Transcript Rserve Generation Proposals: Issues and Options

Trends in the New Zealand
Electricity Market
Christopher Russell
Chief Executive
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Overview
Update on trends and developments in the New
Zealand electricity market
» The demise of a self regulatory regime, and
» The move towards heavy handed regulation
A cunning plan
» Reserve generation
» Long term impact on the market
Topic 1 – Update on Trends
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Current Governance structure
Three voluntary governance arrangements
» NZEM – wholesale spot market – operational since 1996
» MARIA – covers metering, reconciliation and bilateral trades –
established in 1994
» MACQS – to cover security and quality of electricity transported
across the grid – established in 1999 but not operational
Eight Service Providers
Market based on LMP
Annual traded volume through NZEM – 28,862 257 mWh
Amount paid by purchasers – NZD 1,439,229,956
Single Governance
 Labour Government commenced a review of the industry in
2000
 Review recommended a single Governance structure
 Industry Commenced a project in December 2000 “EGEP”
to establish a self Governance structure
» Mandatory Pool
» Consumer voting rights
» Operationalise MACQS
 EGB rules went to vote on April 2003 and failed to obtain a
majority
 Government exercised its powers under the Electricity
Amendment Act 2001 to establish the Electricity
Commission
The Electricity Commission
 It is a Crown Entity, with six independent Commissioners
 The original plan called for the EC market to “go-live” by 1 October
2003, that is now planned for 1 February 2004
 The commencement market rules are largely based on the EGB rules
but the Commission has additional responsibilities, above and beyond
running a market as set out in a GPS
» require generators to offer long-term hedges
» responsible for ensuring modelling and forecasting of future supply and
demand
» require additional information disclosure
» address transmission investment
 Now lines Companies will be able to own unlimited reserve generation
Other issues
Adoption of the EGB rule book means that the
EC market will be a Gross pool - problematic
The EC is required to ensure security of supply
in dry year (one in sixty)
How did we get to this point - lessons
 Lack of ongoing reform
 Vertical integration stifled the development of a hedge
market and retail competition
 New Zealand’s exposure to dry year risk (hydro with
only 16 weeks storage)
 Government a major player in the industry
 The “political” cap price
Topic 2 – Solution = Reserve
Capacity
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Government Approach to RG
 The Government’s view appears to be:
» Markets under-provide security of supply
» Financial interventions are inadequate to assure security of supply
» A ‘bricks and mortar’ approach provides the best assurance of
security of supply
 The Government’s policy is to require the EC to
» Operate to a ‘1 in 60’ dry year security standard
» Achieve this by contracting for reserve generation capacity and fuel
» Withhold reserve generation from the market until dry year conditions
are likely
» Fund financial deficits of RG with a levy
Forecasting
Quantity
of RG
Forecasting Energy Gaps
 Energy modeling and forecasting will now play a critical
role in dealing with dry year situations
» But strong incentives for forecasters to over-estimate RG
requirements
» Impose high levy costs on consumers – perhaps involve consumers
in setting RG quantities
» Critical for the EC to set up modeling and forecasting arrangements
appropriate for meeting its new responsibilities
Forecasting
Quantity
of RG
Intervention
Conditions for
RG
What price level for intervention?
 Efficient to set intervention price at LRMC
» Could price at SRMC if RG deficits funded with hedge
contracts
 However the Government has determined to set the
price at $200 per MWh
» Serious risk of crowding out ordinary investment in midload and peak-load capacity, and stifling the hedge
market
» Sets a price cap
» Imposes administration and compliance costs on
consumers
Committing to the Intervention Price
 EC may face strong pressure to ratchet-down
intervention prices
» Difficult to resist intervention when RG sitting idle and consumers are
hurting badly from high spot prices
» Generators may be viewed as gaming the system
 Credibly committing to intervention prices or intervention
formulae is critical for minimising displacement of
ordinary generation and distorting the market
Forecasting
Quantity
of RG
Intervention
Conditions for
RG
Contracting
RG
Method of Contracting for RG
 Intention is for RG contracts to pay separate prices for capital
costs, O&M costs, and fuel costs
 Hence, selecting RG suppliers requires trading-off capital costs
against variable costs
» May not always be obvious who should win the contract
» May create opportunities for bidders to undertake significant
influence activity
» Real risk that least-cost projects will not be chosen
Contracting Requirements
 Tender and contracting processes
» Need competitive and transparent tender processes
» Need sophisticated and transparent cost-benefit modeling to
compare proposals
» Need detailed guidelines and audit trail for contract negotiations
 Allow demand side participation in RG tenders
» Embedded generation
» Sellback of forward contracts
Forecasting
Quantity
of RG
Intervention
Conditions for
RG
Funding RG
Contracting
RG
Funding RG with A Levy
 The intention is to partially fund RG with a levy. If impose a levy
then
» Levy should be on energy consumed
» Should collect levy from retailers and wholesale consumers
 Funding RG with a levy would seriously diminish hedge market
activity and incentives for self innovative provision of firm capacity
» Need to exempt consumption supplied from (1) self-generation and
(2) firm capacity contracts
» Failure to provide exemptions leaves these consumers paying twice
for their electricity