The Electricity Market - Nine Months Old

The Boatshed, Wellington

Thank you for the opportunity to address members of the electricity market at the launch of Comitview and celebration of the winter solstice - significantly, the first for New Zealand's wholesale electricity market.

This winter was signalled as the first big test of the new wholesale electricity market.

Our electricity reforms are regarded as some of the best in the world - but it was with some interest - and I admit some apprehension - that I watched our young market enter its first winter.

The wholesale electricity market
Nine months ago the self regulated power market got underway after extensive designing and building.

The new market evolved through a number of structural changes that occurred to the industry in the previous two years including:

break-up of ECNZ
creation of Contact
design, build and operation of Interim Market from 2 Feb.
Generation, transmission, and pricing are now carried out in completely different ways than previously.

The new market see risks lie where they fall and thus challenges all participants to understand the workings of the whole system.

In its first few months of operation, the wholesale market has already resulted in some positive changes.

Investment signals
The new market is providing signals for investment in generation and transmission. Investment plans are changing under the new market's disciplines. They are providing signals for economic investment in areas such as generation and transmission:

Contact Energy for example has deferred a hydro station on the lower Clutha River in favour of a combined cycle plant nearer the demand in Auckland.
Transpower also noted the shift in investment plans toward smaller stations located closer to main demand and has shelved a planned $500 million extension of the HVDC link from Haywards to Auckland.
Hydro management
The market has also improved management of resources such as water.

The critics of the reforms said in a dry year we'd run out of water in our hydro lakes without Government control. They said a competitive market wouldn't coordinate water use properly.

Experience both here and in Norway proved them wrong. When Norway - which is 100 per cent dependent on hydro-power - faced a dry year, its market anticipated a water shortage. Power prices rose, consumption fell as people economised, the water was conserved and the crisis disappeared.

Think back to 1992 when - under central control - New Zealand was faced by a power crisis which seemed to take most people by surprise.

It wasn't until May 1992 that anyone outside ECNZ was given information about the deteriorating position of the hydro lakes and by then it was too late.

1997 could have been even worse.

This has been the driest alpine summer since 1974, but hydro lake levels have not reached anywhere near the extreme lows of 1992.

The credit for the early warning signals and subsequent careful conservation of hydro resources has to go to the wholesale electricity market.

Prices rose as lake levels fell, and I would suggest that we are at last seeing price signals arriving when there is still time to do something about a problem, instead of repeating the 1992 mistake of flat prices right up until we ran out of water.

Information
Importantly, the wholesale electricity market has put hydro data at the finger tips of power companies who need to forecast their demand and bids.

Good information and accurate pricing signals provide far greater ability to plan ahead and manage risk. That is precisely how the market was intended to work.

Access to market information is what today's celebration is all about. Comitview marks another step towards the development of a well functioning wholesale electricity market.

Information is vital to the electricity market. In the past, market information has been available only to the biggest players.

Through Comitview any party can have access to the information, at a lower cost, only a short time after the market.

Soon, I would like to see market information made even more readily available.

Comitview is a big step in the right direction, but I would also like to see market information accessible to the household consumer and the general public.

I would like to see the media publishing electricity price information in the same way it publishes share prices or beef and dairy prices.

And I look forward to the day soon , when metering technology allows household consumers to take advantage of price signals and choose when to consume electricity and when to switch off.

Pricing
One of the aims of the electricity reforms was to see that consumers paid the true cost of transmission and generation of their electricity.

An example of this can be seen in prices paid by South Island consumers.

Since the market came into effect in October last year the combined effect of spot prices and long term contracts has delivered an estimated average differential of about 8 to 9 per cent in favour of South Island consumers. That excludes the effect of the $10.9 million Government subsidy whose future has gained so much attention recently.

In other words, the market is delivering competitive power prices which recognise the lower costs of transmission and generation in the South Island.

And, as I have said before, options to introduce more competition are available to the Government if necessary.

Competition
I am taking a strong interest in the performance of this market in delivering competitive prices.

I want to see a market with strong downward pressure on costs and efficient prices.

In order to deliver these, there must be effective competition in all areas of the market from generation, to the wholesale market and retailing.

Barriers to entry must be removed, access to grid and distribution lines must be open with unbundled and transparent costs.

There is still a great deal of work to be done before I am satisfied with the state of our electricity industry.

I have commissioned a study on ways to promote retail competition and drive competition as far down as possible through the retail market.

If there are suggestions that competitive outcomes are not being delivered, then further steps to increase competition will be increasingly prominent in my thinking.

The possibility of further splitting ECNZ has not been forgotten. Generators must do their part in ensuring competitive outcomes.

Ideally, a market should contain no single dominant player.

Nor have I ruled out the possibility of splitting power companies' distribution and retail functions into separate entities.

It seems to me such a move might be the way to keep things simple and circumvent the possibilities of creative accounting which blurs the boundaries between their line and retail businesses under the current information disclosure regime.

The reduction in barriers to competition must become a key focus of the entire industry, if it wishes to remain the least regulated in the world.

I am sure market participants can see the wisdom in taking strategic action to see that the Government's objectives are met with the minimum of Government involvement.

Domestic Consumers
I am also following with interest the developments in the industry on metering issues and innovative metering technologies.

The full potential of the electricity market in New Zealand will not be realised until we get viable household metering technology delivered to ordinary consumers at a reasonable price.

New Zealand is leading the world in developing innovative metering technology which brings choice of supplier, consumption and a range of services such as home security to the householder.

Consumers want choice and value for money. The electricity industry are now beginning to recognise that their customers are not an annoyance attached to the end of their lines.

I would urge you all, if you haven't already, to place your customer at the heart of your operations.

I have made it clear that I am determined effective competition in all possible areas of the market will be achieved. There must be competition in electricity generation. There must be competition in electricity retail.

I have also made it clear that the industry should take action to achieve these by itself while it still has time.

EMCO
The establishment of a successful wholesale market has been a major contribution to the Government's reform programme.

I am pleased to record my recognition of EMCO's leadership in market development which has rightly earned it a large proportion of the credit for the progress of the market.

EMCO has continued to push to improve the market with a number of new developments:

the development of a standard use-of-system agreement
proposals for further changes to the MARIA rules that will enhance competition
facilitation of demand-side management through a variety of measures, including further work on ways to stimulate a forward market
reviewing the dispatch rules to seek further efficiencies
revision of the fees structure for the NZEM to promote entry to the wholesale market
and identifying an improved governance and ownership structure.
Through these initiatives, EMCO has shown itself to be committed to driving down costs and improving service to the wholesale market, and enhancing efficiency and lowering barriers to entry at all levels of the market.

The introduction of Comitview represents another step toward a fully competitive wholesale electricity market, and I congratulate EMCO on its introduction.