27 Oct 2016 by Carl Hansen
Celebrating twenty yearsnow what's next?
On 1 October 1996, New Zealand’s competitive wholesale electricity market started.
We celebrated the milestone of twenty years of the wholesale electricity market on 4 October 2016. Over 100 guests representing key players from the industry then and now joined us in Wellington to share stories and reflect on the achievements of the industry.
My history in the electricity industry goes back to 2000 when I joined an economics consulting firm, so compared with some of the guests, I’m still a relative newcomer. In his welcome speech NZX Chief Executive Tim Bennett likened the event to a school reunion. I think that was pretty accurate.
Most of the last twenty years has been smooth sailing for the wholesale electricity market, but of course there have been a few storms from which we have learned about various weaknesses where refinements were needed. But overall, there is a huge amount to celebrate in a market characterised by its innovation.
New Zealand was only the third jurisdiction in the world to establish a wholesale electricity market, behind England and Wales (1990) and Norway (1993). New Zealand’s market design included several innovative world firsts, including incorporating half-hour market pricing and internet-based electricity trading.
When the wholesale market first began in 1996 there were only a few generation companies selling into the market and the trading options for managing risk were extremely limited. Now, we have 35 generation companies selling to the wholesale market and 47 traders purchasing from it. Risks can be managed through a vibrant and rapidly growing futures market, through cross-hedging to manage hydro risks and through the fast-developing financial transmission rights market.
Other major changes have come about through the methods we have in place to manage security of supply risks and the development of full retail competition in 1999.
The design of the market is put under the microscope whenever we receive visits from international academics and regulators and participants from other jurisdictions. Without exception, they all express admiration for the high quality design of the New Zealand electricity market, and the determination to craft market-oriented solutions wherever possible.
We are now at an interesting juncture. The opportunities presented by evolving technology are set to challenge many of the market structures currently in place, while providing consumers with more choices and control than ever before. The Authority is committed to removing any inefficient barriers to consumers engaging with evolving technology.
So in October 2036, will we be celebrating forty years of the wholesale electricity market? Or will the new world of block chain, household generation and storage systems, mobile apps and the ‘internet of things’ have transformed the market so dramatically that the wholesale market we know today is no more? It’ll be fascinating to see how things evolve over the next few years, and I’m personally very excited to be helping consumers get the most from the industry during this transformative period.
12 Jul 2018 by Rory Blundell
New Electricity Education Portal a first for the energy sector in New Zealand
A new online Electricity Education Portal tool was launched in June, to help new and existing electricity market participants find key information more easily. It also helps participants interact with each other, the regulator and the market.
The portal shows the relationships between hundreds of different topics and knowledge areas within the industry’s guidelines. It’s aimed at anyone with a desire to understand how the electricity system works.
As part of his role as Principal Advisor Market Services, Ron Beatty, works with new entrants to the electricity sector.
“A couple of years ago we had been considering ways of better presenting information and we were shown some new visualisation software,” says Mr Beatty.
“It was immediately apparent to me that we could enhance the guidelines with this type of software. It fixed a lot of issues we knew we had with presenting information to participants in an integrated manner.”
Data visualisation software has been applied to electricity sector guidelines to present information in an easily accessible format. Users who are looking for more in-depth information can follow links to find as much detail as they need.
The tool focuses on the relationships between hundreds of different topics and knowledge areas within the guidelines. It is like a three dimensional neural network.
Mr Beatty says, “There is so much development going on worldwide in technology that is being applied in the electricity industry. There is a lot to keep up with. With over four decades’ experience, I am still learning.
“It’s very important that participants like retailers and generators, networks and metering equipment providers, understand the role they play within the market.
“If, for example, you are retailer new to the sector, you can search on a specific topic, or you can follow the Use Cases as a learning scenario, to find out about the framework that you must operate within (Electricity Industry Participation Code 2010), and what your obligations are to the electricity market.”
The Code talks about obligations and outcomes, but doesn’t show participants the linkages that they need to understand to make their obligations work. The Portal saves time for anyone wanting to find our guidelines by putting the information they need at their fingertips.
Whiteboard Energy and the Authority have worked collaboratively to produce this portal which can be viewed here. This information will continue to be developed going forward. What you see now is the starting point.
To assist you to use the portal we have developed a user guide and video.
20 Jun 2018 by Matthew Keir
Snapshot of the retail electricity market
We have released a new interactive tool to highlight key changes in the retail electricity market. Users can interact with information in the Retail market snapshot and see how the market has evolved over time.
The new interactive Retail market snapshot tool uses Tableau software to summarise key information on switching, market size and share, market concentration, consumer choice, smart meter deployment and solar generation. Users can engage and interact with the information and easily see year-on-year comparisons.
The tool is directly linked to the Electricity Market Information (EMI) website for anyone who wants to drill into the information in more depth.
