed the initial part of defining the new price and quality requirements that ‘non-exempt’ lines companies must comply with, as well as the information disclosure requirements applying to all companies. The next big ticket item is the establishment of final inputs (cost of capital, treatment of taxation, the methodology for valuing assets, etc.) that will be used to define the regime post-2015, and possibly to fine tune the price control starting point for individual companies. Setting these inputs is a demanding exercise for everyone involved. The Commission is expected to spend a good part of 2010 on doing this and, until the task is complete, a great deal of uncertainty will continue to hang over distribution investment plans. Right across the electricity industry the pressures to martial resources for major work programmes are occurring in tandem. Competition for skilled staff, engineers and designers, and for investment capital can be expected from generation, transmission and distribution, potentially adding to costs and delays. The investment capital issue is particularly worrying as this industry-wide expansion is occurring against the backdrop of the global financial crisis. Distributors alone have capital and maintenance plans totalling $7.3 billion over the next 10 years. Somewhere in 2010 we are likely to see the recommendations of the Ministerial Review translated into legislation cutting back the functions of the Electricity Commission, and refocusing it or its successor on the failings of the electricity market. As a concluding comment, I feel that a lot of the problems leading up to need for the current changes can be traced back to the guts being knocked out of the market when the old power companies were forced to sell their energy businesses to the generators. Whatever the merits of separating supposed ‘monopoly’ and ‘competitive’ functions in this way, the result was the elimination of most of the commercial tensions in the wholesale electricity market. The Electricity Commission did its best, but it didn’t have a lot to work with.
Energy NZ Vol.4 No.1 Energy Perspectives 2010 |
The electricity industry is in the midst of a phase of fairly fundamental change, driven partly by big shifts in the regulatory regime, and partly by the realities of new investment needs. By Alan Jenkins, chief executive, Electricity Networks Association.