ELECTRICITY INDUSTRY OVERVIEW
The electricity industry in New Zealand has four main segments: generation, transmission, distribution and retailing. We are also seeing the beginnings of a sixth segment, the demand side, involving developments and systems that empower consumers (such as solar power and battery storage, along with new pricing arrangements and new efficiency technologies). A fifth segment, regulation, also plays a significant part.
Until the 1990’s, over 90% of all electricity was generated by a state-owned conglomerate, ‘Electricity Corporation of New Zealand’ (Electricorp, later ECNZ). A number of local power companies had some limited generation capacity. From the mid-1990s ECNZ was broken up and partly privatised, resulting in four major generators: Meridian, Contact Energy, Genesis and Mercury.
In parallel to the ETCZ break-up, most of the local power companies were forced by legislation (the so-called Bradford reforms) to sell their generation assets as joint ownership of significant amounts of generation and distribution was no longer allowed. One of those power companies, Trustpower, opted to sell its distribution assets instead and to buy up a number of the small generation businesses. Another, Top Energy, obtained a special exemption that allowed it to retain the Ngawha geothermal generation plant in Northland.
Today, downstream technologies such as solar and wind power are opening up new opportunities for smaller generators down to the household level.
Electricity supplied by the major generators is mainly sold through the wholesale electricity market (NZEM) overseen by the Electricity Authority, although a significant portion is sold direct to major industrial users such as the aluminium smelter at Bluff.
All electricity transmission services are provided by Transpower, a Crown company that owns and operates the ‘National Grid’ (the pylons and high voltage cables that bring electricity from major power stations to about 140 regional Grid Exit Points – GXPs – around the country). It was separated from the original Electricity Corporation conglomerate in the 1990s.
Transpower is unique in being allowed a guaranteed return on its approved investments, under a price control formula administered by the Commerce Commission, based on a Transmission Pricing Methodology set by the electricity Authority.
Regional electricity distribution companies supply virtually all New Zealand households, along with the great bulk of commercial, industrial and farming customers, through local electricity distribution networks. They vary in size from Vector (owned by ETNZ member Entrust) with about 25% of the national distribution market, down to Buller (owned by the Buller Electric Power Trust) with around 1% of the market.
Most distributors sell their lines services to the various electricity retailers operating on their networks.
All distribution companies must provide comprehensive performance and pricing data to the Commerce Commission, in accordance with strict information disclosure legislation. In addition, most are subject to price control, again administered by the Commerce Commission.
Around 75% of New Zealand’s electricity distribution assets are wholly or majority owned by ETNZ member trusts. Local authorities in Christchurch, Dunedin, Invercargill and South Canterbury own or partially own the local distributors, while two companies are foreign-owned.
Most New Zealand consumers buy delivered electricity from one of the major retailers owned by the big generators (i.e. from companies such as Meridian, Contact, Genesis etc.). Around 15% of the market is supplied by around 30 independent retailers.
There are two principal electricity industry regulators: the Commerce Commission, and the Electricity Authority. The Commerce Commission regulates distributors’ prices and their supply quality (based mainly on the frequency and duration of outages). In addition it controls the prices of Transpower and of most distributors. While Transpower is guaranteed price levels that recover its costs, distributors are subject to a separate control regime that exposes them to wider market risks.
In addition, there are various legislative controls on power quality and supply safety, and to a complex range of operational commitments administered by the Electricity Authority.
Industry Ownership and Relationships
The New Zealand Electricity Industry
Since the 1980s the electricity industry has changed greatly from a state-owned monopoly handling generation and transmission, and selling power at an annually set North Island and South Island price, to a range of local ‘power companies’ (and a few direct users, such as the rail system and the aluminium smelter, who received special rates). The power companies were, essentially, the local retailers and distributors of electricity, delivering a combined energy and lines service to consumers. From 1982 the ownership structures of most of them were standardised through trusts created in accordance with the Energy Companies Act of that year.
In 1998-99 legislation required the local power companies to be broken up into separate energy retailers and distributors, with ownership of the latter – the Electricity Distribution Businesses, ‘EDBs’ or ‘line companies’ – largely being retained by the energy trusts. Those Trusts make up ETNZ’s members.
In the 1990s the old generation/transmission monopoly (Electricorp then ETNZ, formerly the Electricity Division of the Ministry of Energy) went through a series of break-ups, beginning with the separation out of Transpower – its transmission arm – followed by the creation of Contact Energy and then a final split into the other three major generators (now Meridian, Genesis and Mercury).
- Transpower is a wholly-owned Crown company, which differs from a State-owned Enterprise in not having a purely commercial business focus.
- Contact is a listed company, with no Crown ownership.
- Meridian, Genesis and Mercury are all listed companies with 50% Crown ownership of each.
The major generators acquired most of the energy retailing businesses created by the 1998-99 power company break-up. Just one trust opted to sell its distribution business and be a generator-retailer, forming TrustPower.
For a broad views of the electricity industry’s ownership and structure see the Ministry of Business, Innovation and Employment outline of the Electricity Industry
New Zealand’s Electricity Supply System
ETNZ AND OTHER INDUSTRY ORGANISATIONS
ETNZ Works closely with the Electricity Networks Association (ENA) which represents the interests of the country’s electricity lines companies – the electricity distribution sector. While ETNZ focusses on ownership and beneficiary (i.e. consumer and community) interests, ENA looks after the operational and regulatory matters that have an impact on the day-to-day activity of their members. ENA’s membership includes companies that are not trust-owned (notably 4 companies owned or part-owned by local authorities, along with 2 owned by overseas interests) but, in general our acitivites are well-aligned.
We also have a relationship with the Electricity Engineers’ Assciation (EEA) and recognise the scope for liaison on some issues with parallel organisations such as the Institute of Directors, the New Zealand Trustees’ Association, and Cooperative Business NZ. The distribution companies owned by all ETNZ’s member trusts belong the industry complaints scheme operated by the Electricity Disputes Commissioner. The distribution companies owned by all ETNZ’s member trusts belong the industry complaints scheme operated by the Electricity Disputes Commissioner
ETNZ is funded by a levy paid by all member trusts.
For a general overview of the electricity industry see the Electricity Authority’s document Electricity in New Zealand at www.ea.govt.nz
Hydro storage and supply security
In New Zealand electricity is sold through two primary markets: a wholesale one, where the larger generators sell their output to electricity retailers (and to a few major users) at the points around the country where it leaves the Transpower grid, and a retail market that’s focussed on around 1.8 million points around the country where it leaves distributors’ networks and enters end-users’ meters (known in the industry as ‘ICPs’ – Installation Control Points). The various retailers, dominated by the retail arms of the major generators – gentailers, buy from the wholesale market and sell to end users on the retail market.
Behind-the-scenes there are several related markets:
- The hedge market, where major generators and some end users (or ‘loads’) can offer in longer term financial commitments to either cover the costs of additional wholesale generation that might be needed e.g. in a forthcoming winter, or – in the case of loads – to cut back demand if supply gets tight.
- The instantaneous reserve market, where loads (and others) can be paid to be ready to cut off their demand within moments in the event of a system fault, etc.
- The spinning reserve market, where (usually) one or more hydro generators will have been paid to keep a turbine running, ready to inject power into the system immediately if there’s a sudden supply shortfall.
- The ancillary services market, where distributors and others may be paid to use their systems to maintain power quality, e.g. by boosting voltage if the transmission system gets overloaded.