Electricity in New Zealand

Transcription

1 Electricity in New Zealand

2 Contents Consumers 2 Retail 6 Wholesale 10 Transmission and system operation 14 Generation 18 Distribution 24 Foreword The Electricity Industry Act 2010 changed the shape and structure of the New Zealand electricity sector. Under the Act, the government is seeking to improve competition, reliable supply and efficient operation of the electricity sector for the long-term benefit of New Zealand electricity consumers. The statutory objective of the Electricity Authority reflects this goal. The market reforms undertaken by the government in pursuit of this objective include the establishment of the Electricity Authority as an independent Crown entity, to provide greater certainty and predictability about how the market will be governed and operated, as well as reducing risks of intervention, and improving investor perceptions about market risk. Besides sharpening the focus on improving competition, reliability and efficiency, the Act requires the Authority to undertake specific functions to enhance market performance. These include proactive market monitoring, greater stakeholder involvement in developing the Electricity Industry Participation Code and market facilitation measures under which the market operates, and increased information and educational activity. Electricity in New Zealand is part of a range of communication initiatives that the Authority is undertaking to help develop a shared sense of the nature, needs and achievements of the country s electricity sector. It is intended for a general readership. The publication provides an overview of New Zealand s electricity system in the new era ushered in by the Electricity Industry Act It outlines core market components and physical assets, and the inter-relationships between them. These features will change dynamically as the Authority pushes ahead with the priority issues, such as customer switching and market development, with which it is tasked under the Act, and as technology and the environment in which the electricity system must operate evolve. Those seeking an understanding of the recent performance of the market should consult the Authority s publication Electricity market performance in review. Those wanting more specialised industry information with which to evaluate opportunities, or to assist in decision-making in this evolving environment, are referred to the Authority s website, Dr Brent Layton Chair Electricity Authority Te Mana Hiko Front cover: Providing the power More than half New Zealand s electricity is generated by hydro power stations. Construction of Benmore, the country s largest earth dam created New Zealand s largest manmade lake. Today, Benmore is the second-largest hydro power station, after Manapouri, and the South Island terminal for the high voltage direct current HVDC link with the North Island.

3 $ Almost 6billion a year is spent on electricity by 1.7million 165,000 residential consumers commercial consumers 70,000 40,000 agriculture, forestry and fishing consumers industrial consumers Ministry of Business, Innovation and Employment (energy policy) Consumer Affairs (consumer policy) Energy Effi ciency and Conservation Authority (demand reduction) What is electricity? Electricity is energy produced in the form of electrons flowing in a conducting material, such as copper or aluminium as used in power lines. It is a secondary energy source produced from other forms of energy. Commonly in New Zealand, this is the kinetic energy of falling water. The force of the falling water from dams drives turbine blades to spin huge magnets inside massive coils of conducting wire, and the moving energy, or electricity, that is produced flows into the national transmission network. Wind turbines create electricity in a similar way by extracting kinetic energy stored in the wind. The chemical energy stored in gas, coal or oil can be released in the form of heat by burning and used to produce steam that, under pressure, drives turbines and generators to produce electricity. The force applied to electrons to make them flow is known as voltage, and the rate of flow is known as current. An analogy can be made with water through a pipe. Voltage equates to the pressure applied to make the water flow, and current is the rate at which it flows through the pipe. Power is the rate at which electrical energy is produced or used and is measured in watts (W), kilowatts (kw) or megawatts (MW). Kilowatt hours (kwh) are used to measure household electricity use over time. For example, using a 1kW bar heater for an hour will consume 1kWh of electricity. Average New Zealand household use is about 8,000kWh per year. In contrast, larger electricity users annual consumption is measured in megawatt hours (MWh 000kWh) or gigawatt hours (GWh 000,000kWh). Action under lights in the New Zealand round of the International Rugby Board s Sevens World Series in Wellington.

4 7service providers competing in the market operated by commonly buying Metering through equipment owners 20 retail brands Metering standards Reconciliation 1 Most purchases are met by generation dispatched on the national grid Registry System Market Clearing operator administration Information Pricing Data management Hedge and FTR markets Electricity and Gas Complaints Commission (consumer issues) Electricity Authority (market design and performance)