New Zealanders continue to enjoy a highly competitive retail electricity market. In 2017 we saw small and medium retailer growth, a continuing uptake of new technology and the highest rate of switching on record.
Consumer choice at new high
At the end of 2017, residential electricity consumers had a choice of between 12 and 35 retail brands depending on where they live. This is a new high. Having new brands and options come into the market pushing existing retailers to create new and innovative offerings is an indicator of healthy competition. Consumers are responding to the choice by switching electricity providers at record rates. 2017 had the highest rate of switching on record with 439,720 consumers switching. Otago was the region with the highest switching rate. In total, 23.4 per cent of Otago consumer connections switched retailers in 2017.
Small and medium retailers continue to grow
The growth of small and medium-sized retailers continued in 2017 with new entrants entering the market and competing for customers. In 2017 small and medium retailers supplied 11.1 per cent of consumer connections, up 1.7 per cent from 9.4 per cent in 2016. Electric Kiwi increased the number of connections they supply the most in 2017, gaining an additional 12,239 customers across New Zealand.
Smart meter deployment continues
Installations with smart meters continued to increase in 2017. At the end of 2017, 81.1 per cent of residential consumer connections had a smart meter, 4.4 per cent more than in 2016. Smart metering technology lowers the cost of collecting meter readings and provides access to more detailed information on consumption. More importantly, smart meters allow retailers to design more innovative and tailored offerings to consumers.
Users looking for more in-depth insights can hover over each section in the tool and follow the link to the corresponding EMI report. The EMI website allows users to customise content and visualise New Zealand electricity market information in dashboards and reports as charts, maps and tables. Users can also create their own dashboards allowing them to capture content that they want to return to keeping it in one easy-to-access place.
20 Jun 2018 by John Rampton
The electricity sector is on the cusp of transformation
Electricity Authority’s Manager Retail and Network Markets Craig Evans, outlines the exciting and ever changing environment of the electricity sector and the work the Authority is undertaking to reduce barriers to participation.
The changes are underway now, and in the future consumers will have greater opportunities and choices. Electric vehicles, energy management systems, solar panels and batteries are giving consumers more choice about how they use electricity and where they get it from.
Mr Evans says, “We think the New Zealand electricity sector is well placed for consumers to enjoy the benefits of the new technologies becoming available.”
The Electricity Authority wants to see households, and commercial and industrial consumers, enjoy the benefits of greater choice.
Consumers’ and suppliers’ ability to participate depends on their ability to get access to services.
Adjusting to New Zealand’s electricity future involves three factors that need to be considered to promote increased participation:
- the physical platform, for example the poles and wires used to transport and distribute electricity across the country,
- the market system – how electricity is bought and sold, and
- suppliers of services, for example P2Power which matches people with local generation (eg solar) selling to their neighbours.
Facilitating innovation and participation is a key focus of the Electricity Authority’s work along with reducing barriers to the entry, expansion, and exit, of parties in electricity markets. Craig Evans’ role within the Market Design team is to progress a number of projects in these areas.
“We have several projects looking at barriers to accessing services, such as the Equal Access and Default distributor agreement projects. A particular focus is the relationship between distributors and parties using the distribution network, because most of the changes to the sector are occurring at the consumer and distribution level,” says Mr Evans.
Craig Evans’ team are looking at data flows – “there’s a lot of data behind the scenes in New Zealand’s electricity system. We want to see that data is exchanged between participants across the supply chain.” The Multiple Trading Relationships project is examining concerns related to possible barriers to parties providing services to consumers, such as obtaining data.
They are also investigating pricing – “this is about the prices of the bundle of services needed to get electricity to the consumer better reflecting the cost of supplying each service,” says Mr Evans.
“Our Distribution Pricing project is about encouraging distributors to adopt prices that provide parties using the distribution network with the best possible information about the value and cost of using the network at a particular time and place.”
The Electricity Authority, with the Commerce Commission, are working hard to find and reduce unnecessary barriers to more participation and to consumers enjoying the long-term benefits of the changes occurring around us now.
The Authority’s work feeds into making recommendations for regulatory change.
19 Jun 2018 by Rory Blundell
2017 Winter Review report
We have recently released a report on how the market performed during the winter. The report highlights important events and trends during the 2017 year, and summarises the work we do in monitoring the performance of the market.
The 2017 Winter Report tells a story of how the electricity market performed during the winter of 2017.
Hydro storage was well-managed. Leading into winter, there was extremely low rainfall around the South Island hydro lakes. This limited the amount of water available for generators heading into winter when electricity demand increases. Pleasingly, the electricity supply was well managed, as a result of the regulatory and market mechanisms introduced since 2010 to improve security of supply.
Over 50 per cent of New Zealand’s electricity is generated from large hydro-electric stations in the South Island. If there is low rainfall it means the lakes that provide the water for this generation can suffer from low storage levels.
The Authority developed and now monitors a range of regulatory measures to help effectively manage the risk caused by dry years.
