New Zealand electricity market

New Zealand's electricity market is regulated by the Electricity Industry Participation Code administered by the Electricity Authority (NZ). The Authority was established in November 2010 to replace the Electricity Commission (NZ) and its publication Electricity in New Zealand explains how the market works.

Overview

Until 1987, New Zealand had a centrally run system of providers of generation, transmission, distribution, and retailing. Since then, a step-by-step process of industry reform has led to the separation of the monopoly elements from the contestable elements to create competitive markets in energy generation and electricity retailing, while imposing regulation on the natural monopolies of transmission and distribution.^[1] Currently the market is split into the following areas: administration and market clearing, regulation, generation, transmission, distribution, and retailing.

The wholesale market for electricity operates under the Electricity Industry Participation Code, ^[2] and is overseen by the market regulator, the Electricity Authority. Trade takes place at more than 200 pricing nodes across New Zealand.^[3] Generators can make offers to supply electricity at grid injection points, while retailers and some major industrial users make bids to withdraw "offtake" electricity at grid exit points. The market uses a locational marginal pricing auction which takes generators’ offers and retailers’ bids, and computes final prices and quantities at each node. The auction is re-run every half hour.

The Authority contracts out the services required to run the electricity market. The Reconciliation Manager, who reconciles all metered quantities, Pricing Manager, who determines the final prices at each node, and Clearing and Settlement Manager, who pays generators for their generation at the market clearing price and invoices all retailers for their offtake, are all contracted to NZX - the New Zealand Exchange, who acquired the previous service provider M-Co in June 2009. The grid operator is Transpower, a state-owned enterprise responsible for ensuring electricity supply security and quality. Transpower also takes on the roles of scheduler, predicting likely demand to help generators make bids, and dispatcher, in charge of matching demand and supply in real time.^[4]

Distribution of electricity from the grid exit points to the end consumers' premises is the responsibility of 28 distributors who have monopoly control of the lines services on their networks. Ownership of distributors, also known as lines companies, is through trust-owned companies and public companies. Some major industrial users are directly connected to the grid, such as New Zealand Steel and the Tiwai Point Aluminium Smelter.

As of October 2011, there are five major generators in New Zealand: Meridian Energy, Genesis Power, Mighty River Power, Contact Energy, and TrustPower. These five together produce about 95% of New Zealand's electricity. The first three are state-owned enterprises; the others publicly traded companies. An important feature of the New Zealand market is that all the major generators also own retailing arms. The companies are thus commonly known as "gentailers". Retailers purchase electricity from the wholesale market, and on-sell it to consumers. Retailers currently active are: Bay of Plenty Electricity, Bosco Connect, Contact Energy, Energy Direct, Empower,Energy Online, Genesis Energy, Just Energy, King Country Energy, Mercury Energy, Meridian Energy, Nova Energy, Powershop, Simply Energy, Pulse Energy, Tiny Mighty Power and TrustPower.^[5]

Most of the retailers are linked to generating companies or have common ownership. For example Empower is backed by Contact Energy, Powershop is owned by Meridian Energy, Bosco Connect is a brand owned by Mighty River Power, Energy Online is owned by Genesis Energy, Mercury Energy is owned by the generator Mighty River Power, and Nova Energy and Bay of Plenty Energy have common ownership. ^[6] Not all retailers supply to all locations, for instance Bosco Connect only supplies to Auckland inner-city apartments. Competition for retail customers varies across the country but since 1999, when full retail competition was introduced, customers have switched at a rate between 9% and 14% per annum.^[7]

Wholesale Spot Market

Electricity is traded at a wholesale level in a spot market. The market operation is managed by several service providers under agreements with the Electricity Authority (NZ).^[8] The physical operation of the market is managed by Transpower in its role as System Operator.

Generators submit offers through a Wholesale Information and Trading System (WITS). Each offer covers a future half-hour period (called a trading period) and is an offer to generate a specified quantity at that time in return for a nominated price. The System Operator (Transpower) uses a scheduling, pricing and dispatch (SPD) system to rank offers, submitted through WITS, in order of price, and selects the lowest-cost combination of resources to satisfy demand.

The market pricing principle is known as bid-based security-constrained economic dispatch with nodal prices. The highest-priced generator actually required for a given half-hour sets the spot price for that trading period.

