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.
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.
2 Nov 2017 by John Rampton
Data and data exchange for market transactions consultation
The electricity industry data system needs to support innovation while also continuing to support existing ways of doing business.
The electricity industry is changing rapidly as advancements in technology and new business models make it possible to do things differently. These advancements provide low-cost opportunities to bring new sources of generation, storage and demand response into the market—which have the potential to provide substantial long-term benefits for New Zealand electricity consumers.
With this changing environment, the Authority is examining whether any changes to the data system are required to promote innovation and more participation. Specifically, creating a neutral platform where new technologies and business models can come into market may require revising the industry’s data systems—how data is collected, processed, stored and exchanged. In particular, the data system may need to deal with more parties, more transactions, more data types and more volumes of data.
In September 2017, we published a consultation paper about data and data exchanges for market transactions. The consultation paper is a forward-looking, high-level check of whether the data system continues to be fit-for-purpose in this changing environment. We have identified a number of data-related matters that may need to be addressed to accommodate the range of new and innovative technologies already coming to market today. This includes minimising inefficient barriers to more data exchanges, more participation, new business models and new products and services. We also want to make sure that the data system continues to support existing ways of doing business and is ‘backwards compatible’ to the extent this achieves long-term benefits for consumers.
We are seeking your views on the issues identified in this consultation paper and whether any other changes to market processes, systems and rules may be required. We are particularly interested in your experience in using the data system, data-related matters you think should be addressed and how. Based on your comments, we may pursue further work to develop the market arrangements and data system.
Submissions on our consultation close at 5 pm on Tuesday, 7 November 2017.
5 Oct 2017 by Craig Evans
Sparking innovation in the energy industry
In late 2016 the Electricity Authority asked distribution companies to make public their plans for reforming the prices charged for use of their lines. Now participants in the electricity technology accelerator, Lightning Lab Electric, have credited access to those “pricing roadmaps” as key to their innovations.
Lightning Lab Electric was a four-month, mentor intensive, business acceleration programme held from May to September. The Electricity Authority was keenly interested and involved in the programme, which aimed to provide participating teams with structure, start-up methodologies, business skills and focused support so they can prove, build and launch ideas into market.
As the name suggests, the focus was on sparking innovation in the energy industry. Mentors and stakeholders were brought together with innovators to market test concepts and determine if they were worthy of further development and investment.
Four teams were chosen to take part, with the final part of the programme, a ‘demo day’ to stakeholders, held in early September, which I was excited to attend.
It was great to hear two teams in particular reference the importance of understanding how distribution companies are planning to address their pricing structures as they developed their innovations.
One team, Ampli, has developed what it calls a ‘Smart Grid Enabler’— that is, “a platform that specialises in information sharing, smart meter analytics and modelling for lines companies and electricity retailers”.
Ampli’s innovation may help distribution companies better inform the development of what the Electricity Authority calls ‘service-based and cost-reflective pricing’. Essentially, we expect distributors to provide their customers (those who buy and sell electricity services using their network) with the best possible price information about the value or cost of using the network. This will help consumers to make better decisions about how and when to use electricity. Ampli says its platform takes half hour consumption data from retailers, anonymises it, aggregates it, and uses comparative billing to produce information which lines companies are then able to analyse for the purpose of developing cost-reflective pricing.
Another participating team, emhTrade, also found transparency around distribution pricing plans useful in developing its innovation. Its emh app enables consumers to set personal power preferences to make a positive impact on their bill, community and planet via a transactive grid.
Put simply, it allows people to trade electricity to peers through existing distribution lines.
The other two teams involved in the accelerator were Polanyio and Mlabs. Polanyio is focused on streamlining procurement in the electricity industry via a shared platform that engages with brokers, retailers and consumers providing the “best fit between customer demand profile and retailer pricing offers”.
MLabs is aiming to revolutionise high-speed, high-voltage electrical protection systems through machine learning and cloud-based computing.
All four of the participant teams are undertaking exciting and innovative work with an aim to improve elements of the electricity industry.
There’s so much potential in New Zealand for consumers to really benefit from the innovation and change happening in the electricity sector. We want to reduce any unnecessary barriers and ensure the market is flexible enough to allow for change. It’s great to see entrepreneurs such as the Lightning Lab participants encouraged in their efforts to enter the market and we look forward to seeing more of it.
To read more about how we’re working to facilitate this, see what we’re doing around enabling more parties to take part in the electricity market.