5 1 from grid owner supplied to consumers by 5major and 8 smaller, grid-connected generators and, along with local distributed generation, companies 29distribution and 105 embedded networks Commerce Commission (grid investment approval) Ministry for the Environment (resource consent process) Commerce Commission (regulating lines charges) Key dates 1886 The first high-voltage electricity transmission line is built, running between Skippers Canyon in Central Otago and a mining company 6 kilometres away Reefton is the first town in the southern hemisphere to have a public electricity supply The Water Act empowers the Crown to use water for generating electricity The Hydro-Electric Branch of the Public Works Department is established The first major state hydro scheme at Coleridge begins generating power Government calls tenders for Arapuni, which is commissioned 6 years later, initiating hydro development on the Waikato River Commencement of Roxburgh dam construction starts the development of the Clutha River hydro system The State Hydro-Electric Department becomes the New Zealand Electricity Department (NZED). Wairakei power station, the second geothermal generating plant in the world, is commissioned The North and South Islands are linked by seafloor electricity cables across Cook Strait NZED is corporatised as the Electricity Corporation of New Zealand (ECNZ), which trades for a time as Electricorp ECNZ s transmission business is split off as Transpower. The electricity industry establishes the Metering and Reconciliation Information Agreement (MARIA) to facilitate the bilateral trading of electricity between buyers and sellers ECNZ is split again, with a new generation business, Contact Energy, being formed. A wholesale spot electricity market, the New Zealand Electricity Market (NZEM), is established. Like MARIA, the NZEM is industry self-governed Contact Energy is privatised. The remainder of ECNZ is split, with the major assets divided between Mighty River Power, Genesis and Meridian Energy, and the minor assets sold off The Electricity Commission is established to manage the New Zealand electricity market The Electricity Commission is replaced by the Electricity Authority, tasked with governing the electricity market under the new Electricity Industry Act The Authority reports completion of priority matters specified in the Act: compensation to consumers and a floor on spot prices during electricity shortages; a mechanism to help manage price risk caused by transmission constraints; facilitating active responses by large users to wholesale market conditions; more standardisation of distribution tariff structures and terms; and improving electricity hedge market liquidity.

6 2 Figure 1 Electricity demand by region for year ended July % Auckland and Northland 34.5% Other North Island 37.4% South Island residential consumers Rio Tinto s smelter at Tiwai Point accounts for around 1.7million commercial consumers 165, % of New Zealand s annual electricity demand agriculture, forestry and fishing consumers industrial consumers 70,000 40,000 Essentially electrical: cooking, lighting, refrigeration, entertainment and more everyday life relies on electricity

7 Consumers 3 Total electricity consumption in New Zealand is near to 40,000 gigawatt hours (GWh) per annum. Electricity demand has increased at approximately 2.5 percent a year since the 1970s. That trend is strongly related to economic growth and population size, and, based on Statistics New Zealand projections, demand is forecast to continue growing at a rate of around 1.5 percent a year through to 2050 as shown in Figure 2. As demand for electricity varies from moment to moment, supply must change almost instantly. Consumption follows strong daily and seasonal patterns. At low demand times such as a summer night, total demand may be as low as 2,737 megawatts (MW), whereas at peak times (winter evenings), it can exceed 6,330MW. Although electricity use has been highest historically on cold winter evenings, some regions now have summertime peak demand as a result of increasing use of farm irrigation and domestic airconditioning. Figure 1 shows annual electricity demand by region for the year ended July 2011 Electricity consumption by sector is shown in Figure 3. Commercial, agricultural and industrial users, as shown in Figure 4, make up 15 percent of customer numbers but, through higher average consumption per customer, account for two-thirds of total demand. Ministry of Business, Innovation and Employment The Ministry of Business, Innovation and Employment (MBIE) provides the government with policy advice on energy issues, including supply and demand, efficiency and conservation, and renewable energy strategy. Figure 2 Historical and forecast total national energy demand GWh 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10, Historical demand 2008 Statement of Opportunities forecast 2010 Statement of Opportunities forecast

8 4 Consumers Figure 3 Estimated electricity consumption by sector (GWh) (38,423,798MWh total in year ended March 2010) Source: MED Energy Data File, 2011 For example, the single largest user (Rio Tinto Aluminium the smelter at Tiwai Point in Southland) accounts for just on 14 percent of New Zealand s total electricity demand. 5% Agriculture, forestry, fishing 35% Residential 36% Industrial 24% Commercial Consumer Affairs Consumer Affairs is tasked with developing consumer policy, including consumer protection, and administers a range of consumer legislation. It also provides information, education and advice for consumers and businesses. Figure 4 Consumer ICPs by sector (total of 1,925,911 customers in year ended March 2010) Source: MED Energy Data File, 2011 Figure 5 Average family household energy usage Source: EECA Energywise 30% Water heating 29% Space heating A further six electricity consumers have single sites that consume at least 10,000 times as much electricity as the average domestic household. These six very large industrial electricity consumers are Carter Holt Harvey (Kinleith pulp and paper mill), Norske Skog Tasman (Kawerau pulp and paper mill), New Zealand Steel (Glenbrook steel mill), Pacific Steel (Otahuhu steel mill), Pan Pac (Whirinaki pulp mill) and 86% Residential Winstone Pulp International (Karioi pulp mill, near Ohakune). 9% Commercial 4% Agriculture, forestry, fishing 2% Industrial 3% Other appliances 7% Cooking 8% Lighting 11% Refrigeration 12% Electronics and other uses Residential users account for about one-third of total consumption, with most residential demand being for water heating, space heating and refrigeration as shown in Figure 5. Technological progress has an impact on electricity consumption as well as generation. There has been growth in electricity-using technologies over time, such as computers and airconditioning, but there have also been improvements in electricity efficiency. For example, modern electric lighting, heating appliances and motors are significantly more efficient than their predecessors. Electricity efficiency As demand for electricity continues to rise, as shown in Figure 2, in a generation-constrained environment, improved electricity efficiency will play an increasingly important role in future security of supply and achieving sustainability objectives. There is significant untapped potential to use electricity more efficiently and at lower cost than building new power stations. The KEMA New Zealand Electric Energy- Efficiency Potential Study concluded that, by investing in economic efficiency measures, New Zealand can save around 15 percent of projected electricity use by Lighting is a good example of where cost-effective savings are readily available. Compact fluorescent lamps (CFLs) make it possible to light homes and businesses at around 20 percent of the electricity cost of traditional incandescent bulbs.

