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Outlook

27 Mar 2018 by Rory Blundell

Inflows boost hydro storage

Outlook

Insights and Analysis

Education

Market Monitoring

Reliability

Wholesale market

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

Customer compensation

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:

  1. 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.)
  2. 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.


Outlook

22 Nov 2017 by Carl Hansen

Keeping the lights on

Outlook

Chief Exec Update

Education

Generation

Insights and Analysis

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.

Benmore

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.

The situation

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

Figure 1: Hydro storage

What’s changed

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.

Stress testing

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.

Customer compensation

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.


Projects

2 Nov 2017 by John Rampton

Data and data exchange for market transactions consultation

Projects

Innovation

Efficiency

Participants

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.


Events & Education

5 Oct 2017 by Craig Evans

Sparking innovation in the energy industry

Events & Education

Competition

Consumers

Distribution

Participants

Innovation

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.

Lightning Lab Electric Demo Day

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.


Outlook

3 Oct 2017 by Carl Hansen

Our 2016/17 Annual Report

Outlook

Chief Exec Update

Competition

Consumers

Efficiency

Reliability

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.

A PDF version of the Annual Report is available on our website. Alternatively, you can request a hard copy of the Annual Report by emailing your name and postal address to communications@ea.govt.nz.


Projects

31 Aug 2017 by Tim Street

More accurate pricing can unlock technology potential

Projects

Efficiency

Reliability

Wholesale market

Innovation

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.


Events & Education

29 Aug 2017 by Carl Hansen

Prerequisites for a competitive retail market

Events & Education

Chief Exec Update

Competition

Insights and Analysis

Education

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.

  1. 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.
  2. 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.
  3. Low barriers to consumer action
    It’s important that consumers believe they can exercise meaningful choice when they want it.
  4. 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.

  1. 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.
  2. 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.
  3. 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.

You can see my slides.


Events & Education

7 Jul 2017 by John Rampton

Malaysia looks to New Zealand for inspiration

Events & Education

Competition

Insights and Analysis

Education

Meetings and Workshops

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?”


Events & Education

3 Jul 2017 by Craig Evans

New Zealand's electricity market compares well

Events & Education

Insights and Analysis

Meetings and Workshops

Wholesale market

Innovation

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.


Events & Education

27 Oct 2016 by Carl Hansen

Plenty of food for thought at APERF

Events & Education

Chief Exec Update

Education

Meetings and Workshops

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. 


Events & Education

27 Oct 2016 by Carl Hansen

Celebrating twenty yearsnow what's next?

Events & Education

Chief Exec Update

Meetings and Workshops

Wholesale market

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. 


Outlook

18 Oct 2016 by Carl Hansen

Our strategic focus for 2016/17

Outlook

Chief Exec Update

Consumers

Efficiency

Participants

Planning and Strategy

Technology

Innovation

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.

 Figure 1: Our strategic framework. 

framework

Outlook

13 Sep 2016 by Fraser Clark

Smart meters: Enhancing competition and enabling new consumer technologies

Outlook

Competition

Consumers

Insights and Analysis

Retail market

Technology

Innovation

The electricity industry is facing a wave of new technology that is challenging the way the industry works, and increasing the choices available to consumers. Smart meters are playing an important role in enabling these choices.

New technology is changing the way we can buy, use and even generate and sell power. Smart meters, and the Advanced Metering Infrastructure (AMI) that manages the meter data, are one of these new technologies. Smart meters have been a game changer in the industry, improving customer service while also providing the basis for the innovative business models being adopted by new entrant retailers. Looking ahead, smart meters will be a tool to help change the way we use electricity and facilitate other new technologies such as batteries and electric vehicles.

More than 70% of NZ homes (over 1.5 million meters) are now benefiting from smart meters and their ability to provide more accurate consumer invoicing. These consumers’ electricity invoices are now based on actual meter reads rather than estimates. Smart meters also provide much less invasive meter reading. Consumers with a smart meter don’t have to open their properties to a meter reader.