3 Oct 2017 by Carl Hansen
Our 2016/17 Annual Report
Today we published our Annual Report for the 2016/17 financial year, which demonstrates strong improvement across our three key outcomes of competition, reliability and efficiency.
Between 1 July 2016 and 30 June 2017, five electricity retailers entered the market, taking the total number to 29. Competition forces market players to continually look for new and better ways to serve customers and adapt quickly to technological innovations, delivering large gains for consumers over the long term. For the first time in the history of New Zealand’s retail electricity market, small to medium companies now account for more than 10 per cent of market share.
We have also seen improved reliability and efficiency in the market; hydro generators effectively managed lower-than-normal rainfall in the South Island during the 2017 winter. In addition to these positive results, consumers are becoming increasingly confident that the electricity market is operating as it should. Consumers’ perceptions of competition, reliability and efficiency in the electricity market have increased across the board. For example, 59 per cent of consumers surveyed in 2017 said, “There is a reliable supply of electricity each day, that is, a good balance is achieved between the cost to consumers of power cuts versus the cost of maintaining electricity supply.” Whereas, 2015 survey results were 48 per cent.
In regards to compliance, the number of serious breaches investigated by the Authority decreased in 2016/17 to a total of four, down from six in the previous year. This is a positive result as it indicates the Authority is doing its job in encouraging market players to operate in accordance with the rules governing the electricity market.
The Authority and NZX celebrated 20 years of New Zealand’s wholesale electricity market in October 2016. While many of the foundations set in 1996 still remain, the market has evolved considerably over those 20 years and a key job now is to ensure it remains flexible for the future. Looking forward, we are focused on continuing to reduce unwarranted barriers to evolving technology and new business models and facilitate greater competition, and to pave the way for pricing that reflects the cost of delivering electricity to consumers.
Overall, the 2016/17 year has been a positive one for the Electricity Authority as we continue to ensure positive outcomes for the long-term benefit of consumers.
31 Aug 2017 by Tim Street
More accurate pricing can unlock technology potential
It’s important to improve the certainty and reliability of spot price information to enable the growth of new technology, such as batteries and electric vehicles, and business models.
For example, batteries can help to meet demand in peak periods, but need reliable spot price information to ensure they contribute energy at the most valuable times. It’s likely that consumers will be less inclined to invest in and use batteries if they can’t get reliable spot price information to help them make those decisions.
Currently, spot market prices are finalised two or more days after ‘real-time’—after generators have supplied electricity to the market and consumers have used the electricity. However, if prices were finalised in real-time, participants and consumers would receive more price certainty and could make better decisions about their electricity use.
On 1 August we published a consultation paper on our real-time pricing proposal. If progressed, our proposal will be a major development for New Zealand’s electricity market, and is the result of a detailed programme of work over many years.
Our proposal would enable smarter decisions which are likely to save consumers money and reduce the overall investment that New Zealand needs to make in the power system. Prices would be more actionable and more efficient, and the process would be simpler and easier to understand.
“More actionable” means consumers and participants can trust and respond to the prices they see in real-time. More efficient means consumers and participants would be much less likely to regret their decisions, and prices reflect the cost of resources actually used to run the power system at the time.
In August 2017, the Authority and system operator held two briefings to provide an opportunity for stakeholders to ask questions in advance of finalising their written submissions. The briefings were a valuable opportunity for interested parties to raise and discuss issues, and we appreciated the opportunity to provide clarity. Slides and video recordings from the briefings are available on our website.
Submissions on our consultation close at 5 pm on Tuesday, 26 September 2017.
29 Aug 2017 by Carl Hansen
Prerequisites for a competitive retail market
Earlier this month I presented at the recent Singapore Electricity Roundtable, sharing thoughts on what’s needed to create a successful competitive retail market.
Singapore has similar electricity market arrangements to New Zealand. And while Singapore doesn’t have a competitive retail market for residential consumers yet, it’s interesting to see they have a lot of retail competition for non-residential consumers.
So whilst we know there is always more work to do, I thought I’d share my perspective on what the Authority believes to be key drivers of success here in New Zealand.
New Zealand’s energy market has become increasingly competitive since full retail competition was introduced in 1999. As at 31 July 2017, consumers had 40 retail brands to choose from, delivered by 29 parent companies.
Market share snapshot
Competition brings long-term benefits for consumers because retail companies are forced to innovate to deliver better offerings to gain and retain customers.