Electricity spot prices can vary significantly across trading periods, reflecting factors such as changing demand (e.g. lower prices in summer when demand is subdued) and supply (e.g. higher prices when hydro lakes and inflows are below average). Spot prices can also vary significantly across locations, reflecting electrical losses and constraints on the transmission system (e.g. higher prices in locations further from generating stations). Trades take place at approximately 285 nodes (grid injection points and grid exit points) across New Zealand every half-hour. Generators make offers to supply electricity at 59 grid injection points (GIPs) at power stations, while retailers and major users make bids to buy electricity at 226 grid exit points (GXPs) on the national grid. Final prices at each node, taking account of grid losses and constraints, are processed and confirmed the following day.^[9]

All electricity generated is required to be traded through the central pool, with the exception of small generating stations of less than 10MW.^[10] Bilateral and other hedge arrangements are possible, but function as separate financial contracts. Trading develops by bids (purchaser/demand) and offers (generator/supply) for 48 half hour periods for each pricing nodes on the national grid.

Bids and offers start 36 hours before the actual real-time consumption or ‘trading period’. Up to 4 hours (pre-dispatch) before the ‘trading period’ starts a new ‘forecast price’ is calculated to guide participants in the market. From four hours to the start of the trading period every half hour a ‘dispatch price’ is calculated and communicated. Two hours before the start of the ‘trading period’ bids and offers can no longer be revised (with some exceptions) and the new prices reflect Transpower's adjustments in load forecasts and system availability.

During each half hour period Transpower publishes a new real-time price every five minutes, and a time-weighted 30-minute average price. The real-time prices are used by some large direct-connect consumers to adapt their demand. The above prices are however guidelines only as the ‘final prices’ are calculated ex-post (normally noon the following day, unless there are irregularities or disputes) using the offer prices as established two hours before the ‘trading period’ and volumes as established during the ‘trading period’. Differences between forecast, dispatch, real-time and final prices can be significant.

History of reform

Regulation of the electricity market started in a light-handed fashion but there has been an increasing trend towards more heavy-handed regulation. Light-handed regulation is based on the threat of regulation providing an incentive on companies with market power to exercise self-regulation. The normal regulatory legislation such as the Companies Act, Electricity Act, Resource Management Act 1991, Commerce Act 1986, and Fair Trading Act 1986 provide the framework for regulating normal commercial and environmental transactions.

The government has increased the extent of intervention through the Electricity Industry Reform Act 1998, which forced power companies to divest either their energy or their lines business, and the Electricity Amendment Act 2001. The latter led to another round of industry reform concentrating on achieving better governance of the electricity market and tighter control of monopoly functions. The "threat of regulation" was extended to the production of a set of regulations that would be brought into effect if the industry's self-regulation did not meet the Government's criteria.

On May 16, 2003 the result of a referendum by industry participants and customer representatives on a proposed set of self-regulating rules was announced:

Consumers voted 4.4% for the proposal

Traders voted 66.2% for the proposal (traders = generating companies and retailers)

Transporters voted 47.4% for the proposal (transporters = distributors and Transpower)

As there was not a substantial majority of all classes in favour of the proposal it was not implemented.

The result put paid to the prospect of a multilateral agreement on the governance and operational arrangements for the electricity market. The New Zealand government invoked the regulations already prepared to meet this contingency. The "threat of regulation" had been insufficient to stave off regulation.

On 2 July 2003 a draft set of Electricity Governance Regulations and Rules was issued on behalf of the Minister of Energy by the Electricity Commission Establishment Unit (ECEU). This set was for consultation purposes and after submissions were received and reviewed, a set of regulations and rules was recommended to the Governor-General.

In September 2003 a revised set of draft rules and regulations was issued by the ECEU for submissions by the end of October. The set did not include proposed transmission regulations, which were still being drafted. Also in September the Minister of Energy announced the chair and members of the Electricity Commission. Roy Hemmingway, whose most recent position was chairperson of the Oregon Public Utility Commission in the USA, took on the role as chairperson of the Commission.

The final set of Electricity Governance Regulations and Rules (excluding rules for transmission) became effective on 1 March 2004. The final chapter of the Electricity Governance Rules, on transmission, was gazetted on April 28 to become effective on 28 May 2004.

A Ministerial Review of Electricity Market Performance was initiated on 1 April 2009 and led by an independent Electricity Technical Advisory Group, appointed by the Minister for Energy and Resources, with assistance from officials from the Ministry of Economic Development. ^[11] There were 29 recommendations arising from the review. ^[12]

One of the key recommendations approved by Cabinet was the transfer of ownership and operation of some power stations between Genesis Energy and Meridian Energy in order to increase retailer competition in both islands and to give Genesis a South Island generating base. It was decided that Genesis would receive the Tekapo A and Tekapo B hydroelectric power stations from Meridian, and Meridian would receive the Whirinaki Power Station from the government (although Meridian eventually declined to accept). The transfer of Tekapo A and B was completed on 1 June 2011. ^[13]