We are pleased the dry winter conditions were handled with no noticeable impacts and no disruption to consumers.
The greatest contribution to effective management of dry winters has come from the range of measures introduced, in particular the clear rules about when any official conservation campaign would be run and a stress testing regime which ensures major retailers and users of electricity are aware of the risks they face.
In an extremely severe event, a public conservation campaign may be needed. This means all consumers will be asked to use less electricity. If this happens, electricity retailers must pay compensation to their customers. The rate for this compensation is currently set at $10.50 per week, per customer. By conserving water early the electricity system has more options to get through the winter and there is a lower likelihood of a public conservation campaign.
Our stress testing regime requires participants buying electricity from the wholesale electricity market to apply a set of standard stress tests to their market position, and report the results to their board and to an independent registrar appointed by the Authority.
In the electricity futures market, the difference between the best offer to sell at and the best bid to buy widened over the winter. This widening can reduce the ease with which parties can manage the risks they face and maintain confidence in the reliability of the prices in the electricity futures.
The Authority will be looking at whether further measures are needed to strengthen the electricity futures market.
Around 10 per cent of residential consumers on spot contracts switched to fixed price variable volume contracts—the most common sort of retail contract—during the winter. The Authority will continue its work to ensure spot price retailers ensure their customers are well informed about risk.
31 May 2018 by Authority Communications
Our People Series - Ross Hill
In this edition of Our People, we shine a light on Ross from our Senior Leadership Team.
This month we sat down with Ross Hill, General Manager (GM) Legal and Compliance to discuss his role at the Authority and the challenges that come with working in a constantly evolving industry.
Ross’s career in electricity began back with the Electricity Commission as the embedded lawyer for what was then the Transmission team. Shortly before the Authority was established in 2010, Ross stepped in as Acting General Counsel before moving into his current role in February 2011.
Ross now leads the Authority’s legal and compliance group, which has two teams: The in-house legal team provides legal advice and support across the organisation. The compliance team carries out the Authority’s statutory function of monitoring, investigating and enforcing compliance with the Code. As a GM, Ross is also on the Authority’s Senior Leadership team assisting with major decision making and championing the organisation’s mission, vision and values.
He entered the world of electricity with a law degree and considerable experience in other compliance jurisdictions. Although he had no background in the electricity industry he was drawn to the Authority by an interest in electricity, brought on by friends already working in the industry, and a desire for a big challenge.
He finds the biggest challenge now is that the easier stuff has been done. “It seems like we’ve been talking about evolving technology and innovation for a while, but now it is really starting to happen,” he says. “The work is becoming more complicated as the industry changes.”
Ross says that as the industry evolves it is important that the Code is as accessible, readable, and understandable as is possible. This is a challenge considering the Code’s content and the existing level of prescription. “We don’t want the rule book to be perceived to be, for example, a barrier to entry into the market.” he says.
Alongside the challenges, Ross’s role comes with many rewards. He says the best work the legal and compliance team do is to help people. Ross commends the experts in his team who are on the phones with participants helping them with issues so they don’t breach the Code.
“It would be interesting to know the statistics of the compliance cases we never see because we have helped participants with their compliance in the first place,” he says. “As a manager and leader it’s rewarding to see people doing well and I’ve been some assistance in enabling them to do so.”
Recently Ross and his team were involved in a Regulations Review Committee hearing, which involved a complaint about a change in the Code. The case involved months of preparation and lots of work ahead of the hearing including detailed submissions. The hearing itself only lasted a few hours but the hard work paid off when the Committee found the grounds for the complaint were not made out. Ross says this was a very pleasing result that endorsed the robustness of the Authority’s processes.
28 May 2018 by Tim Sparks
Renewables, energy efficiency and storage on the agenda at WFER
Earlier this year I attended the World Forum of Energy Regulators (WFER) in Cancun, Mexico. Held every three years, the forum is an opportunity for the Authority to keep up with developments in international energy regulation and meet with key regulators from across the globe.
Over the course of the 4-day event I listened to some of the most relevant voices in the global energy industry talk about “Regulating in a Time of Innovation” – the main theme of this year’s forum.
The energy sector is evolving rapidly and as Michael Liebreich from Bloomberg New Energy Finance said, “By 2040 one third of the world’s energy will be wind and solar, one third of vehicles worldwide will be EVs and the economy will be one third more energy-productive”.
As innovation and technology developments are rolled out, it is important we swiftly and efficiently adapt. And as the sector evolves we need to adjust the way we regulate it.
New Zealand is taking a clear lead in the global trend towards more renewable generation and we are in a strong position to manage increased levels of intermittent generation such as wind and solar. It was interesting to hear how other countries are dealing with the unpredictability of intermittent renewables that only produce energy when the wind is blowing or the sun is shining.
In countries like Denmark and Germany the variance in renewables can be managed and the reliability of the system can even outperform countries with a far smaller proportion of renewables, like the US. One way that variance in renewables can be managed is by backing up with a portfolio of other resources such as high-storage air-conditioning and smart-charging EVs.
