Power sector brought into line

Meridian will be given the 155-megawatt diesel-fired reserve generator at Whirinaki, currently owned by the Crown. Photo / Hawkes Bay Today

The electricity sector is in for the most comprehensive overhaul since the late 1990s now that the Government has accepted the recommendations of the Layton review.

Many of the changes intended to increase competition and restrain the growth in power prices are a matter of delivering what were always intended to be features of the market.

This includes moves to establish a liquid electricity hedge market.

Such a market should make it easier for large industrial users to manage price risk and also make it possible for companies (including lines companies) with limited generating capacity of their own to get into the electricity retailing business by contracting for future electricity supplies.

Previous attempts to establish a liquid hedge market have foundered.

When asked why it would be different this time, Energy Minister Gerry Brownlee said: "We are going to make it happen."

Legislation to be introduced to Parliament today will require all the big generators to put up a combined 3000 gigawatt hours of electricity, not matched by any offsetting obligations, into the market and to act as market makers.

That represents nearly 8 per cent of national electricity demand.

One reason a deep and liquid hedge market has never taken off is the absence of a financial instrument for managing the risk that a power company will find itself with retail obligations and generating assets on opposite sides a bottleneck in the national grid and the wrong side of the associated price differentials.

This has resulted in the situation where New Zealand is not a single national market but a series of regional ones, which limits competition.

The review, headed by Brent Layton, called for the introduction of such a mechanism and the legislation provides for the minister to impose one if the new Electricity Authority (the smaller successor to the Electricity Commission) has not already done so within 12 months of its establishment.

However, following a round of consultation, the Layton review modified its most contentious recommendation, an asset swap between two of the three state-owned generators, Meridian and Genesis.

Instead of requiring them to exchange the jewels in their respective crowns, the 730MW Manapouri hydro scheme and the 385MW gas combined cycle plant at Huntly, the review has recommended, and the Government has accepted, a less radical alternative.

Meridian will transfer to Genesis the Tekapo A and B dams in the upper Waitaki (185MW between them) and gain in return the 155MW diesel powered plant at Whirinaki built as reserve generation after the 2003 dry year scare. That scheme, under which Whirinaki's costs are met by a levy on all electricity consumers, is to be scrapped.

Brownlee said that as Meridian's portfolio of wind farms grew its need for peaking plant - a role for which Whirinaki is suited - would increase.

In addition there will be what the Government describes a "virtual" asset swap among the three SOEs in the form of long-term (15-year) hedge contracts.

Meridian will sell 1000GWh a year of South Island power to Mighty River Power and buy the same amount of North Island energy from it.

Meridian will have a similar arrangement for 450MWh a year with Genesis.

The aim of the physical and virtual asset swaps is to give the North Island SOEs enough electricity to go into competition with the South Island incumbents, Meridian and Contact, in the south and give Meridian enough electricity to take on customers in the north.

But it will also reduce Meridian's dominance in the hydro system, which a review by US expert Professor Frank Wolak into market power in the system identified as a problem.