9 5 Electrification of sections of the North Island main trunk railway line greatly increased productivity, cutting transit times and increasing payloads by 50 percent. Energy Efficiency and Conservation Authority The Energy Efficiency and Conservation Authority (EECA) promotes and supports energy efficiency, energy conservation and the use of renewable sources of energy in New Zealand, including in the electricity sector. Residential consumers living in averagesized homes can save up to $170 a year by replacing their existing lighting with energy-efficient options. Electricity efficiency: everyone saves lower power bills and reduced construction of power stations. If every household used efficient lighting, New Zealand could reduce its annual energy consumption by as much as 1,200GWh, which is equivalent to the annual electricity usage of Waitakere and North Shore cities or more than $278 million a year in residential power bills. The New Zealand Energy Efficiency and Conservation Strategy sets the Government s strategic direction for the promotion of energy efficiency, energy conservation and renewable energy. It is a companion document to the longer-term New Zealand Energy Strategy, the goal of which is for New Zealand to make the most of its abundant energy potential through the environmentally responsible development and efficient use of the country s diverse energy resources. With respect to electricity, areas in which the Energy Efficiency and Conservation Authority (EECA) has identified significant savings potential include; motorised systems in industry; lighting, heating and airconditioning in commercial buildings; and lighting generally, including streets. Programmes to explain opportunities for improved efficiency and to assist consumers to make savings include: funding assistance (such as financial contributions for efficiency projects in commercial buildings) to help get investment in more energy-efficient products or systems over the line in a cost-constrained economy; training (such as courses for commercial building managers) to increase knowledge and astute decision-making on energy management; information to assist awareness and choice such as the website which promotes the savings opportunities available to consumers from more efficient lighting; setting and monitoring minimum energy performance standards and ratings; and research and monitoring of electricity efficiency opportunities and uptake.

10 6 Customer Compensation Scheme On 1 April 2011, the Authority announced a Customer Compensation Scheme as a key means of avoiding electricity supply shortage. Under the scheme, retailers will pay qualifying customers $10.50 per week during any future public conservation campaign, and also have the option of offering their own compensation schemes potentially linked to individual customers conservation efforts. brands, 20retail including Bay of Plenty Energy Hunet Energy Powershop NZ Bosco Connect Just Energy Prime Energy Contact Energy King Country Energy Pulse Energy Empower Mercury Energy Simply Energy There are currently over 670,000 Energy Direct NZ Energy Online Genesis Energy Meridian Energy Nova Energy Opunake Hydro Tiny Mighty Power TrustPower smart meters installed in New Zealand, with 1million expected to be installed by 2013 Guess you co switch compa Find out at Increased retail competition, due to more electricity consumers shopping around for the best deal, reduced retail electricity prices in the September 2011 quarter, following the launch of the What s My Number campaign. WhatsMyN

