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.
Contents |
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]
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.
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 16 May 2003 the result of a referendum by industry participants and customer representatives on a proposed set of self-regulating rules was announced:
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 28 April 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]
The major milestones in the electricity market reform process in New Zealand between 1987 and 2004 were:
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.
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]
| 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. | |||||||||||
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.
| 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.