There was widespread discussion on the importance of energy efficiency and why it should be front of mind for regulators. As Amory Lovins from the Rocky Mountain Institute said, “Energy efficiency and demand response will out-compete other sources of supply if allowed to compete fairly and realise their true value”. According to Lovins, regulation needs to be neutral to allow this to happen and avoid rewarding the wrong things, such as capital investment in networks.
A presentation from John Pierce, Chairman of the Australian Energy Market Commission (AEMC) covered the regulatory challenges surrounding energy storage. While the big companies like Tesla say regulators should set a mandated target for battery storage, there could be unintended negative consequences down the track. Amory Lovins said there are lots of ways to get flexibility and due to the expensive nature of bulk storage it may not be the best option. It might be more cost-effective to use more energy efficient buildings instead of building more batteries.
Key energy industry players, high-level policymakers, academics and regulators from all over the world were at this year’s forum. I had useful conversations with our close neighbours at the Australian regulatory institutions. It was valuable to compare approaches to emerging technologies and share experiences of communicating with stakeholders.
28 Mar 2018 by Authority Communications
Our People Series - Sarah Hughson
Designing and operating New Zealand’s electricity system takes great people. In this series, we shine a light on a selection of our staff members.
While the new role is light years removed from work Sarah has done previously, it still aligns closely with the work values she has held since leaving school.
Sarah says she chose to work at the Authority, joining in 2015 as a Market Operations Coordinator, because she could see people here were keenly interested in what they do but managed to have a bit of fun at the same time.
Her role within the half-a-dozen-strong Market Operations team is to provide a gateway between the operational arm of the Authority and the industry (participants and market operations service providers like NZX and Transpower), helping parties on both sides meet their requirements under the Electricity Industry Participation Code 2010 (the Code).
Sarah fields consumer-related questions and enquiries about industry-related processes, referring them on to others to resolve when they reach the boundaries of her knowledge. However, those boundaries are being pushed out all the time. Since taking up the role last year, she feels she’s rapidly becoming a “jack of all trades” and building a deep understanding of how the electricity sector works.
The Authority has turned out to be an ideal place for a motivated woman with an appetite for knowledge and experience. Sarah left school early without a clear idea of what she wanted to do and pursued an assortment of jobs − tutoring in photography, working as a clown, labouring on a building site, retailing in pharmacies before moving into an office environment.
During a stint in the UK, she worked for the Institute of Chartered Accountants, managing facilities staff in its Milton Keynes office from her base in the London headquarters. Returning to New Zealand, she took up a succession of short-term roles before finding her way to MSD working as the Executive Assistant to the General Manager Integrity Services for a year and then to the Authority.
Out of work hours, Sarah travels whenever she gets the chance. Her interest in finding out how things work behind the scenes has led to some wonderful experiences, including the chance to see places like Manapouri when travelling for work.
“I’m in a job where there is always something new to learn about and new connections to be made,” she says. She’s also having to change the way she thinks. “Most of my earlier jobs were task related; now I’m having to think about things differently, and it’s stretching me in different ways.”
Most of all, Sarah enjoys the variety of work at the Authority. “You never know what’s going to land in the inbox each day,” she says. “I’m not sure you could ever stop learning.”
27 Mar 2018 by Rory Blundell
Inflows boost hydro storage
The level of water in New Zealand’s hydro lakes has risen rapidly to above average for this time of year – a clear indication that the security of electricity supply can quickly change.
At the start of the year, the ‘controlled storage’ available for use in New Zealand’s hydro lakes was sitting at about 2,240 gigawatt hours (GWh) − about 17 per cent below the mean storage level for that time of year.
We know the situation can change rapidly and, sure enough, rain in the hydro lake catchments has pushed storage in the country’s hydro lakes above the mean for this time of year. Controlled storage increased by around 850 GWh in February – enough to power an additional 100,000 homes over the course of a year. And in mid-March, lake levels hit a five-year high for that time of year.
Of course, things can easily change again in the reverse direction. As we saw at this time last year, storage was high but steadily decreased over April, May and June, moving us into a ‘dry winter’ situation. Aside from consumers on spot price contracts or living near the hydro lakes, it is likely most people weren’t aware of the situation. That’s because we have a comprehensive set of arrangements to ensure the lights can stay on even when supply looks tight.
Spot prices increase to conserve hydro
A feature of our wholesale market is that electricity generators can calculate the price at which they can economically generate, and they start up their generators when the market price is high enough. When the controlled storage in hydro lakes is lower than average, those hydro generators are likely to increase their prices – put simply, because there is less ‘fuel’ it becomes more valuable. Other generators such as thermal generators, which have a higher cost of operation, watch the prices. If the prices offered to the market reach a point that would cover their costs of operation, the thermal generators are likely to start up. This may result in temporary increases to the spot price of electricity, as we saw in 2017.