11 Retail Apart from purchases on the wholesale market by major industrial users (page 4), most New Zealand consumers buy their power from 20 retail brands. Other communities are supplied by small, dedicated generator-retailer-distributors, as in the case of Kaingaroa Energy Supply Incorporated, which supplies a very small, isolated community on the Chatham Islands. Genesis Energy, with a percent market share, is the largest retail brand, followed by Contact Energy with percent. The approximate market shares of larger retail brands are shown in Figure 7. Market evolution New Zealand s competitive electricity market is a relatively recent development. In 1985, local electricity distribution and supply to consumers were the responsibility of 61 electricity supply authorities (ESAs), which were statutory monopolies (while electricity generation and transmission were amongst the responsibilities of the then Ministry of Energy). how much uld save by ing power nies? umber.org.nz In 1986, the government announced its decision to reform the electricity industry. In September 1989, an Electricity Task Force set up by the government issued a report making a number of key recommendations for the restructure of the electricity industry. These recommendations included the corporatisation and privatisation of ESAs, separate ownership of generation and transmission, and the possible creation of a wholesale electricity market. During 1993 and 1994 statutory monopolies in the distribution and retailing of electricity were removed. However, the industry rules in place to ensure an individual consumer s electricity consumption was metered accurately meant it was only costeffective for large electricity consumers to switch electricity suppliers. This changed in April The industry rules were amended to enable an individual consumer s electricity consumption to be profiled using a set of relatively low-cost arrangements. This development enabled all consumers to switch electricity suppliers if they wished. The electricity market was self-regulating until 2004, when it began operating under the Electricity Governance Rules and the Electricity Governance Regulations, overseen by the Electricity Commission. A ministerial review in 2009 tightened the focus on market performance and, through the Electricity Industry Act 2010 (Act), provided for the electricity market to be governed by the Electricity Industry Participation Code (Code), overseen by the Electricity Authority, from 1 November The Authority s statutory objective is to promote competition in, reliable supply by, and the efficient operation of, the electricity industry for the longterm benefit of consumers. Competition The Code promotes retail competition by specifying efficient switching processes and by allowing any party to be an electricity retailer provided minimum standards are met. Electricity Authority The Electricity Authority is an independent Crown entity established to promote competition, efficiency and reliability of supply for the long-term benefit of consumers, through market design, overseeing market operations and monitoring and enforcing compliance with market rules. Although the extent of retail competition varies across the country, almost all electricity consumers have a choice of retail brands. In some parts of New Zealand, there are nine or more competing brands. To help strengthen competition in the retail sector, the Act provided for the establishment of a 3.5 year Consumer Switching Fund. The first initiative using this fund is the What s My Number campaign, a programme to promote to consumers the benefits of comparing and switching retailers. Launched by the Authority at the end of May 2011 in partnership with the Ministry of Consumer Affairs and Consumer NZ, the campaign aims to increase consumers readiness to switch suppliers and, as a result, permanently lock in pressure on retailers to produce innovative pricing plans and service offerings. By improving the flow of information through the system, switching has become faster, as Figure 6 shows, and now generally can be done conveniently by a phone call to the new retail brand. During the first 3 months of the campaign, 390,927 people visited the website and 128,000 switches took place. On average, switching rates increased by 44 percent as consumers found deals that better suited their needs. 7

12 8 Retail 25 retail invoices are issued every year Almost million In the year to October 2011, some 349,000 consumer ICPs switched retailers Metering Metering is a critical part of retail market operations. The Code specifies requirements for meter performance and maintenance, including meter suppliers responsibilities and standards for accreditation of metering test houses. Twenty test houses are currently approved by the Authority to certify that metering systems are operating accurately, and all test houses are audited periodically. The roll-out of advanced metering in New Zealand is a significant technological advance being led by retailers. Although key technical aspects, such as data-exchange protocols, are standardised, the rollout is unregulated, voluntary and currently at no additional direct cost to consumers. Since 2005 when the first advanced meters were installed by Meridian Energy in Central Hawke s Bay, the number of advanced meters has increased to 670,000. It is projected that about 1 million will be installed by 2013, with some estimates suggesting some 1.55 million could be in use by Advanced metering can give electricity consumers the opportunity to analyse expenditure and control costs by running appliances at leastcost times of day and will play an important part in the uptake of smart appliances and electric vehicles. It also enables distributors and retailers to manage their portfolios more cost-effectively and to share infrastructure, spreading the cost of automating with other utilities such as gas and water. Ultimately, the ability across the system to better manage electricity demand eases pressure for investment in new generation, transmission and distribution assets. Complementing smart meters on site, the advent of smart-grid technology will enable intelligence to be built into distribution networks, for example, allowing deferment of capital by facilitating improvements in the management, reliability, availability, security and efficiency of electricity supply. Market administration The Authority contracts out the services required to operate the retail and wholesale electricity markets, apart from the market administration function, which it performs itself. Certification for conventional residential meters expires in Many retailers see this as an opportunity to update to smart meters rather than have existing meters recertified.