On 1 November 2010, the Electricity Authority commenced operations, taking over from the Electricity Commission. ^[14]

Milestones in the reform process

The major milestones in the electricity market reform process in New Zealand between 1987 and 2004 were:

• Prior to 1987, a government department – the New Zealand Electricity Department (NZED) controlled and operated almost all New Zealand electricity generation and operated the New Zealand electricity transmission grid
• April 1987 - The New Zealand Government corporatised the NZED and formed the state-owned enterprise– The Electricity Corporation of New Zealand (ECNZ)
• April 1993
  • Electricity Market Company (now M-co) established as a joint venture by New Zealand electricity industry players to act as a focal point for the design of a wholesale electricity market.
  • The Metering and Reconciliation Information Agreement (MARIA) was set up as a multilateral arrangement to allow for retail competition for customers with half-hour interval meters.
  • Former local electricity supply authorities established as energy companies
• April 1994 - Transpower separated from ECNZ and established as a stand-alone state - owned enterprise.
• July 1994 - NZEM commences trading as a secondary market for ECNZ hedges. An independent market surveillance committee was formed.
• June 1995 - After an exhaustive policy debate, the Government announced significant reform of the electricity industry including a framework for buying and selling electricity through a wholesale pool
• February 1996 - An interim wholesale market is put in place allowing ECNZ and Contact to begin competing.
• April 1996 - Contact Energy commenced operations
• October 1996 - The reformed wholesale electricity market (NZEM) began trading
• April 1998 - Government announced the Electricity Reform Act 1998,^[15] which included:
  • Privatising Contact Energy
  • Splitting ECNZ into three competing state-owned enterprises
  • Instructions to all energy companies to split their retail and lines businesses and sell one or other within a set time period
• April 1999
  • Electricity Corporation of New Zealand (ECNZ) disbanded, establishment of 3 separate competing spin-off generating companies i.e. Mighty River Power], Genesis Power, and Meridian Energy.
  • Low-cost system for customer switching established allowing every consumer to choose their electricity retailer.
• May 1999 - Contact Energy shares listed for trading on the New Zealand and Australian Stock Exchanges from 11 May 1999.^[16]
• February 2000 - The Ministerial Inquiry into the electricity industry begins. ^[17]
• June 2000 - The report of the Ministerial Inquiry is published
• November 2000 - Electricity Governance Establishment Project set up as a result of the government's review of the report of the Ministerial Inquiry.
• December 2000 - Government Policy Statement published. ^[18]
• April 2003 - An industry referendum on the outcomes of the Electricity Governance Establishment Project (EGEP).
• May 2003 - The rules developed by EGEP fail to gain sufficient support in the referendum to avoid government regulation.
• July 2003 - A draft set of regulations and rules was issued for consultation.
• September 2003 - As a result of submissions received, revised rules and regulations were issued for further consultation. A revised Government Policy Statement was issued for submissions and the Electricity Commission was appointed
• March 1, 2004 - The Electricity Commission took over control of the New Zealand electricity market from the self regulating bodies, the MARIA Governance Board (MGB) and the Rules Committee of the NZEM.
• October 2004 - The Electricity Act was amended to increase the powers of the Electricity Commission.
• April 2009 – Ministerial review of Electricity Market Performance commences. ^[11]
• December 9, 2009 – Minister announces outcomes of market review, including 29 new measures.^[11]
• November 1, 2010 – Electricity Authority takes over from Electricity Commission, and the Electricity Industry Participation Code comes into effect.^{[14] [19]}

Current structure

As mentioned above, the New Zealand electricity market is split into the following areas: administration and market clearing, regulation, generation, transmission, distribution and retailing.

The current legislation (Electricity Industry Reform Act 1998) prevents the ownership of cross-sector investment (that is energy and lines functions). This means a generation company cannot own or have an interest in a distribution company and a distribution company cannot retail electricity or deal in electricity hedges. There are two exceptions to the regulations: generation companies can own the lines required to transport electricity from their power stations to the grid or local distribution network; and distribution companies can own a small amount of conventional generation capacity within their network but are not limited in the level of renewable generation capacity. There is no barrier to vertical integration from generation to retail. The overall arrangement of the industry creates some very interesting market behaviour amongst the players.

First of all, generation is dominated by five companies: Meridian Energy, Contact Energy, Genesis Power, Mighty River Power, and TrustPower.

Retail companies

The electricity retailers in New Zealand are Bay of Plenty Electricity, Bosco Connect, Contact Energy, Empower, Energy Direct, Energy Online, Genesis Power, Just Energy, King Country Energy, Mercury Energy, Meridian Energy, Nova Energy, Powershop, Todd Energy, Simply Energy, Mighty River Power, and TrustPower.