Hydro risk curve showing controlled storage to 19 March 2018
New Zealand also has a unique arrangement to discourage electricity retailers from seeking a public conservation campaign unless it is absolutely necessary. Before 2011, retailers had the incentive to lobby for a national conservation campaign to be launched so they would be less exposed to high spot prices. This happened in 2001, 2003 and 2008.
To prevent these campaigns from happening unnecessarily the Authority set up the Customer Compensation Scheme, with two key features:
- The scheme stipulates that an official conservation campaign should occur only when the hydro lakes have a 10 per cent risk of running out of controlled hydro shortage. (Storage fell to its lowest level last year since the scheme was introduced, with a 2 per cent risk of running out of controlled shortage.)
- If an official campaign is launched, customers are compensated for their conservation efforts. Retailers have to pay their customers $10.50 for every week of the campaign, which could cost some retailers almost $5 million per week. The requirement for compensation provides a good incentive for retailers to manage spot price risk through measures such as financial or physical hedges.
The Authority is currently reviewing two aspects of the Customer Compensation Scheme. We’re asking for feedback on whether a retailer should be required to compensate a customer for the full conservation campaign period, even if the customer switches to another provider during that time.
We’re also considering whether we need to review the minimum weekly amount paid to customers more or less frequently. Currently the amount is reviewed every three years, but we’re keen to hear industry views on whether this timeframe should be changed.
The consultation on these two aspects of the Customer Compensation Scheme is open until 10 April.
26 Mar 2018 by Carl Hansen
Adjusting to NZ's changing electricity future
There are challenges and opportunities facing New Zealand as it looks towards a fully renewable electricity future.
Renewable generation of electricity reached 85 per cent in New Zealand in 2016. It’s a statistic that puts the country among the leaders in the OECD for renewable generation; others, including the United Kingdom, Australia and United States have so far failed to pass the 25 per cent renewables mark.
The target of reaching 100 per cent renewable electricity generation by 2035 (in years when rainfall and inflows into our hydro lakes is considered normal) is supported by the country’s flexible and resilient electricity system.
We’ve outlined the current state of play and why we’re well placed to deliver the target in a document published on 13 March 2018. The document, “Adjusting to New Zealand’s electricity future”, also discusses factors that need to be considered to ensure increased renewable generation supports good outcomes for consumers.
The country is already well on the renewable energy path; in 1997, renewable generation accounted for only about 65 per cent of total generation. While high internationally, the increase since then to around 85 per cent demonstrates how far New Zealand has come.
The electricity system has been able to accommodate increased renewable generation largely thanks to its flexibility. Most renewable generation is intermittent by nature, meaning there needs to be careful consideration of how to ensure the supply of electricity to end consumers remains secure. However, New Zealand has plenty of backup options for when weather conditions prevent renewable sources from fully meeting demand, enabling the continued growth of renewable generation..
Generators are actively responding to customers’ demand for clean, green electricity, and the costs of renewable generation and renewable technologies are increasingly favourable for consumers. The Emissions Trading Scheme also offers further incentive to switch to lower-emission generation, with the expected future costs of emissions an important factor in investment decisions.
But, as we outline in the document, challenges and opportunities remain. For example, there are potential downstream effects from new technology. Technologies giving consumers greater control over their own levels of reliability and security of electricity supply are changing expectations about the overall costs and who should pay.
It’s also possible that the costs of having reserves of renewable generation, needed only rarely to meet times of increased demand, may be high.
The document concludes that for New Zealand to avoid the use of fossil-fuelled backup generation while retaining high reliability standards and current cost levels, it will need to rely on innovations in technology and demand management. It will also be vital to ensure the uptake of renewables isn’t thwarted by unnecessary barriers. The Authority’s current work programme and strategies consider all of these issues. We look forward to continued discussion about our current projects and New Zealand’s renewable future.
Read the “Adjusting to New Zealand's Electricity Future” document on our publications page.
21 Feb 2018 by Carl Hansen
Authority tracking well on work programme
The Authority is progressing well on its comprehensive work programme, with significant work being done to reduce barriers to innovation.
We’re now more than halfway through the current financial year, which provides a good milestone to reflect on our progress so far.
The Electricity Authority publishes its annual work programme every July. We regularly review progress against project milestones and I’m pleased to say we are tracking extremely well against the targets set.
The work programme covers projects across five different “streams”:
- Evolving technologies and business models
- Consumer choice and competition
- Pricing and cost allocation
- Risk and risk management
- Operational efficiencies
One of the biggest projects we’re progressing this year is determining whether to publish final prices for the spot market in real-time, what we call “real-time pricing”. Currently spot prices published in real-time are indicative only. The pricing manager publishes final prices for any given day at least two days after real-time. Our consultation in September last year received 18 submissions, with widespread support for the project. We’re pleased this project is tracking well against the targets we set for 2017/18.