13 9 Figure 6 Average business days for consumers to switch between traders 60 Average days to switch Jan 06 Apr 06 Jul 06 Oct 06 Jan 07 Apr 07 Jul 07 Oct 07 Jan 08 Apr 08 Jul 08 Oct 08 Jan 09 Apr 09 Jul 09 Oct 09 Jan 10 Apr 10 Jul 10 Oct 10 Jan 11 Apr 11 Jul 11 Oct 11 The market administrator role encompasses a range of background, but important, operational obligations. These functions are of an oversight nature, rather than active processing of market data or provision of real-time market services as performed by contracted service providers. Market administration includes, for example, appointing auditors of metering test houses and metering installations, collating various reports from contracted service providers and specifying back-up procedures for use in the event of a failure of market systems. In the retail market, at present, the key services of registry and reconciliation are contracted to Jade Software Corporation Ltd (Jade) and the New Zealand Stock Exchange (NZX) respectively. Figure 7 Retailer market share by active ICPs October 2011 Retailer Nova Energy 1 King Country Energy Bosco Connect 2 Pulse Utilities 3 Bay of Plenty Energy 4 Powershop NZ 5 Energy Online 6 TrustPower Meridian Energy 7 Mercury Energy 8 Contact Energy 9 Genesis Energy Percent of market share 1. Nova Energy is a subsidiary of Todd Energy. 2. Bosco Connect is a subsidiary of Mighty River Power and includes the Tiny Mighty retail brand. 3. Pulse Utilities includes the Just Energy and Pulse Energy retail brands. 4. Bay of Plenty Energy is a subsidiary of Todd Energy. 5. Powershop NZ is a subsidiary of Meridian Energy. 6. Energy Online is a subsidiary of Genesis Energy. 7. Meridian Energy customer numbers include Rio Tinto, which accounts for about 14% of national electricity demand, and Energy Direct s ICPs. 8. Mercury Energy is a subsidiary of generator Mighty River Power. 9. Contact Energy includes the Empower retail brand. Electricity and Gas Complaints Commission The Electricity and Gas Complaints Commission (EGCC) provides a free, independent dispute resolution service for consumers having difficulties with their electricity and gas suppliers. EGCC can look into most complaints, including billing, disconnections, damaged property, property access issues and difficulties in switching companies. Registry The registry is managed by Jade in accordance with Part 11 of the Code. This is a national database containing information on nearly two million points of connection at which electricity is supplied to a site. Referred to as installation control points (ICPs), each ICP has a unique identifier, which is used in managing customer switching and reconciliation processes. Reconciliation Ensuring industry participants are allocated their correct share of electricity generation or consumption is essential to operating an efficient market. To facilitate this as specified in Part 15 of the Code, the contracted reconciliation manager, NZX, receives and processes about 50 million metering data points on a monthly basis, reconciles them against a register of contracts and passes the data to industry participants. The process involves a considerable amount of detailed analysis to process and correct data for inaccuracies. Reconciliation information is used in the electricity market settlement function performed by the clearing manager (page 12). Data management Retailers, generators and those consumers directly connected to the national grid are responsible for managing the data generated by 3 million conventional and advanced meter registers covering 99 percent of New Zealanders and their businesses. In some cases, external service providers are engaged to perform this function. Across the New Zealand electricity market, more than 1.1 billion data points are settled annually.

14 10 $ 2.1billion Electricity purchased by retailers and major users on the wholesale market in the year to July Electricity Authority Jade Direct New Zealand Stock Exchange (4 services) Transpower service providers Ready access to market information is crucial for investment and innovation. Developing tools such as EMI, the user interface to the Authority s mathematical programming models and visualisation tools, is part of a focus on more open access to information.

15 Wholesale 11 Retailers and a small number of customers, typically large industrial users, buy electricity directly from the spot market. These parties will typically also enter into financial contracts, often called hedges, which smooth out some or all of the volatility in spot prices. Jointly, the spot and hedge markets are the major components of the wholesale electricity market, which also includes the ancillary services markets. Generators that are bigger than 10MW or are grid connected compete in the electricity spot market for the right to generate electricity to satisfy demand, subject to transmission capacity. They do this by submitting offers through the wholesale information and trading system (WITS). Each offer covers a future halfhour period (called a trading period) and is an offer to generate a specified quantity at that time in return for a nominated price. The system operator (Transpower) uses a scheduling, pricing and dispatch system to rank offers, submitted through WITS, in order of price and selects the lowestcost combination of resources to satisfy demand. The highest-priced generator actually required for a given half-hour is the key determinant of the spot price for that trading period, although prices can, on occasion, be many times higher than the highest cleared offer. Electricity spot prices can vary significantly across trading periods, reflecting factors such as changing demand (eg lower prices in summer when demand is subdued) and supply (eg higher prices when hydro lakes and inflows are below average). Spot prices can also vary significantly across locations, reflecting electrical losses and constraints on the transmission system (eg higher prices in locations further from generating stations). Trades take place at approximately 248 nodes grid injection points and grid exit points across New Zealand every halfhour. Generators make offers to supply electricity at 52 grid injection points (GIPs) at power stations, while retailers and major users make bids to buy electricity at 196 grid exit points (GXPs) on the national grid. Final prices at each node, taking account of grid losses and constraints, are processed and confirmed on an interim basis the following day and confirmed as final prices the day after. The Authority is responsible for the effective day-to-day operation of the electricity market in accordance with the Code, and has governance and compliance responsibilities, including market development, performance monitoring and breach investigation. The Authority undertakes the function of market administrator and, as with the registry and reconciliation functions (page 9), contracts service providers to perform the core wholesale market and system operation services. In addition to reconciliation (page 9), NZX is contracted to provide three services: pricing manager, clearing manager and WITS. From late 2012, a contracted financial transmission rights (FTR) market operation service provider will begin operation of an interisland FTR market in New Zealand.

