Electricity

Description

Background and history

Electricity is an important input for industrial, commercial and residential users. It is therefore vital that the electricity market operates in a manner that is efficient and fair, and that can support both improved economic activity and improved living standards.

Electricity was produced and distributed by a government department until 1986. It then became a corporation under the State Owned Enterprises Act, the Electricity Corporation of New Zealand (ECNZ). In 1994, the ECNZ was split into a transmission company (Transpower, an SOE) and four separate generating companies, one of which was sold (Contact Energy), the other three becoming individual SOEs. Some power stations were sold to other companies such as Trustpower. As a result, arrangements for the production of electricity have changed from a state-owned monopoly to a mixed-ownership competitive market.

Institutional arrangements

The main components of the electricity market are described below.

• Generators: Meridian, Contact, Genesis, Mighty River Power and Trustpower own around 93% of total electricity capacity. Meridian and Contact are the biggest players in the generation market, and both have large hydro electricity operations based in the South Island.
• System Operator/Clearing Manager: This function is carried out by Transpower under contract with the Electricity Commission. Transpower is responsible for the real-time operation of the electricity system.
• Transmission: Transpower owns and operates the national electricity transmission system.[80] The national grid is largely an alternating current (AC) transmission system, but it incorporates a direct current (DC) connection from the southern South Island (Benmore station on the Waitaki River) across the Cook Strait (by undersea cable) to the southern end of the North Island (the HVDC[81] system). Transpower supplies regional distribution companies and provides electricity directly to some large industrial companies.
• Distribution: 29 lines companies own the local distribution networks throughout New Zealand. Distribution companies include listed companies, shareholder co-operatives, community trusts and local government ownership, with most lines companies owned by trusts. Lines companies range in size from Vector (500,000 end users) to Buller Energy (4,000 end users). Some transmission and distribution infrastructure is also being used to deliver telecommunications services.
• Retail: The five main retail companies are also the main generating companies. These compete with each other to meet consumers' electricity needs and often provide bundled services for consumers. The retailers' charges to the end users include the cost of the electricity supplied to the consumer as well as the costs for transmission and distribution services.

Assets

The location, source and total generation capacity of the New Zealand market is shown in the graphic that follows. Renewable energy sources are a dominant feature of the market, accounting for almost 60% of total capacity.

Figure 26: Main electricity suppliers

Source: Ministry of Economic Development, 2009

As at June 2009, the transmission lines, substations, communications and HVDC cable owned by Transpower Group were valued at $2.7 billion.[82]

Funding and pricing

The diagram that follows shows how the price for electricity is set.

Figure 27: How price is set in the electricity market

Some characteristics of the wholesale market:

• Generators offer to sell electricity into the spot market for each 1/2 hour of each day
• Generation is scheduled and managed in real-time by the system operator to ensure that supply matches demand continuously
• All energy is sold at the market clearing price for each 1/2 hour, set by the most expensive generator dispatched for each 1/2 hour
• Spot price varies significantly over time and can reach very high levels, for sustained periods, during periods of low hydro inflows
• Retailers and large consumers (some of whom purchase from the wholesale market) enter into contract-for-differences (commonly referred to as hedge contracts) in order to reduce the volatility of costs and revenues
• Small consumers typically buy electricity from retailers on fixed-price, variable volume contracts, and are not exposed to the variations in spot market prices

Source: Ministry of Economic Development, 2009

Planning

Planning is undertaken by the individual players in the electricity market. They respond to the market opportunities as well as the regulatory settings that govern the market.