We’re also tracking well on two projects focused on enabling innovation and more participation in the sector: multiple trading relationships and data and data exchange. The multiple trading relationships project is looking at reducing barriers to consumers having more than one electricity service provider serve them at the same time. For example, at the moment consumers can only have a trading relationship with one retailer. If they have invested in their own generation, such as rooftop solar generation, then can only sell that energy to their retailer. Hence, we’re looking at the feasibility, and the costs and benefits, of making it easy for consumers to trade with more than one retailer at the same time.
Meanwhile, the data and data exchange project is looking at whether the existing data system supports new innovations. Both of these projects have been out for consultation this financial year and we’re looking forward to making decisions on the next steps in these projects.
We did have a setback with one of our other big projects last year – the Transmission Pricing Review. We were disappointed to have to take longer to complete it but we are making good progress on it now after having brought the new Board members up to speed on all aspects of this significant project. We expect to provide stakeholders with an update by the end of the financial year.
14 Dec 2017 by Tim Street
Hedge market breaks records
The total value at risk on the ASX NZ futures and options market has reached record levels. At the end of November, ‘open interest’ in ASX contracts reached a peak of around 5,750 GWh, which equates to approximately 65 per cent of the total volume of the physical electricity market, up from around 4,500 GWh in November 2015. This is good news, however more needs to be done to further lift the performance of this market and improve other performance metrics, such as trading volumes.
New Zealand’s wholesale electricity market is made up of three different markets:
The spot market is where electricity is bought and sold every half hour at around 240 points across the country. Market participants vary the price and volume at which they offer electricity to reflect changing supply and demand conditions. Rapidly changing conditions can make spot prices very volatile.
The ancillary services market is where services are procured that ensure the quality and reliability of power. For example, the system operator procures instantaneous reserve which works automatically to secure the network in the event of a sudden failure of a large generating plant or piece of the transmission network.
The third is the hedge market, which consists of the over-the-counter market (OTC), the Australian Securities Exchange (ASX) futures and options platform and the Financial Transmission Rights (FTR) market. The hedge market offers participants a way of insuring against volatile spot prices. Participants buy and sell financial instruments whose prices are based on expectations about the spot market and its underlying conditions. These products allow them to ‘lock in’ electricity prices in the future (futures products) or gives them the right to lock in a price if they choose (options product).
New Zealand electricity futures were first listed on the ASX in 2009 and the Authority has consistently worked to encourage the development of exchange-traded products. Most recently the ASX introduced monthly baseload futures and in 2018 we’re expecting a range of cap products to be added, with reference points at Benmore and Otahuhu. This will give buyers more opportunities to strategically protect their electricity purchase prices and support electricity sellers in underwriting new plant investments.
As the ASX futures and options market has developed, so too has the number of participants trading on the market and their willingness to take larger positions. A key way of measuring this is the level of open interest. Open interest is essentially the total volume of contracts that can earn or owe money on the exchange at a given point in time. Some participants may hold contracts that cancel each other out, these aren’t counted in the open interest measure as a dollar earned on one contract would be lost on another contract by the same participant.
As you can see from the graph below, the volume of open interest has been on a steep upward trajectory over the past year and reached 5,752 GWh in late November. That record level has remained fairly steady since.
It’s important to appreciate open interest is just one measure of market performance. Trading volumes during November were 95 per cent higher than November 2016. We did see the spread between buy and sell prices widen temporarily over winter. These and other measures will be considered as the Authority carries out its comprehensive review of market performance over the 2017 winter.
Open interest - ETI
There are a number of motivators for the growth in open interest, including:
- The recent dry winter prompting buyers to seek new ways to protect against spot price rises
- Expectations that next year’s winter, and possibly this summer, may also be dry
- New participants entering the market, both proprietary derivative traders and retailers
- Increased trading in quarterly ASX options.
Generally, more volume in the hedge market creates more opportunities for generators and retailers to effectively manage spot price risk. This reduces price shocks for generators and retailers and ultimately consumers.
As mentioned, the ASX is preparing to introduce two cap products to the hedge market. These cap products will allow electricity purchasers to pay an upfront premium to protect themselves against spot price which reach either $130/MWh or $300/MWh (depending on which cap product they buy), with both products being provided at both Benmore and Otahuhu.
Meanwhile, the cap products will enable sellers of electricity to gain more stable income for infrequently used plants and will help to underwrite or support new investments.
For more information on the hedge market data visit https://www.emi.ea.govt.nz/
13 Dec 2017 by Rory Blundell
Customisable market insights
The Electricity Authority’s latest iteration of the powerful Electricity Market Information (EMI) website offers users easy-to-navigate and customisable access to detailed data.
It’s been five years since we launched the EMI website, offering anyone access to detailed and timely information on New Zealand’s electricity market. The website provides access to millions of charts and insights, from grid generation and demand trends to retail market share.