16 12 Wholesale Figure 8 Wholesale market payments ($ million) dry-year impact 2008 is clearly evident Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Pricing Changing demand and supply over the course of a day results in price differences each half-hour trading period. Prices also vary by location, reflecting the costs of getting electricity from source (generators) to destination (consumers). As pricing manager, NZX is responsible for calculating and publishing the spot prices at which electricity market transactions are settled. These are referred to as final prices in the Code. Prices are derived using the same model the system operator uses to dispatch generation. The model calculates prices at each node, in accordance with Part 13 of the Code, for each trading period based on generator offer prices and quantities, demand and system conditions. These final prices are provided to the clearing manager to use in the clearing and settlement processes. The pricing manager calculates approximately 12,000 final prices every day, which are published to market participants through WITS. Clearing In its role as clearing manager, NZX is contracted to ensure that wholesale market participants are paid or pay the correct amount for the electricity they generated or consumed during the previous month, in accordance with Part 14 of the Code. This involves a number of tasks, the primary one being invoicing participants for the sale and purchase of electricity and related services. On a monthly basis, the clearing manager does this by combining the reconciled quantity information provided by the reconciliation manager with half-hourly pricing information from the pricing manager to determine the amounts owed to and by each market participant. On average, over the last 5 years, $235 million worth of electricity passed through the clearing system per month. The clearing manager also calculates and invoices ancillary services settlement and will do so for the new financial transmission rights (FTR) market (page 13). The clearing manager also plays an important part in maintaining market confidence, and under the Code, it has the role of administering prudential requirements in the form of acceptable credit ratings or securities for the purpose of ensuring purchasers of electricity or ancillary services can meet their payment obligations. Rulings Panel As with other matters, such as breaches and disputes between participants, prudential security decisions made under the Code may be appealed to an independent Rulings Panel consisting of a Chair and four other members. The Panel is appointed by the Governor-General on the recommendation of the Minister of Energy, after consultation with the Authority. The information system The WITS manager operates the electricity market wholesale information and trading platform. It is the system used by electricity market participants to upload their bids and offers. WITS also delivers pricing, scheduling and other market data to participants and other parties. Operation of the system as required by Part 13 of the Code, is contracted out to NZX. WITS also offers a free-to-air service providing price, demand and hydrology information for general interest (

17 local gener- ators direct consumers 13 Retail Wholesale Grid exit points Grid injection points Consumers 230 volts for residential and business Distribution 11, 33 or 66kV Transmission typically 110 or 220kV Generation 11 16kV Metering equipment owners Registry (Jade) System operator (Transpower) Metering standards (test houses) Reconciliation (NZX Energy) Market administration (Electricity Authority) Clearing (NZX Energy) Wholesale information (NZX Energy) Pricing (NZX Energy) Data management (traders) Hedge and FTR markets The market administrator In October 2004 when the existing market administrator service provider agreement expired, rather than contract this function out again, the Electricity Commission assumed the role itself. As the market administrator today, the Authority provides several operational and administrative services, mostly in regard to the retail market as discussed on pages 8 9. The hedge market In order to manage the risk of price movements in the spot market, generators and purchasers can enter into hedge contracts to insulate them from variations in the spot price of electricity. This improves their ability to manage tight supply situations and assists retail competition. Traditionally, the hedge market in New Zealand has operated through over-the-counter (OTC) contracts, where buyers negotiate directly with sellers to agree on a price. These contracts can be customised and offer flexibility for both parties. As an alternative to OTC contracts, recently, buyers and sellers of electricity have been able to contract on the futures market operated by the Australian Stock Exchange (ASX). ASX provides a market in which participants can buy or sell standard 1MW contracts covering quarterly or annual strips (1MW is the amount of electricity required to continuously supply 1,000 single bar heaters). A key advantage of futures trading is the publication of contracts with full transparency of prices, allowing other participants to more readily observe the forward price of electricity. Forward prices for long-term contracts provide valuable information to generation and demandside investors, and prices for shortterm contracts assist with short-term generation and demand decisions. In late 2011, new market-maker arrangements for New Zealand electricity futures trading were adopted by the ASX and the large generators. These arrangements sharply reduced the bid-ask spreads for futures contracts and substantially boosted trading volumes, providing the foundation for an increasingly active hedge market, which other parties, such as financial institutions, are expected to enter over time. Financial transmission rights FTRs are a type of hedge contract initially allowing parties to cover their price risk between two nodes on the national grid. Over time, this will extend to more nodes. FTRs protect wholesale market participants from half-hourly variations in spot-market prices at one location versus another. An FTR market is expected to be operating in New Zealand by October It should significantly enhance competition in the retail and hedge markets by reducing barriers to generator-retailers competing for retail and hedge customers on a nationwide basis as opposed to focusing primarily in regions close to where they own generation assets.

18 14 Transmission 25,000 towers and 16,450 poles carry 1grid owner Transpower 12,000km of transmission lines in the national grid Source: Transpower Asset Management Plan, 2010 Capital investment in the national grid has ramped up in recent years, nearing $700 million in the year to June 2011, compared to an average of around $100 million a year for the past 2 decades.