Of the electricity retailers, Contact Energy has the largest market share.^[20]

New Zealand electricity retailer share, October/November 2010^[21]

Company	New Zealand share	Auckland share		Hamilton share	Tauranga share	Napier-Hasings share	Palmerston North share	Wellington share		Christchurch share	Dunedin share
		United	Vector					north	south
Contact Energy	24%	22%	18%	10%	3%	52%	14%	11%	18%	23%	40%
Genesis Power	23%	35%	7%	73%	12%	5%	54%	65%	51%	7%	6%
Mercury Energy	20%	35%	66%	11%	5%	n/a	5%	8%	10%	11%	22%
Meridian Energy	12%	2%	2%	3%	<1%	3%	16%	9%	11%	53%	10%
TrustPower	11%	<1%	<1%	1%	75%	3%	<1%	2%	2%	2%	19%
Energy Online	3%	3%	<1%	<1%	1%	36%	<1%	<1%	<1%	n/a	n/a
Nova Energy	2%	n/a	n/a	<1%	2%	n/a	9%	4%	4%	n/a	n/a
Other	3%	2%	5%	<1%	2%	1%	<1%	<1%	3%	4%	3%
Orange shading indicates the incumbent retailer (the retailer who inherited the lines company's retail business during the 1998 reforms), of whom is also the largest retailer in the area; green shading indicates the largest retailer in the area; n/a means the retailer does not serve the area.

Generation companies

The electricity sector in New Zealand is dominated by five companies, which are Meridian Energy, Contact Energy, Genesis Power, Mighty River Power, and TrustPower. These are all active in generation, the wholesale market and retail sales of electricity. These five companies combined produce or control more than 95% of NZ's total electricity generation.

New Zealand Generating Companies

Company	Capacity MW	Generation GWh	Revenue	Employees	Customers	Ownership
Contact Energy	2,070[22]	11,035[22]	2,756m[22]	1,000[22]	650,000[22]	public ownership
Genesis Power	1,977	9,126[23]	2,482m[23]		700,000	state-owned enterprise
Meridian Energy	2,601[24]	11,914[24]	2,604m[24]		183,000[24]	state-owned enterprise
Mighty River Power	1,369[25]	5,954[25]	1,172m[25]	752[25]	391,000[25]	state-owned enterprise
TrustPower	594[26]	2,018[26]	681m[26]	340[26]	222,000[26]	public ownership

There are a number of smaller companies in the electricity generation industry including WEL Networks, NZ Windfarms, NZ Energy, MainPower and Top Energy.

The retail space is dominated by the five generating companies (Mighty River Power's retail arm is better known as Mercury Energy). The generation and retail companies use this vertical integration as a natural hedge to manage risks associated with volatility of the spot market. For example, during a dry year, the high prices in the wholesale market price benefit the generation arm but hurts the retailers who buy at wholesale prices and sell electricity to consumers at fixed prices; when prices are low, the loss of profits in the generation side is offset by the profits in the retail business.

These five companies have now extended their risk management strategy further by aligning their retail and generation businesses to the same geographic locations. For example, the majority of Meridian Energy's generation assets are in the South Island, and that's where their retail strongholds are. Mighty River Power's generation assets are exclusively in the North Island, and Mercury Energy's customer base is also exclusively in the North Island.

See also

• Electricity sector in New Zealand
• List of power stations in New Zealand
• Ministry of Economic Development (New Zealand)

