The Electricity Commission

The Electricity Commission was created in September 2003 with the announcement by the Minister of Energy of the appointment of its Board of members.

The Commission came into being in response to government concerns over the management of the electricity industry and the security of supply in dry years. Its brief, in what are complex wholesale and retail electricity markets, is to carry out the intentions of the Electricity Act which recognises, among other things, the mixed public and private ownership of the industry.

The Commission is governed by an executive chair and six part-time members. It draws its direction from the Electricity Act 1992, as amended, principally by the Electricity Amendment Act 2001 and the Electricity Amendment Act 2004 (EAA), as well as from the Government Policy Statement (GPS) on electricity governance. It also receives additional powers and responsibilities under the EAA.

The GPS sets the objectives and outcomes that the Government expects of the Commission. In particular it requires that:

Whenever possible, the Commission should use its power of persuasion and promotion, and provide information and model arrangements to achieve its objectives rather than recommending regulations and rules.

The Commission makes extensive use of advisory groups to help it develop market arrangements and give advice concerning rules and regulations. Advisory groups are comprised of industry and consumer experts and are the first forums of discussion for most of the Commission's identified work issues.

Instead of hiring a large staff to detail with the immense numbers of issues it has to address, the Commission has established a strong core team and will use external advisers and advisory groups to progress most of its issues.

Principal objective

The Commission’s principal objective, as set out in the Electricity Act, as amended, is to ensure that electricity is produced and delivered to all classes of consumers in an efficient, fair, reliable and environmentally sustainable manner. The Commission is also required to promote and facilitate the efficient use of electricity.

The Commission oversees and regulates the wholesale and retail markets by ensuring that:

• electricity is generated and distributed in a reliable way
• a market for buying and selling electricity is administered efficiently
• disputes that arise in the course of the operation of the system and the markets are managed effectively.

Funding

The Commission is funded by a levy on electricity companies, which ultimately flows through to electricity customers. This levy for policy and regulatory management is in addition to the levies for reserve energy and market service providers. The bulk of the levy is directed to making certain that electricity is generated and distributed in a reliable way, that a market for buying and selling electricity is administered efficiently, and that disputes that arise in the course of the operation of the system and the markets are managed effectively.

Regulation and rules

Regulation in the New Zealand electricity sector is not intended to impose a heavy hand of state control on an industry that now is operating largely in response to market forces. Instead, the Commission provides oversight of the electricity markets to ensure that they run fairly and efficiently.

No market can function without rules. A primary purpose of the Commission is to recommend market rules to the Minister of Energy and to enforce those rules. However, while it has extensive powers to regulate to achieve its aims, before introducing new regulations, the Commission will consult widely with stakeholders and use influence to seek mutual solutions.

The Commission came into being to fill the void created by the inability of the electricity sector to agree on self-governance. The Commission’s new Electricity Governance Rules (Rules), which came into effect on 1 March 2004, ensure that New Zealand’s electricity system meets high standards of reliability and that the buying and selling of electricity is done fairly and efficiently. Electricity is a unique commodity that must be produced at the exact moment and in the precise quantities that consumers demand it. The EGRs are designed to ensure these delicate balances between supply and demand are maintained with the reliability and power quality that a modern society requires.

The Commission has extensive powers to regulate to achieve its aims. However, it consults extensively with stakeholders and uses its influence to seek mutual solutions before resorting to regulation. Good communication with stakeholders, at the consultation stage and when regulations are promulgated, is an essential part of the Commission’s regulatory process. It is Commission and government policy that the Commission remains open to hearing a range of stakeholder views.

Commission’s priority work areas

The Commission has been charged by the government to address a number of challenges within the electricity sector. The priority areas to meet government objectives and outcomes are to:

• manage security of supply and implement reserve generation policy
• work with Transpower and grid users to facilitate priority investment in the grid
• improve hedge market arrangements and demand side participation
• promote and facilitate efficient use of electricity.

The Commission has identified six core workstream components to meet its objectives:

• market operations
• policy and market design
• reserve energy
• transmission
• supply and demand modelling and forecasting
• electricity efficiency

It has contracted with a number of external service providers to assist with the administration, project management and technical support of its work streams.

With reforms starting more than a decade ago, New Zealand has created wholesale and retail markets for electricity. Instead of being able to buy electricity from one state-owned monopoly only, wholesale customers now have a choice of power suppliers. As well, electricity retailers now buy their electricity in a competitive wholesale market. These markets are expected to deliver to the electricity sector the benefits that competitive forces bring to the rest of the economy: downward pressure on costs and prices, emphasis on customer choice and service, and technological innovation.

Reserve: New Zealand relies on hydroelectric power for about 60 per cent of its electricity supply. Since hydro inflows are variable, the country faces unpredictable shortages of hydroelectric power that must be addressed. The government has indicated that it expects the Commission to deal with this problem and to ensure there is sufficient electricity in a one-in-60 dry-year event. The government took initial action in 2003 by commissioning the reserve generation plant at Whirinaki. The Commission is assessing whether additional reserve generation is needed, as well as how the challenges of dry periods can be met with least cost and least risk of shortage.

Transmission is another area where the government has asked the Commission to find solutions. Little significant investment in the transmission grid has been made in the past two decades.  If action is not taken, this lack of investment will create problems of electricity shortage at peak periods in many parts of the country. The government has asked the Commission to address these issues by approving a grid-pricing methodology for Transpower, the national grid company, approving plans for Transpower to upgrade the grid in critical places, and sorting out the contractual relationships between Transpower and the companies that receive services from the national grid.

Transmission brings electricity from remote generation sites to distant customers, provides greater system reliability by making multiple generators available over diverse locations, and allows for the market to operate efficiently through dispatch of least-cost generation. However, these benefits can also often be achieved through demand reduction or correct location and configuration of new generation. A challenge for the Commission is to determine the optimum investment in new transmission for the country without resorting to central planning and undue interference in the market.

The Commission is concerned that electricity markets operate to send the appropriate signals so that new investment in generation is made by market participants in time to meet the national need.

Common quality

Because New Zealand is a small, island country, it will never be absolutely secure from the failure of a major system component, a dry period without historical precedent, or other contingencies. However, the Commission will be assessing how much ‘insurance’ is prudent to provide in terms of additional reserve energy to meet these possibilities.

Electricity efficiency

There is the need to encourage electricity efficiency and the Commission is investigating where there might be significant savings. The Commission has a role in ensuring that renewable resources, such as wind, can become part of the electricity market. Its powers do not extend to subsidising alternative electricity sources.

As far as electricity efficiency is concerned, there is a large but unquantified level of investment in many sectors of the economy that would save electricity at a cost vastly lower than the cost of new generation. This investment would benefit all customers by providing greater assurance of adequate supplies while keeping the need for high-cost new generation to a minimum. The Commission has the power to promote and facilitate electricity efficiency and a small budget for that purpose has been passed for 2004/05, funded by the levy on the electricity sector.

The Commission will work closely with other agencies, such as Energy Efficiency and Conservation Authority (EECA), to review the potential for electricity efficiency to contribute cost effectively to the government’s electricity objectives, including estimating the level of investment required to achieve that potential.

The Commission plans to put in place arrangements and programmes that promote efficiency in generation, the wholesale electricity market, the national grid and distribution lines, and among electricity consumers.