19 and system operation15 T he national grid is owned and operated by Transpower, a State-owned enterprise. Subject to review and approval of investment proposals by the Commerce Commission, Transpower builds new grid investments and is responsible for all transmission development processes, such as obtaining resource consents, arranging access and undertaking construction. Under the Act, Transpower is also contracted to act as system operator, in accordance with Part 7 and Part 8 of the Code, and is required to coordinate supply and demand resources to maintain real-time security. Ensuring real-time security requires the system operator to schedule and dispatch electricity so that a balance between electricity supply and demand is continuously maintained. The system operator s scheduling, pricing and dispatch (SPD) software is a cornerstone of the market system. It enables competitive bids (a bid from a purchaser to purchase a quantity of electricity) and offers (an offer from a generator to generate a quantity of electricity at a price) to be compared and ranked in order of price. It also optimises generation schedules, while accounting for factors such as instantaneous reserve, transmission system losses and constraints. In addition to real-time dispatch, the system operator s responsibilities also involve significant investigating and planning activity over periods ranging from years to minutes ahead of real time. Examples of this are coordination of generation and transmission outages, facilitating commissioning of new generating plants and procurement of essential ancillary services through contracts with generators, retailers and distributors. Ancillary services There are five ancillary services. Frequency-keeping is carried out by generators that can quickly change output to match load fluctuations in consumer demand. System frequency must be kept within limits so that equipment, such as manufacturing plant, is not tripped. Instantaneous reserve is interruptible load or spare generating capacity that is used to cover the largest potential event, such as the loss of a large generation plant or the HVDC link between the North and South Islands. Over-frequency reserve is a service that automatically reduces the level of generation injected into the grid to stop an unplanned rise in frequency. Voltage support is the service that injects reactive power into the system to increase or decrease voltage at the point of injection.

20 16 Transmission and system operation 174 substations, over 1,000 transformers converting low voltage electricity to high voltage for transmission on the national grid and back to low voltage for end use and 2,300 circuit breakers protecting circuits from damage caused by overload or short circuit Source: Transpower Asset Management Plan, 2010 One of New Zealand s largest transmission projects in half a century involves building new substations and some 200km of transmission lines and underground cables between Whakamaru and Auckland at an estimated cost of $824 million, for scheduled completion in Black start is provided by certain generators with the capacity to restart their generation plant with no electrical input if the system has blacked out. Generators without this capability require power from the grid to restart their generating plant. Frequency-keeping and instantaneous reserve operate on market-based procurement, with offers of quantity and price used to select the respective providers in each half-hour trading period. The other three ancillary services are procured bilaterally by the system operator, generally on an availability payment basis, with the exception of voltage support, which operates on both availability and event payment contracts. Security of supply As part of its responsibility for monitoring security of supply, the system operator is required to assess the supply outlook over the next decade, and evaluate factors such as planned generation, transmission constraints, forecast growth in demand, and fuel stockpiles. The system operator is also involved in routinely monitoring short-term security (up to 18 months ahead) and providing the industry and consumers with information on factors, such as risks to hydro-lake storage and changes in electricity consumption patterns. Under the Act, the system operator has operational responsibility for emergency management. Reflecting the national importance of assured power supply, the Act required the formation of a Security and Reliability Council to provide independent advice to the Authority on the performance of the electricity system and of the system operator on reliability-of-supply issues. Members of the Council are appointed by the Authority from publicly nominated sector specialists. Commerce Commission The Commerce Commission is responsible for evaluating and approving capital expenditure proposals prepared by Transpower for investment in the national grid and for overseeing efficiency, quality and pricing of electricity lines services.

21 17 Transmission network Source: Electricity Authority 2011 Otahuhu Huntly Whakamaru Line capacity 350kV (HVDC) 220kV 110kV 50kV, 66kV Substation Stratford Bunnythorpe Haywards Kikiwa Islington Benmore Tiwai

22 18 Government energy policy targets 90 % of electricity generation from renewables by Figure 10 Generating capacity as at June Contact Energy 2 Genesis Energy 3 Meridian Energy 4 Mighty River Power 5 Trustpower 1 Alinta Energy 2 Bay of Plenty Energy NGC JV 3 Bay of Plenty Energy Vector JV 4 King Country Energy Todd Energy JV 5 Norske Skog Tasman 6 NZ Windfarms 7 Tauhara North No 2 Trust Mighty River Power JV 8 Tuaropaki Power Company major and 8 smaller, grid-connected generators, along with local supply from distributed generation 54.4% Hydro 7.3% Geothermal 1.8% Diesel 0.6% Other 15.9% Gas Figure 9 Percentage of generation (GWh) by generation company 10% Coal 7.4% TrustPower 3.08% Other independents and on-site generators 16.6% Mighty River Power 6.1% Wind 3.9% Cogeneration 17.01% Genesis Energy 23.26% Contact Energy 32.64% Meridian Energy Exploiting strong westerly winds that blow unhindered across the Tasman Sea, wind generation capacity has continued to increase in recent years. Current capacity is sufficient to supply 180,000 homes each year.