We’re on a continual journey to improve EMI and have recently launched the latest iteration of the site. There are three main changes which give users easier access and personalisation.
1. Enhanced navigation
We’ve switched things up a bit to make navigation around the EMI site easier and more intuitive.
- The main menu now reflects the four categories we segment data and reports into, allowing users to easily select their area of interest. These categories are Retail, Wholesale, Forward markets and Environment. Trending content is available under each category, eg reports, datasets and latest discussions.
- We’ve promoted report subject tags to provide another method of navigation. Users can simply click a subject tag they are interested in to see all reports with information on that subject.
- Information about the data in any report has been moved from notes below the chart into its own tab above the report to make finding that information much easier.
We’ve also added relevant discussion tags to each report that link to conversation topics on the EMI forum, to help provide further context to users and help them find the answers they’re looking for.
2. My dashboards
Users now have the ability to create and save their own dashboards. Similar to the favourites list on an internet browser, My Dashboards offers the ability to collate regularly visited data in one easy-to-access place. What’s more, the functionality enables users to save their own specific parameters for views they set on charts, rather than always having to start from the defaults.
3. EMI news
We also have an “EMI news” tag on the site. By choosing to follow the news tag registered users will receive an email any time we release a new report or dataset on the site, a great way to ensure you’re kept up to date with all the latest information. Users can also follow other categories and tags to ensure they don’t miss other relevant discussions other users are having.
We’re pleased to have launched the latest version of EMI, but we know with sites like these there are always opportunities for improvement. Whether you’re a regular user or new to EMI, we’d love to hear your feedback. Head over to the EMI forum to join the conversation. For more information on how to use EMI to your advantage, visit our previous Market Commentary article.
13 Dec 2017 by Androula Dometakis
Your views on our proposed 2018/19 appropriations and focus
We invite you to share your views on our proposed appropriations for the 2018/19 year and the focus of our work programme.
The Authority is funded by the Crown through appropriations of public money. The Crown recovers the cost of this funding through the Electricity Industry levy on industry participants.
Before requesting this funding, each year we consult with levy payers in the electricity industry to take on board their feedback, improve our focus and comply with our requirements under the Electricity Industry Act (2010).
For 2018/19 we are proposing funding of $74.270 million to enable us to deliver core functions and progress our work to promote a competitive, reliable and efficient industry for the long term benefit of consumers.
More than 70 per cent of this money will fund the operation of the electricity system and market, with the remainder used to fund the Authority’s core operating expenses and work targeted at facilitating consumer participation.
In addition to our core operational appropriation, we also seek funding for two contingent appropriations: Managing the security of New Zealand’s electricity supply and the Electricity litigation fund. For 2018/19 we are proposing that these appropriations stay at the same level as in 2017/18.
Chart: Where our operational funding goes:
Proposed Electricity industry governance and market operations appropriation in 2018/19 ($74.270 million)
What’s different this year
The electricity industry is undergoing transformation and responding to evolving technology, changing consumer expectations and increasing uncertainty. A significant commitment to market development is needed to ensure the industry remains flexible into the future so that consumers can make the most of opportunities resulting from innovation.
For the Electricity industry governance and market operations appropriation, our proposal of $74.270 million is a slight increase of $0.333 million from 2017/18.
This reflects a small increase in funding that we consulted on last year to enable the system operator to deliver improvements to its Electronic Dispatch Facility.
We are also seeking feedback about extra funding from 2021/22 that would be needed to enable the Authority’s Board to make a decision to implement real-time pricing. Implementing real-time pricing will provide much better price certainty and unlock a range of opportunities for new technologies and new business models.
Our work programme
We’re also seeking feedback on the six programmes covering our key project work. These programmes are aligned with our strategies for delivering long term benefit for consumers.
To help you understand more about how they align, we’ve included a short table that summarises the links between the programmes and strategies below.
Summary of our work programme framework
|Programmes||Programme descriptions||Alignment with our key strategies|
Evolving technologies and business models
|This programme covers initiatives to reduce inefficient barriers to the development and use of evolving technologies and business models across the supply chain.||Reduce barriers|
Consumer choice and competition
|This programme covers initiatives to promote competition and empower consumer choice in the retail market.||Improve consumer participation|
Pricing and cost allocation
|This programme covers initiatives to promote efficient pricing in markets and for monopoly services.||Improve price signals|
Risk and risk management
|This programme covers initiatives to promote efficient management of capacity and energy risks.||Increase flexibility and resilience|
|This programme covers initiatives to increase the efficiency of electricity market operations.||Enables all of our strategies|
|This programme includes initiatives to improve participant compliance with the Act, regulations and the Code.||Enables all of our strategies|
We need your views by 5 pm on 19 December. We always get great value from the input our stakeholders and levy payers provide and we appreciate the effort you put into this process.
The appropriations will be announced in the Government’s Budget, which usually occurs in mid-May. The detailed information will be published in the Authority’s Statement of Performance Expectations (SPE) for 2018/2019.