In each distribution network region across New Zealand the largest retailer has experienced diminishing market share. The average market share of the largest retailer in a network region was 76 per cent in 2004. That has almost halved so that the largest retailer in each region now holds, on average, 42 per cent of the market as a result of other large players having gained more customers.
From my perspective there are four key prerequisites to developing a successful retail market.
- A level playing field
It’s crucial that potential market players believe there is a level playing field. If they don’t then they’re unlikely to enter and compete.
- Reduction of barriers to retailer expansion
Competition can be seriously compromised if market players face high barriers to expanding their business. Therefore, the Authority is focused on minimising inefficient barriers for retailer expansion.
- Low barriers to consumer action
It’s important that consumers believe they can exercise meaningful choice when they want it.
- A vigilant regulator
There will always be a time when ‘the going gets tough’. In these instances it’s important there is a vigilant regulator focused on market-oriented solutions.
Following on from these four key prerequisites, there are three outcomes which demonstrate the existence of a successful, competitive retail electricity market.
- Price changes reflect cost changes. In theory a competitive market should deliver prices reflecting the efficient costs of supply. If price changes are broadly reflective of cost changes over a reasonable period of time then we can take that as an indication the market is workably competitive and prices are reasonable.
- Diverse range of choices. As consumers are highly diverse in their preferences, a wide diversity of choices available in the market indicates retailers are facing strong competition to meet the needs of consumers.
- Technology changes are adopted quickly. Over the long term, innovation delivers the largest value gains for consumers, typically far greater than the value gains from prices more accurately reflecting costs. We’re now seeing various electricity retailers bringing innovations to the market—from communications advances offering the ability to charge customers differently to new ways of packaging power bills.
But one additional thing is needed to demonstrate a successful competitive market. All industries experience tough times and so, a successful competitive retail electricity market is one which “lasts the distance”. That is, its fundamental features, prices and other key terms and conditions, are determined by market forces and are robust to serious adverse events.
We’re pleased to see that consumers now rank the electricity market as the third most competitive retail market behind supermarkets and the telecommunications industry.
The Authority is continuing with its comprehensive programme of work to continue improving these measures, all the details are available on our website.
7 Jul 2017 by John Rampton
Malaysia looks to New Zealand for inspiration
In May 2017, we met a study group from Malaysia’s large, vertically-integrated electricity utility, Tenaga Nasional Berhad (TNB).
Tim Street, Alistair Dixon and I hosted the study group when they visited the Authority during their New Zealand trip. The group included senior regulatory and finance representatives who were interested in obtaining a better understanding of the workings of effective electricity markets.
Malaysia does not have a competitive electricity market; TNB own and operate generation, transmission, distribution, system operation and retail functions. However, there are some private power stations, and TNB also operates a ‘single buyer’ function that effectively aggregates electricity production at a wholesale level.
Malaysia is moving to separate the system operator and single buyer from TNB, which will likely prove to be the first step to further reform of the electricity system to deliver greater benefits. New Zealand’s competitive electricity market was a key topic at the meeting—retail competition, price structures and performance monitoring created plenty of conversation.
Our discussions with TNB highlighted some areas of New Zealand’s regulatory structure that are perhaps more difficult to understand from a distance. These areas include the roles and interface between the Authority and the Commerce Commission. The group found it interesting to compare the single regulator (Suruhanjaya Tenaga) in Malaysia with the New Zealand framework.
Even though our markets are quite different, the potentially disruptive effects of emerging technology on electricity systems are similar in Malaysia and New Zealand. There’s no denying that emerging technology impacts us all, just in different ways.
It was interesting to explore the differences between New Zealand’s market-based approach and the single monopoly supplier in Malaysia. What was clear was that New Zealand’s markets can introduce change more swiftly, resulting in increased innovation, which leads to more efficient outcomes for the long-term benefit of consumers.
It’s an exciting time in Malaysia’s market development and they were keen to learn from their New Zealand experience. We enjoyed meeting the TNB group and were pleased to share guidance, advice and information with them. Likewise, it was equally valuable for us to consider what they’re doing and what they plan to do next.
The TNB group representatives indicated that their visit to the Authority further confirmed their desire to move to more competitive, market-based outcomes. It led them to ponder a final question, “How long would it take for Malaysia to get an electricity market like New Zealand?”
3 Jul 2017 by Craig Evans
New Zealand's electricity market compares well
Compared to markets in and near the US, the New Zealand electricity market is less complex and more durable. Our focus on promoting workably competitive markets is also a more effective way for responding to innovation and change than approaches being tried elsewhere.