23 Generation 19 New Zealand s five major generation companies produce almost 97 percent of the country s electricity. Two of these, Contact Energy and TrustPower, are publicly listed companies, Contact Energy having been created through the first split of ECNZ in The other three, Genesis Energy, Meridian Energy and Mighty River Power, are State-owned enterprises created from the second split of ECNZ in Jointly, these major generators own 98 power stations. In addition, they operate 81 power stations on behalf of other owners. Other hydro, cogeneration, geothermal and wind generators operate a further 35 plants. Of these 214 power stations, 52 are grid-connected, 6 provide grid-connected cogeneration, 14 provide a combination of grid-connected and partially embedded capacity and 142 are embedded, connecting into local distribution networks or providing onsite supply. Some of these embedded generators are relatively large. Te Uku, which supplies electricity to the WEL distribution network in the Waikato, for example, has a capacity of 64.4MW and is the 39th largest plant in New Zealand. White Hill in Southland has a capacity of 58MW, and Te Rapa Cogen has a capacity of 44MW. The map on page 21 shows the location of grid-connected generating stations over 10MW in size, and Table 1 (page 22) provides details on these plants. More than half of New Zealand s electricity is generated from hydroelectric stations. With the addition of other renewable sources of energy geothermal, biomass, solar and wind some 77 percent of New Zealand s electricity generation output came from renewable energy resources in The government s Energy Strategy aims to lift this to 90 percent by Other fuel types in the generation mix are coal, diesel and gas. In addition, some industrial sites produce heat and electricity for industrial purposes, in a process known as cogeneration. Often, excess cogenerated electricity is exported into distribution networks or to the national grid. Because New Zealand s hydro storage lakes can only hold enough water for a few weeks of winter energy demand, hydro generation is sensitive to the level of inflows from rainfall and snowmelt. For this reason, when inflows are low for a sustained period, alternatives such as coal must fill the place of reduced hydro generation. At the end of June 2011, 54.4 percent of electricity capacity was produced at hydro stations, 15.9 percent by gas-fired power stations, 10 percent by coal-fired stations, 7.3 percent geothermal, 6.1 percent wind power, 3.9 percent cogeneration, 1.8% diesel and less than 0.6 percent from other sources. Hydro generation has ranged between 52 percent and 57 percent of total annual generation over the last 5 years. Figure 11 shows how generation by fuel type has changed over time.

24 20 Generation Cogeneration delivers energy efficiency benefits by using heat produced in the process of generating electricity, commonly by steam turbines, for industrial purposes such as drying kilns. Total generating capacity of the New Zealand electricity system is about 10,000 MW The greatest capacity 1,448MW is provided by Huntly 1 6 Changing technology Wind power in New Zealand generates a small but rapidly growing proportion of the country s electricity. At the moment, wind supplies around 3 percent of New Zealand s electricity needs, although the proportion of wind generation is expected to rise significantly as important wind-farm developments in the South Island come on line. Some projections see wind s share of New Zealand s total annual electricity generation reaching 11 percent in An upper limit of 20 percent is generally considered likely as the uneven strength of wind and its intermittent nature mean output needs to be balanced by availability of other generation. There are a number of new generation technologies under development in New Zealand and internationally. Solar, tidal and wave power are examples of emergent technologies that might become commercially viable in the future. Tidal power uses the predictable movement of tides to generate electricity, whereas wave power uses the energy of ocean surface waves. Because of the different characteristics of generation types, as summarised in Table 2 (page 23), a mix of plant types rather than reliance on one fuel source, location or technology is desirable. New Zealand pioneered geothermal electricity generation in the 1950s with the aim of providing cover for hydro generation in dry years and avoiding dependence on imported fuel. Today, geothermal energy is the source of 10 percent of the country s electricity.

25 21 Location of electricity generators in New Zealand Ngawha Te Uku Te Rapa Kaimai Scheme Karapiro Kawerau Kawerau Arapuni Waipapa Kinleith Matahina Maraetai Atiamuri Aniwhenua Whakamaru Poihipi Ohakuri Wheao and Flaxy Mokai Ohaaki Aratiatia Nga Awa Purua Rotokawa Kaitawa Tuai Wairakei Tokaanu Piripaua Rangipo Southdown Otahuhu Glenbrook Huntly Te Rapa Te Uku Karapiro Arapuni Waipapa Maraetai Whakamaru Poihipi Mokai Aratiatia Tokaanu See Inset Kaimai Scheme Kawerau Kawerau Kinleith Matahina Atiamuri Aniwhenua Ohakuri Wheao and Flaxy Ohaaki Nga Awa Purua Rotokawa Kaitawa Tuai Wairakei Piripaua Rangipo Kapuni Stratford Peaker Taranaki CC Whirinaki Ministry for the Environment Whareroa Patea The Ministry for the Environment (MfE) oversees the framework of the Resource Management Act 1991 (RMA), which governs resource consents for construction projects and other developments. MfE is also involved in renewable generation and electricity transmission policy development. Cobb Te Rere Hau West Wind Te Apiti Tararua Mangahao Type of generation Coleridge Hydro Highbank Tekapo B Ohau A Ohau B Benmore Aviemore Tekapo A Ohau C Waitaki Gas Geothermal Coal Clyde Manapouri Whitehill Teviot Roxburgh Mahinerangi Waipori Wind Cogeneration Other (biomass/waste heat) Diesel