References

1. ^ Evans, Lewis; Meade, Richard (2005). Alternating Currents or Counter-Revolution?. Victoria University Press. pp. 138. ISBN 0864735251. 
2. ^ "The Code Electricity Authority". http://www.ea.govt.nz/act-code-regs/code-regs/the-code. Retrieved 2011-10-15. 
3. ^ "Connecting and Dispatching New Generation in New Zealand". Transpower. http://www.systemoperator.co.nz/f1684,1999807/1999807_connecting-dispatching-new-generation-nz.pdf. Retrieved 2009-05-04. 
4. ^ Evans, Lewis; Meade, Richard (2005). Alternating Currents or Counter-Revolution?. Victoria University Press. pp. 73–4. ISBN 0864735251. 
5. ^ "New Zealand Consumer Powerswitch Website". http://www.consumer.org.nz/powerswitch/topic.asp?docid=1049&category=&subcategory=&topic=Powerswitch&title=Contact%20the%20companies&contenttype=general. Retrieved 2011-10-19. 
6. ^ "Electicity Supply Industry Aurora Energy". http://www.auroraenergy.co.nz/content/electricitysupplyindustry.php. Retrieved 2011-10-19. 
7. ^ New Zealand Electricity Commission (2009). "Retail Market Statistics". http://www.electricitycommission.govt.nz/opdev/retail/regstats/index.html. 
8. ^ "Market Operation Service Providers, Electricity Authority". http://www.ea.govt.nz/industry/mo-service-providers. Retrieved 2011-10-15. 
9. ^ "Electricity in New Zealand, Electricity Authority". November 2010. http://www.ea.govt.nz/document/12098/download/about-us/documents-publications/. Retrieved 2011-10-15. 
10. ^ New Zealand Institute of Economic Research (2005). "Market Design Report". http://www.electricitycommission.govt.nz/opdev/wholesale/marketdesign/mktdesignrpt/. 
11. ^ ^{a b c} "Ministerial Review of Electricity Market Performance 2009, Ministry of Economic Development". http://www.med.govt.nz/templates/StandardSummary____41689.aspx. Retrieved 2011-10-15. 
12. ^ "Summary of Main Decisions - Ministerial Review into Electricity Market Performance". Ministry of Economic Development. 20009-12-07. http://www.med.govt.nz/upload/70927/summary-of-decisions.pdf. Retrieved 2011-10-15. 
13. ^ "Genesis Energy takes ownership of Tekapo Power Stations". New Zealand Stock Exchange. 2011-06-01. https://nzx.com/companies/GPL/announcements/209751. Retrieved 2011-10- 15. 
14. ^ ^{a b} "New era for the electricity sector". New Zealand Government. 2010-11-01. http://www.beehive.govt.nz/release/new-era-electricity-sector. Retrieved 2011-10- 15. 
15. ^ Ministry of Economic Development (2006) (PDF). Investment in Electricity Generation by Lines Companies. Discussion Paper. http://www.med.govt.nz/upload/34734/discussion.pdf. Retrieved 2009-05-13. 
16. ^ Contact Energy Half Year Report for Period to 31 March 1999
17. ^ "Ministerial Inquiry into the Electricity Industry 2000, Ministry of Economic Development". http://www.med.govt.nz/templates/StandardSummary____16316.aspx. Retrieved 2011-10-15. 
18. ^ "Government Policy Statement: Further Development of New Zealand's Electricity Industry [December 2000, Ministry of Economic Development"]. http://www.med.govt.nz/templates/MultipageDocumentPage____12408.aspx?&MSHiC=65001&L=0&W=Government+Policy+Statement+&Pre=%3cb%3e&Post=%3c%2fb%3e. Retrieved 2011-10-15. 
19. ^ "Initial Electricity Industry Participation Code, Ministry of Economic Development". http://www.med.govt.nz/templates/ContentTopicSummary____43215.aspx. Retrieved 2011-10-15. 
20. ^ "Retail market share". Electricity Commission. February 2009. http://www.electricitycommission.govt.nz/pdfs/opdev/retail/regstats/regstatspdfs/percenticps/Jan09-Appendix1.html. 
21. ^ http://www.med.govt.nz/upload/76108/Quarterly%20Survey%20of%20Domestic%20Electricity%20Prices%20-%2015%20November%202010.pdf
22. ^ ^{a b c d e} Contact Annual Report 2008
23. ^ ^{a b} Genesis Annual Report 2008
24. ^ ^{a b c d} Meridian Annual report 2008
25. ^ ^{a b c d e} MRP Annual Report 2008
26. ^ ^{a b c d e} Trustpower Annual Report 2008

Further reading

• Reilly, Helen (2008). Connecting the Country – New Zealand’s National Grid 1886 - 2007. Wellington: Steele Roberts. pp. 376 pages.. ISBN 978-1-877448-40-9. 

External links

• The Ministry of Economic Development has a wealth of detail and statistics on the electricity industry, and other New Zealand energy matters.
• The Electricity Authority is the current regulator of the electricity market in New Zealand.
• Em6 and ComitFree provide current data on the New Zealand electricity market.
• Contact Energy
• Domestic Energy Users' Network
• Genesis Energy
• Meridian Energy
• Powershop
• Mighty River Power and Mercury Energy
• Trustpower
• Transpower
• M-co
• Aurora Energy is a distributor, which supplies network services to Dunedin and surrounding areas in the south of the South Island. Their web site has extensive links to the main parties involved in the New Zealand Electricity Market as well as statistics on the industry. It can be viewed at Dunedin Electricity
• Criticism of power privatisation and reforms Campaign Against Foreign Control of Aotearoa
• Marta Steeman, "Power sector 'lost its way'", Christchurch Press, 18 July 2006