Many people involved in the US-based markets are concerned about adapting wholesale market design to respond to new technologies and renewable energy targets. In particular, capacity mechanisms appear vulnerable to new technology and changes to how electricity networks are being used, for example from increased investment in batteries and demand response for electricity markets. A further problem faced in the US-based markets is a lack of integration and coordination in the design of wholesale markets and downstream markets. This lack of integration is undermining the US-based wholesale markets, inhibiting the development of the retail market and, more than likely, contributing to an inefficient uptake of evolving technologies. Fortunately, the market governance arrangements here in New Zealand avoid this by providing the Authority with a whole-of-market and supply chain focus.
Various US government subsidies have led to a massive increase in wind generation, which has had some interesting market effects, including increasing periods of negative prices. A key concern about wind generation is that it will not be flexible and fast enough to maintain system reliability and security.
New York State has developed a “Reforming the Energy Vision” (REV) programme in response to some of the same issues we are facing in New Zealand—including inefficient distribution prices encouraging consumers to invest in solar panels. However, the contestable focus of the REV programme will face challenges because it does not have the solid platform that New Zealand has following the changes to industry structure in the late 1990’s and subsequent efforts aimed at promoting workably competitive markets.
The distributor and default retailer for New York City, Consolidated Edison, is starting a roll out of 5 million smart meters which they expect to take until 2022. There is considerable interest in New Zealand’s approach to metering, and some surprise that we have achieved 75% penetration without explicit regulatory intervention regarding metering functionality. This success is partly because retailers are responsible for installing meters—metering is a contestable service and so is best provided by a range of contestable providers, rather than a monopoly provider (such as a distributor).
In the US, there is considerable regulatory oversight of wholesale prices due to concerns with the prices bid by generators through the wholesale market process. Regulatory intervention in the wholesale market is one reason for a “missing money” problem because wholesale prices do not allow generators to recover their fixed costs. The solution to this problem appears to have been to introduce capacity markets. In contrast, New Zealand and Australia are developing wholesale markets that encourage competition rather than trying to regulate wholesale prices. This is because, in practice, it is difficult to distinguish whether high prices are a result of a competitive market process, or are the outcome of the exercise of market power.
Retail competition can lead to large value gains for consumers in the long-term, and assure consumers they are paying reasonable prices. But in New York State, retail competition is compromised by a widespread perception that electricity retailers are fraudsters and scammers, and this means very few people switch from the default utility supplier. Here in New Zealand, there were 28 independent retailers operating at the end of March 2017, and there were 40,691 switches during March 2017 (the highest count in the 2017 calendar year to-date).
My over-arching impression is that New Zealand’s electricity market is much better placed than most other jurisdictions to manage the fundamental changes being experienced by the electricity industry. Although we still have some work to do, we are further along than many jurisdictions and have a superior platform (market design and industry governance). The Authority has a comprehensive programme of projects aimed at identifying and reducing inefficient barriers and allowing for more participation. On 30 May 2017 we released a consultation paper titled, Enabling mass participation in the electricity market: How can we promote innovation and participation? We are seeking views on opportunities for more participation across the electricity supply chain, and on changes needed for consumers to benefit from innovation—the consultation closes on 11 July 2017.
We’re looking forward to further engagement with participants and expect it to be a fascinating and thought-provoking time of change for the industry.
Craig visited the US to attend the 34th Electricity Intermarket Surveillance Group (EISG) Conference. The EISG brings together organisations responsible for electricity market surveillance and monitoring in Canada, the US, Mexico, Colombia, Philippines, South Korea, Singapore, Australia and New Zealand. The Electricity Authority hosted the 32nd EISG Conference in April 2016.
While in the US he also met with representatives from New York State’s generation and transmission business, The New York Power Authority; the New York distributor and default retailer, Consolidated Edison, and the New York State Department of Public Services. He also met with an electricity consultant to utilities and governments across the US and an expatriate Kiwi working for an electricity retailer in New York.
27 Oct 2016 by Carl Hansen
Plenty of food for thought at APERF
I recently returned from the 2016 Asia Pacific Energy Regulatory Forum (APERF) in Seoul, Korea. The forum brings various Asia-Pacific counterparts together, where they can share best practice regulatory and market arrangements.
I attended the forum with Authority Chair Brent Layton and board members Susan Paterson and the Hon. Roger Sowry. Dr Stephen Gale, Commissioner at the Commerce Commission, also joined the New Zealand delegation. Over the course of the 2-day event, we met with delegations from South Korea, the United States, Australia, Tonga, China, Japan, Singapore and the Philippines.
