Appendix: The electricity sector

There are two aspects to the electricity sector - the physical system and the electricity market.

The physical system

The physical system comprises:

• Generation: There are five major electricity generating companies - three are State-owned enterprises and two are private companies. About 60% to 70% of New Zealand's electricity is generated by hydro stations (the percentage depends on hydrology conditions such as rainfall and snow melt). The balance is generated from geothermal stations, gas, coal and oil-fired thermal stations, bio-mass plants, and wind farms.
• Transmission: Transpower (a State-owned enterprise) owns and operates the national electricity transmission system, which comprises switch gear (substations), high voltage cables, transformers, and overhead lines for transmitting high voltage electricity from generating stations to distribution (lines) companies.
• Distribution: There are about 28 lines companies that own distribution networks throughout New Zealand. The lines companies are connected to the national grid and usually sell their services to retailers who provide bundled "delivered electricity" services¹ to domestic and commercial consumers. Most consumers are connected to local networks, but a small number (such as the Comalco aluminium smelter) are directly connected to the national grid, and contract directly with distribution companies.
• Retail: Retailers purchase electricity at wholesale prices from the generating companies and transmission or distribution services from lines companies. Consumers are charged for the cost of the electricity as well as charges for transmission and distribution services.

The electricity market

The electricity market comprises wholesale and retail markets.

The wholesale market comprises multiple parties carrying out various functions including bidding (purchasers), offering (generators), scheduling and dispatch² (system operator), pricing (Pricing Manager), and clearing and settlement (Clearing Manager). Each of these functions is governed by the Electricity Governance Rules 2003, which need to be maintained and changed to respond to changes in the market.

The retail market arrangements focus on operational tasks, including registering consumers, enabling consumers to switch easily between suppliers, and counting electricity purchases and sales. Around $4.5 billion of electricity is purchased by consumers each year, and almost 10% of consumers switched suppliers in the year to 30 September 2008.

The regulatory framework

The electricity industry is covered by generic and specific legislation (including regulations). The main legislative and regulatory instruments include the:

• Electricity Act 1992;
• Electricity Industry Reform Act 1998;
• Commerce Act 1986;
• Government Policy Statement on Electricity Governance;
• electricity governance regulations; and
• the Electricity Governance Rules 2003.

Roles and responsibilities

Ministry of Economic Development

The Ministry of Economic Development's responsibilities in the electricity sector include:

• developing and implementing policies for the electricity sector, including the Government Policy Statement;
• reviewing and developing legislation to ensure that it reflects government policy;
• electricity governance regulations and the Electricity Governance Rules;
• monitoring electricity prices; and
• monitoring the performance of the Commission.

Electricity Commission

The Commission is responsible for giving effect to government policy. The Commission's responsibilities are:

• Governance: To give effect to the Government Policy Statement objectives and outcomes and to provide advice to the Minister of Energy on matters concerning the electricity industry. This includes formulating and making recommendations concerning electricity governance regulations and rules in accordance with the Electricity Act 1992, and overseeing and enforcing compliance with electricity supply governance regulations and rules. This also includes developing best practice methodologies and other standards and model agreements for use by industry participants.
• Security of supply: To use reasonable endeavours to ensure security of supply, and the continuous normal operation of the market. This includes contracting for reserve energy, and not assuming any reduction in demand from emergency conservation campaigns. The Commission is also required to carry out forecasting and modelling of future electricity supply and demand, and promote conservation and the efficient use of electricity. This includes funding incentive programmes and managing emergency conservation campaigns to avoid supply shortages.
• Complaints: To approve one or more complaints resolution systems for the purpose of addressing complaints by any person about electricity retailers and/or distributors. This includes potential consumers, or owners and occupiers of land that may be used by electricity industry participants.

The Commission is responsible for establishing, operating, and facilitating the operation of markets for both industry participants and consumers. The Commission contracts and manages external service providers to operate the electricity system.

The Commission contracts a System Operator (currently Transpower) for the day-to-day operation of the electricity system.

The wholesale market involves bids to buy and offers to sell electricity. For that to happen, the Commission contracts the Pricing Manager to set final prices, the Reconciliation Manager to reconcile electricity volumes, and the Clearing Manager to carry out the process for settling accounts. The Commission contracts the Wholesale Information and Trading System to carry out information transfers, especially uploading bids and offers.

In the retail market, the Commission contracts the Registry to hold information on points-of-connection for consumers. The Registry enables consumers to switch retailers, and enables retailers to access the information they need to facilitate the switching process. The Commission appointed itself as Market Administrator in 2004.

1: This is where the transmission charges are bundled with the distribution charges and included in one tariff.

2: "Dispatch" is defined in the Electricity Governance Rules, 1 May 2008: "'dispatch' means the process of (a) pre-dispatch scheduling to match expected supply with expected demand, and to allocate ancillary service offers and transmission offers to match expected grid conditions; and (b) rescheduling to meet forecast demand: and (c) issuing instructions based on the pre-dispatch schedule and the real-time conditions to manage resources to meet the actual demand."