When water drops, power rises

By DANIEL RIORDAN

New Zealand’s wholesale electricity market is designed so that when lake levels drop and power supply falls, prices rise — the way all markets are supposed to work. Most in the industry say the system has worked well.

But one of the problems is that many wholesale price increases have not been passed on to end users because retailers have been afraid of losing customers.

Households, which consume about a third of all power, have not paid higher prices at all, because they have contracts with their suppliers (the retailers) preventing price increases at short notice.

Business and consumer groups are calling for a review of the market, before the next crisis comes along — and until we greatly reduce our dependence on hydro generation that event is a sure bet.

How did we get here? It wasn’t easy:

* 1987 — Electricity Department restructured to form state owned enterprise Electricorp, generating around 70 per cent of New Zealand’s electricity.

* 1991 — Transpower formed as a separate subsidiary within Electricorp to own and operate the national transmission grid.

* 1992 — Energy Companies Act enacted, mandating local electricity and retail bodies to operate as profitable businesses.

* 1993 — former local electricity supply authorities established as energy companies to provide both distribution and retail services. Electricity Market Company (now M-co) established to design a wholesale electricity market.

* 1994 — Transpower established as a SOE, separate from Electricorp.

An agreement for metering and reconciling bilateral energy trading (called MARIA) enables large electricity consumers to bypass their local energy company and buy directly from generators.

* 1995 — numerous reforms introduced, including:

- a framework for buying and selling electricity through a wholesale pool

- generator Contact Energy formed with 25 per cent of Electricorp’s assets

- sale of eight small hydro stations

- various restraints in place to restrict ECNZ from expanding and exercising its dominance

- policy statements for electricity supply, distribution and pricing security.

* 1996 — Contact Energy began operations in April. The wholesale electricity market began in October.

* 1997 — Government announced further reforms to develop competition for small consumers.

* 1998 — Energy Minister Max Bradford announced the Electricity Industry Reform Act, which included:

- selling Contact Energy

- setting up competing SOEs: Genesis, Meridian Energy and Mighty River Power

- instructions to all energy companies to split their retail and lines businesses

* 1999 — system for customer switching introduced

* 2000 — in response to problems with implementation of the 1999 reforms, a ministerial inquiry initiated by new Energy Minister Pete Hodgson recommends more changes. They include a new single market structure (M-co) with a board elected by stakeholders and comprising a majority of members independent of the industry; compulsory membership for generators, distributors, retailers and Transpower; operation under Government-agreed principles; robust mechanisms for self-regulation; and contestable service provision to the market.

The adoption of a real-time wholesale market was made a priority and the Commerce Commission was made responsible for the content and enforcement of information disclosure regulations and analysis of line company performance.

Protocols for switching consumers are enforced by the new market’s board.

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