Part 5: What the Electricity Commission has achieved

Electricity Commission: Review of the first five years.

5.1
In this Part, we describe the Commission's achievements to date. They include:

5.2
The Commission's primary focus since September 2003 has been in:

  • assuming responsibility for operating the electricity system and markets, including developing and implementing Rules for Operations, and resolving several long-standing issues (approving a transmission pricing methodology, strengthening the operation of the wholesale market, and completing a development plan for real-time electricity system operations);
  • making transmission investment easier, including resolving several long-standing issues (creating a grid reliability standard to measure and prioritise transmission investments against, and developing a transparent cost-benefit test to assess transmission investment proposals);
  • developing and implementing security of supply standards and policies; and
  • promoting electricity efficiency.

5.3
During its first five years, the Commission has completed many tasks required in the Government Policy Statement that are important to the ongoing functioning and development of the market. However, the Commission notes that its major challenge is to put in place voluntary and regulatory arrangements that allow commercial enterprises to deliver the desired outcomes.

5.4
The Commission has noted that it is difficult to measure in absolute terms the effect of its work on outcomes - that is, a measurable change to the electricity market. The Commission has a greater understanding of the effects of its work and has developed a measurement framework. However, it is a difficult area to measure and the Commission intends to continuously improve its outcome monitoring. We discuss this further in The Commission has noted that it is difficult to measure in absolute terms the effect of its work on outcomes - that is, a measurable change to the electricity market. The Commission has a greater understanding of the effects of its work and has developed a measurement framework. However, it is a difficult area to measure and the Commission intends to continuously improve its outcome monitoring. We discuss this further in Part 6.

5.5
We consider that some of the Commission's significant achievements include:

  • establishing a security of supply policy;
  • completing pricing and contracting arrangements for transmission services (the Transmission Pricing Methodology and Benchmark (Transmission) Agreement);
  • establishing a regulatory framework and decision-making processes for grid investment, which enabled approval of $2.7 billion in grid investment and significant savings on some proposals;
  • working on wind capacity, resulting in wind generation being integrated into the system;
  • improved reconciliation rules and a reconciliation system producing more accurate and reliable accounting for electricity bought and sold; and
  • renegotiating the five market service provider contracts, resulting in lower contractual costs and improved services.

Improving rules and regulations

5.6
The Commission has carried out an ongoing programme to administer and improve rules and regulations. This programme of work has resulted in the Commission completing 70 maintenance and development rule changes up to April 2009. The Commission has also carried out a number of projects that have resulted or will result in rule changes. Examples include:

  • investigations into options for integrating wind generation into the power system and electricity market;
  • improving the transparency of hedge contracts1 and contract markets, improving liquidity and the ability to manage electricity price risk;
  • developing new reconciliation arrangements to improve the accuracy of allocation of electricity volumes to purchasers;
  • adopting the Common Quality Development Plan to address long-standing issues to do with power system security and quality;
  • writing guidelines to facilitate the introduction of advanced metering at minimal cost to consumers;
  • writing guidelines to protect vulnerable consumers in consumer disconnections; and
  • writing model contracts for retailers and their customers.

5.7
In line with the Government Policy Statement, where possible the Commission establishes voluntary arrangements and guidelines in preference to regulating, particularly in the retail area. The Commission monitors these voluntary arrangements to ensure they are effective, and to consider whether regulation might be necessary.

Supporting investment decision-making

5.8
The Commission has provided information to support investment decision-making. For example, the Commission has prepared and published several documents and data sets, including:

  • the Statement of Opportunities, which provides a high-level analysis of the system to help identify investment opportunities; and
  • the Centralised Data Set, which includes detailed historical modelling data necessary for investment analysis.

5.9
The Commission has prepared reliability standards for assessing grid investment proposals. It has also resolved issues on service standards and who should pay.

5.10
The Commission has established a transmission framework, starting from the guidelines and processes set out in the Electricity Governance Rules 2003. The regime, which was consulted on widely with the industry and is similar to that used in other electricity systems, includes:

  • Grid Reliability Standards to underpin investment proposals (no formal standards previously existed);
  • the Grid Investment Test, which is a cost-benefit test to assess transmission investment proposals against alternatives;
  • a Transmission Pricing Methodology (the issue of allocating the costs of transmission services had been unresolved for more than a decade); and
  • Benchmark (Transmission) Agreements for Transpower and its customers. These provide minimum enforceable and common contract standards for access to transmission services, and reflect a reasonable balance of interest between Transpower and its customers and electricity consumers.

5.11
Since the transmission framework was established, the Commission has approved over $2.7 billion in new transmission investments up to May 2009, the most significant being the North Island grid upgrade ($824 million), the upgrade of the high voltage transmission cable that transports electricity between the North and South Islands ($672 million), the North Auckland and Northland upgrade ($473m), and the Wairakei upgrade ($141m).

Preparing security of supply standards and policies

5.12
The Commission has prepared security of supply standards and policies to ensure that electricity demand can be met when water-flows into the hydro lakes are low.

5.13
The Act requires the Commission to properly and efficiently manage risks to security of supply (section 172N of the Act). Since 2004, the Government Policy Statements have required the Commission to have, and publish, a security of supply policy that would achieve targets set out in the statements. The Commission published the Initial Security of Supply Policy in June 2005.

5.14
The Commission has:

  • developed a methodology, in consultation with industry stakeholders, for determining whether procuring reserve energy (additional generation or load reductions) is needed to achieve the agreed standards; and
  • carried out annual needs analyses to determine whether reserve energy is required.