A key take-away from this years’ forum was how important it is to have well-functioning wholesale electricity markets. Electricity markets are highly dynamic and security of supply considerations are important factors in all jurisdictions. All countries who attended the forum are at different stages in their development, so the topics ranged from a need for flexibility, to concerns over inefficient capacity, to wholesale market developments.
The presentations from the US delegation showed their strong focus on creating more flexibility in the electricity system. The California ISO can experience big changes in solar and wind power—often just as demand is increasing rapidly—making flexibility and fast ramp rates in other sources of generation vitally important. Flexible demand response systems are a key focus in the US.
There are a wide range of reforms coming into the Japanese market and the Japanese delegation gave an interesting presentation about transmission pricing issues in their country, with several problems similar to those the Authority discussed in its transmission pricing paper released earlier this year. An interesting insight was that in the wake of the Fukushima nuclear disaster, 30 nuclear stations were taken out of operation but there was still just enough capacity for the country to operate without experiencing ruinous black-outs. The head of the Japanese delegation highlighted how this level of excess capacity is not efficient.
Often the talk these days is on micro grids, so it was interesting to hear from delegates about exploratory work on a super grid connecting South Korea, Japan, China and Russia. SoftBank has indicated willingness to fund the project but there remain significant issues about how much each country would pay for the super grid.
We had an engaging bilateral meeting with the Electricity Market Authority (EMA) of Singapore, whom we enjoy a close working relationship with. Singapore is moving to full retail competition and from vesting to hedge contracts, so we were able to provide our insights in this area. We’ve been happy to welcome the EMA’s Allan Chong to our Market Design team, while he’s on secondment for six months. Our team has really valued his contribution, and I’m sure he’s found it to be an equally valuable career experience.
Outside of APERF, we also had a very good meeting with Enernoc Korea. Enernoc has seen a dramatic increase in their business—offering demand response capacity to the market—following government determination to pursue a wide range of options to avoid a repeat of rolling outages in earlier years. In fact, the Korean market is now Enernoc’s second largest demand response programme in the world, after PJM in the United States.
Tokyo will host the next APERF in 2018. There are major reforms due to be introduced in Japan in 2020, so I’m looking forward to see how things are progressing in 2018.
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.
18 Oct 2016 by Carl Hansen
Our strategic focus for 2016/17
Rapid evolution is occurring in and around the electricity sector and it is imperative we identify and remove any inefficient barriers to emerging technology affecting the electricity sector.
In our 2016/17 Statement of Performance Expectations (SPE) we identified that the implications of new technologies and business are likely to have a significant impact on the electricity sector. We expect new technologies to create many new options for how electricity is generated and used, meaning consumers will have far greater choice and control than ever before. This could also have a significant impact on market participants, with the potential for new and innovative players to enter and grow market share.
We have reoriented our work programme
Our 2016/17 work programme supports our SPE and gives indicative information about major projects for the year ahead.
We consider evolving technologies and innovative business models are increasingly blurring the traditional demarcation between retail market, wholesale market and transport activities. We are concerned that the current Code and market facilitation measures, market administration and operational processes and its compliance arrangements may inhibit dispersed forms of generating, storing, transporting and purchasing electricity. We are keen to remove barriers to these developments, including removing barriers to residential consumers purchasing directly from the wholesale electricity market or from local generators.
With these influences in mind, the new market development programmes for 2016/17 are:
- Programme A: Evolving technologies and business models. This programme aligns with our strategy to reduce barriers.
- Programme B: Consumer choice and competition. This programme aligns with our strategy to improve consumer participation.
- Programme C: Pricing and cost allocation. This programme aligns with our strategy to improve price signals.
- Programme D: Risk and risk management. This programme aligns with our strategy to increase flexibility and resilience.
- Programme E: Operational efficiencies. This programme covers initiatives to increase the efficiency of electricity market operations.
- Programme F: Compliance education. Our compliance function plays an integral role inensuring the integrity of the electricity market. Please note that the compliance programme remains unchanged from prior years.
We have revised our work programme to ensure we are able to consistently and proactively pursue our statutory objective of promoting competition, efficiency and reliability for the long term benefit of consumers. Figure 1 below demonstrates how our programmes, functions and strategies support our statutory objective.
As always, we remain focused on providing opportunities for parties to innovate and compete, and on promoting choice for consumers.