In the last five years, 21 new retail brands have entered the market. Most of these retailers have built their business models to use smart meter data to reduce costs, increase efficiency, improve customer service and offer new services and tariffs. Some of these new retailers are growing their market share rapidly, encouraging other, existing retailers to create new services to retain customers.

Retailers are now using smart meters to provide a gateway for services such as Electric Kiwi’s free ‘hour of power’, Flick Electric’s wholesale price-following tariff and Glo-bug’s web-based prepay service.

Smart meters will enable consumers to get the maximum benefit from new technologies such as battery storage, solar PV and smart home technology. They will also help consumers to benefit from cost reflective pricing such as ‘time of use’ tariffs. When used together, smart meters and new technologies that enable consumers to decide how they use and generate power will deliver significant benefits for consumers. Using a smart meter with solar PV and battery storage could help a consumer decide when, and how much, power to buy from or sell into the grid. Smart meters enable ‘time of use’ tariffs by recording exactly when consumers use or generate their power throughout the day. 

New Zealand’s competitive electricity market is world-leading, and is supported by the successful roll-out of smart meters. These smart meters are providing a gateway to the electricity market for other emerging technologies. As the market regulator, we are looking forward to the challenge of ensuring the market continues to evolve and adopt new technology, with consumers receiving the benefits.


Events & Education

30 Aug 2016 by Rory Blundell

ACCC and AER Regulatory Conference 2016

Events & Education

Competition

Insights and Analysis

Market Monitoring

Meetings and Workshops

Our Staff

Participants

Retail market

We sent three delegates to the ACCC/ AER regulatory conference in Brisbane. This was a two day conference with international delegates from America, Britain, Australia and New Zealand. There was also an additional half day conference run by the Energy Networks Association of Australia.

The Authority sent Tim Sparks and Daniel Vincent from our Market Design team and me, as part of our international engagement programme, and to get an update on international regulatory developments.

Part of our work at the Authority is to engage with other international organisations to be able to judge how the New Zealand market is doing at an international level.

The main conference theme was around economic regulation of electricity markets, and answering the question: “does the conventional wisdom still apply?”

Delegates discussed the big issues in infrastructure regulation with a view to how evolving technologies are creating new issues.

We were particularly interested in the future of the electricity industry and what it may mean for regulating the grid. One of the sessions was based on the structural implications of energy disruption, with the emergence of new technologies and new forms of service delivery.  

The electricity market is changing, with the increase in use of battery storage, solar PV, electric vehicles and other distributed energy resources. Most international delegates are facing these same issues in their home environments.

There was a broad consensus that the future electricity industry looks very different to the industry of today. The advent of peer to peer trading in electricity will require significant change to the regulatory framework for many countries. Most regulators are concerned with staying ahead of the curve, to make sure their rules allow for well-functioning markets. This concern means that conferences like these are great talking and learning points where regulators can come together and discuss how best to adapt to these emerging trends.

Tim, Dan and I made some valuable contacts with Australian electricity industry participants, and we will be sure to keep up conversation with them, to stay in touch with international developments. We also had good discussions with international delegates on their emerging technologies and their role as regulators overseas.

We also got some great insight into the Australian regulators’ definition of the line between monopoly and competitive elements, and the extent to which regulated monopolies can participate in competitive markets.

We look forward to being able to use these relationships and thinking in our future work. 


Market Insights

28 Jul 2016 by Rory Blundell

Real residential energy prices reduce for the second year running

Market Insights

Competition

Consumers

Insights and Analysis

Market Monitoring

I on the Market

Retail market

Ministry of Business, Innovation and Employment statistics show that the energy component of residential retail electricity prices have dropped.

We recently released our residential performance document, which details how the residential electricity market performed in 2015.

In June 2016 the Ministry of Business, Innovation and Employment (MBIE) released revised national-level residential electricity cost data for the year-ended March 2016.