5.15
If water-flows into the hydro lakes during a period are low, the Commission has limited authority to intervene in normal market operations. The interventions that are available to it are:

  • to determine the point at which the Whirinaki reserve energy station is offered into the spot market;
  • to run a conservation campaign and/or seek to purchase load reductions, if the system enters what is termed the "emergency zone"; and
  • to initiate rolling power cuts as a last resort.

5.16
The period of low flows into the hydro lakes in 2008 has tested both the market design and security of supply arrangements. Although the winter saw high spot prices and a public conservation campaign lasting some weeks, there were no compulsory power cuts.

5.17
In late 2008, the Commission carried out a review of the 2008 winter period. The review team reported that they noted many positive aspects, including:

  • a relatively high level of hedging by customers;
  • improved information availability; and
  • strong efforts to increase non-hydro supply and to conserve electricity.

5.18
The report also noted that:

... there were no forced power cuts, despite extremely dry conditions in major hydro storage catchments. In short, a relatively young market withstood considerable stress and maintained uninterrupted supply of electricity to consumers.2

5.19
The review team made eight recommendations, including clarifying the roles of the Minister and the Commission in the security of supply area, and giving the Commission a greater degree of independence in the exercise of its regulatory functions. The report noted that a number of people who were interviewed felt that the interrelationships between the Act, Government Policy Statement, and the Commission's own policies made the boundaries between roles less clear. For example, the Government Policy Statement specifies some matters to a level of detail that would appear more appropriate in the Commission's policies. The review team thought that the 2008 Government Policy Statement was an improvement on the 2006 Government Policy Statement in this respect.

Delivering energy efficiency programmes

5.20
The Commission has delivered energy efficiency programmes aimed at reducing demand and carbon dioxide emissions through more efficient electricity use.

5.21
The 2004 and 2006 Government Policy Statements noted that the Commission "has as a key goal the efficient provision and use of electricity" and demand-side management to help reduce the demand for electricity, thereby reducing pressure on prices, scarce resources, and the environment. The Commission was required to give its full consideration to the contribution of both the demand side as well as the supply side in meeting the Government's electricity objectives. This requirement is also included in the 2009 Government Policy Statement.

5.22
In the 2004 and 2006 Government Policy Statements, the Commission was required to put in place arrangements and programmes to promote efficiency in the following parts of the electricity sector:

  • generation;
  • wholesale market;
  • conveyance (that is, transmission and distribution); and
  • end-use.

5.23
The Commission has completed a "bottom-up" analysis of the potential opportunities and priorities for electricity efficiency in New Zealand. This analysis indicates that annual savings of 6400GWh3 can be achieved at less cost than supply-side alternatives and that the Commission could achieve 840GWh (about the annual usage of a city the size of Dunedin) of these savings by 2016 based on current funding levels.

5.24
The Commission has a savings target of 450GWh a year by the end of 2009/10. The Commission anticipates that it will meet its electricity savings target, with about 430GWh of savings to 31 March 2009, and expects to exceed the target by the end of 2009/10.

5.25
In conjunction with the Lighting Council New Zealand and EECA, the Commission has led the development of a three-year national strategy on efficient lighting. It has also launched three major efficiency initiatives. These initiatives have achieved the following results:

  • About five million efficient light bulbs have been sold through the Commission's programmes to March 2009, resulting in savings of around 403GWh a year - the equivalent of the annual usage of Rotorua.
  • In the industrial sector, the Commission has established an accredited auditing programme for compressed air systems, and a "bounty scheme" to replace inefficient electric motors. More than 80 compressed air audits have been completed, and savings from both initiatives have delivered over 18GWh a year of savings to March 2009.
  • In the commercial sector, a programme targeting inefficient refrigeration, heating, ventilation and air conditioning, lighting, and other technologies has now achieved savings of 16GWh a year (to March 2009). This figure is expected to increase to 100GWh a year by June 2010.

Completing a review of the design of the electricity wholesale and retail markets

5.26
The Commission had also carried out the Market Design Review to improve the operation of the wholesale and retail electricity markets in New Zealand.

5.27
In mid-2007, the Commission examined a range of indicators to gauge the performance of the current market arrangements. The Commission identified areas where performance was satisfactory, and areas where it had potential concerns. The work was summarised in an issues paper published by the Commission.4 After considering the submissions received, the Commission released a paper entitled Market Design Review - Update. It highlighted five areas for closer review:

  • pricing and competition, especially in the retail market;
  • energy affordability issues;
  • the effectiveness of the energy-only spot market design;
  • demand-side participation; and
  • availability of market information.

5.28
Some of the issues identified in the Market Design Review - Update are not new, and projects have already been established to address the issues. The Market Development Programme brings these projects and issues identified in the review of the 2008 winter period (see paragraph 5.17) within the one programme. They are now being managed as part of a prioritised programme rather than as individual projects.

5.29
The Commission notes that major investments taking place in all areas of the electricity system are putting pressure on prices. The Market Development Programme will seek to optimise how the markets operate, which is intended to improve security and help to keep prices down.

5.30
The Commission has identified the top 10 projects within the Market Development Programme. These include reviewing transmission pricing, introducing "locational" hedges,5 reviewing distribution pricing, and monitoring retail prices and competition. A number of initiatives that were identified as part of the review of the 2008 winter period are also included in the Market Development Programme.

1: A hedge contract is a contract for sale and purchase of electricity that protects against price risks associated with the spot price of electricity.

2: Review of 2008 Winter and the period leading into winter, Electricity Commission, page 7 (available at www.electricitycommission.govt.nz).

3: One gigawatt hour (GWh) is equal to one million kilowatt hours. New Zealand's annual demand is about 38,000GWh.

4: Issues Paper - Survey of Market Performance, available at www.electricitycommission.govt.nz.

5: "Locational" hedges protect against price risks associated with a particular site of power generation - for example, risks associated with a North Island or South Island site of power generation.

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