More detail including the full consultation documents are available on our website.
Note—we have corrected a typo in the consultation paper affecting Question 6 (Page 19). This question should refer to 2018/19 as opposed to 2017/18. The link to the consultation paper now refers to the document with this corrected.
7 Dec 2017 by Craig Evans
Multiple trading relationships
Currently consumers can only choose one electricity supplier with which to establish a relationship. The future could look very different as innovation creates new opportunities for consumer choice and control.
Consumers are used to receiving an electricity bill from only one supplier, typically their retail electricity company. But the electricity world is changing. Your experience with electricity will also change, particularly as existing and new suppliers use new and emerging technologies to provide innovative electricity services which give you more choice and control. As an example, we’re seeing more consumers choose to generate their own electricity and explore the potential for battery storage.
The Electricity Authority wants to remove any unnecessary barriers to consumers taking advantage of this shift. We are considering whether consumers can easily establish relationships with more than one electricity provider if they wish to. For example, some consumers may want to buy electricity from one supplier and sell their excess electricity to a different party. Or they may want to engage with a party, that’s not their retailer, to help manage electricity use. We want to remove any inefficient barriers to consumers making these choices.
The current market rules were not designed with this in mind. Instead, it assumed there would be one “trading relationship” at each location. The current arrangements may also be making it harder for new parties to get involved in the market because they don’t have quick and easy access to the data needed to provide their services.
If this is the case, it may unnecessarily limit consumer choice and control.
Making it easier for consumers to have multiple trading relationships is likely to have benefits: more choice for consumers, greater competition and innovation in business models and services, more reliable supply and a more efficient electricity industry.
We’re asking interested readers to share their thoughts with us as part of a new consultation on this idea of multiple trading relationships. Some of the questions we’re putting to interested parties include whether the constraints to multiple trading relationships are material, what the benefits may be from removing or addressing any constraints and what services could be enabled if action is taken.
The consultation is open until 5pm on 27 February 2018, more information is available here.
22 Nov 2017 by Carl Hansen
Keeping the lights on
Electricity prices and risks of power blackouts have been grabbing headlines globally. New Zealanders need to know their electricity system has been performing effectively to manage dry winters.
It’s been 25 years since one of New Zealand’s most significant power crises: in the winter of 1992 street lights were turned off, people faced hot water restrictions and the country’s major industrial power user had to cut consumption by a third.
Just shy of a decade later in 2001, and then again 2003 and 2008, Kiwis were asked to voluntarily cut electricity use when dry winters occurred.
Something similar could have happened again this year: we’ve just come out of yet another dry winter, not that the average consumer would have noticed. And that’s a good thing, that’s what we want. But we should also recognise and appreciate the major changes that have made it so.
Leading into winter 2017 there was extremely low rainfall around our South Island hydro lakes. The low inflows meant less generation capability heading into the cold months when electricity demand is at its highest level.
The industry closely monitored the situation in preparation for launching a public conservation campaign just in case it was needed. As it turned out, it wasn’t. Had we faced this same situation 10 or 20 years ago people could have again been reduced to shorter showers and eating dinner by candlelight.
Figure 1: Hydro storage
A range of different factors have made the market what it is today, enabling it to manage dry winters effectively. The biggest impact has been the introduction of transparency measures for retail electricity companies and large industrial customers and a plan where customers are compensated if they are asked to conserve power.
The ‘stress testing’ scheme was introduced in 2012. Under the scheme electricity retailers and large industrial companies have to disclose what they stand to lose if wholesale market prices rise to very high levels. The idea is that they can’t skimp on insuring themselves from high prices (by buying specific financial products) and then complain when prices rise.
It was this sort of activity that played a large part in driving conservation campaigns in the 2000s.
If a conservation campaign was launched now, electricity retailers would have to pay residential customers and other small consumers $10.50 a week. That could amount to almost $5 million a week for some retailers.
This scheme was launched in 2011 to reduce the incentive for retailers to lobby for conservation campaigns to lower their exposure to high electricity prices when lake levels are low. Instead, the retailers now arrange for backup generation to be run earlier and harder (generating more electricity) to limit price rises and conserve the hydro lakes.
In addition to these major reforms, our hydro lakes are also managed by more companies which appears to have encouraged better decision-making.
A successful industry
Around the world the risk of power blackouts as a result of limited generation capacity are not uncommon. The United Kingdom, for example, was warned this time last year that people could be facing blackouts over the festive season due to a lack of capacity.
Closer to home, just last month Queenslanders were warned they may be asked to conserve electricity use over summer to prevent blackouts.
Against this backdrop, it’s important to understand how our industry has changed to better manage dry winter situations.
New Zealanders should feel comfortable the industry is working to avoid similar situations as those in the United Kingdom and Australia from happening here unnecessarily. We may be small but our power system is mighty and envied by many international players.