These figures provide an indicator of the average cost of a residential consumer’s energy and lines charges. And the good news is (allowing for inflation) the energy component of these costs has dropped across both the years-ending March 2015 and March 2016.

The sales-based electricity cost data published by MBIE is based on total national revenue and consumption volumes obtained from retailers each quarter.

Costs are split between lines components, and energy and other components. The combined data covers all residential consumers, on all tariffs and all levels of consumption, and takes retailer discounts into account. This means that the final figures are a robust indicator of the average cost per kilowatt-hour that was actually paid by residential consumers.

Figure 1 shows movements in the energy component of residential retail prices since 2010, expressed as average cents per kilowatt hour (c/kWh) consumed, in both nominal and real (i.e. adjusted for inflation) terms.

Figure 1 : Nominal and Real Energy Component of Residential Average Electricity Prices, year-ending March 31 (GST inclusive)

Figure 1 : Nominal and Real Energy Component of Residential Average Electricity Prices, year-ending March 31 (GST inclusive)

Figure 2 below compares the breakdown between the lines component and energy component in real terms, since 2010. The energy component is associated with the competitive part of the electricity sector. Those costs have reduced across both the years-ending March 2015 and March 2016.

The lines component is associated with the part of the industry that is regulated by the Commerce Commission because of its monopoly characteristics. Those costs saw an increase in the year-ending March 2015, off-setting the reduction in the energy component, but reduced in the year-ending March 2016.

Figure 2 : Real Residential Average Electricity Prices - Lines Component vs Energy and Other, year-ending March 31 (GST inclusive)

Figure 2 : Real Residential Average Electricity Prices - Lines Component vs Energy and Other, year-ending March 31 (GST inclusive)

There is a significant seasonal aspect to electricity consumption, with most households consuming more during winter months than during summer. Figure 3 below illustrates this seasonality, with consumption and total expenditure on energy being shown for each quarter since April 2013.

Consumers will be pleased to see that, on average, real expenditure on the energy component of electricity costs reduced year-on-year in all quarters of the March 2016 year.

Figure 3: Quarterly real average household expenditure on energy vs quarterly consumption, grouped by year-ending March

Figure 3: Quarterly real average household expenditure on energy vs quarterly consumption, grouped by year-ending March

Events & Education

3 Jun 2016 by John Rampton

Real time pricing workshop

Events & Education

Competition

Consumers

Education

Meetings and Workshops

Planning and Strategy

Wholesale market

The Authority recently hosted a workshop on real time pricing with Dr Howard Haas, Chief economist at Monitoring Analytics (market monitor of the PJM electricity market).

Dr Haas was visiting New Zealand as part of the Energy Intermarket Surveillance Group forum that the Authority hosted in Wellington in April 2016. We held an additional presentation for industry participants to attend and ask questions on the topic. On hand to answer questions were Greg Williams, Senior Adviser Wholesale Markets, David Hunt Director of Concept consulting, representatives from the system operator, and Dr Haas. 

Dr Haas stated that through their own experiences at PJM, people are more likely to respond to a transparent electricity market. With prices that are clear and consistent, confidence will grow in interacting with the market. “People realise that you’re actually going to be billed at what you do.”

Real time pricing is a topic that is particularly close to the Authority as we recently released a consultation paper on the options for our own real time pricing project.

We consider that real time pricing will result in more consumer participation and increased competition in the wholesale, hedge and retail markets. Generators will be more responsive and accurate with their pricing in response to real time pricing capabilities. This should benefit consumers in the long run with more innovative tariffs and keener power pricing.

In New Zealand, final spot prices used for settlement are published at least two days after the day on which trading occurs.

As Dr Haas said, “Right now, if you find out two days later how much it cost to put gas in your car, you might be making some very different decisions.”

The consultation is now closed and we will be publishing the submissions we received in due course. 


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