Less Chance Lights Will Go Out Under Electricity ReformsEnterprise and Commerce
Enterprise and Commerce Minister Max Bradford says there will be less chance the lights will go out in a "dry year" when ECNZ is split into three generating companies.
"The split of ECNZ will mean security of supply risks will be better managed than at present because there will be stronger incentives for all the electricity generation companies to actively manage their risks, and for hydro-only companies to maximise the value of their water resources," Mr Bradford said.
"These incentives are not just financial but go to the core of their business activities - that is the provision of a secure, reliable energy supply for their customers.
"The Electricity Reform Transition Unit (ERTU) report has confirmed this point, just as energy consultant Dr Keith Turner did in December 1997 when he reported to the Government on security issues prior to the Government's decision to implement its electricity reform package."
Issuing an updated Government policy statement (attached) on the management of dry year risk, Mr Bradford said the majority of market participants (wholesale buyers and sellers of electricity) have accepted responsibility for managing their exposure to dry year and other supply risks.
"The policy statement outlines the need for market participants to undertake prudent management of supply risks, and makes it clear that the Government will not step in to rescue companies which have failed to put in place adequate protection," Mr Bradford said.
"Rising electricity prices will act as an early warning mechanism of an impending shortage, compared with the previous dominant one company position where warning mechanisms tended to be muted. These better price-shortage signals will assist the companies to manage any future supply risks."
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GOVERNMENT POLICY STATEMENT: MANAGEMENT OF ELECTRICITY SUPPLY RISK
"Dry Year" Risk
A key risk to the security of electricity supply in New Zealand is climatic uncertainty. We rely heavily on hydro generation and New Zealand has limited water storage capacity. Unusually low rainfall, or "dry years", can create electricity shortages. The economy will continue to face this risk for the foreseeable future.
The Government's objective is to provide a framework which will ensure that dry year and other supply risks are managed prudently at least cost to the economy.
The Government has issued previous policy statements concerning the management of dry year risk. These have emphasised:
the Government's expectation that electricity market participants should ensure that they take responsibility for managing dry year and other supply risks; and that the Government will not step in to protect those who fail to provide adequate protection.
If market participants did not take such action, and a government stepped in, the likelihood of future supply shortages would increase as a result of weaker incentives on buyers and sellers of electricity to arrange appropriate risk management strategies.
It is timely to re-emphasise the Government's expectations of market participants and the principles that should be observed in managing electricity supply risks. The Government expects that retailers will communicate to their customers the level of service (including the security of supply) that they are offering. This is so that consumers will have the information they need to make informed choices.
Expectations and Principles
- Dry year and other supply risks should be managed in such a way as to minimise overall costs to the economy.
- Responsibility for managing risks relating to supply rests with wholesale buyers of electricity and their consumers.
- Generators are responsible for providing protection against supply risk at a quality and quantity that is demanded by their customers and established in contracts.
- Spot and contract prices in the wholesale market should signal the changing risks of a dry year event.
- A range of mechanisms are available to market participants to manage dry year and other supply risks, within and outside the wholesale market.
- The trade-off between the costs of supply and protection measures should be made by those at risk.
- The wholesale market rules should not be biased against any particular protection mechanism.
- The Government is not expected to step in to protect wholesale buyers who fail to put in place adequate protection arrangements.