Energy Minister Simeon Brown issued a Government Policy Statement (GPS) to the Electricity Authority (EA) concerning the electricity industry, with a particular focus on updating the wholesale electricity market and security of supply. The EA, as an independent Crown Entity, is required to "have regard to" the GPS when performing its functions relating to its responsibility for the governance and regulation of New Zealand's electricity industry.[1] According to Minister Brown, the GPS sets the Government's "expectation that the Electricity Authority will drive a more competitive, fuel agnostic, electricity sector that works in the long-term interests of consumers and avoid excessive prices".[2]
The GPS was issued in anticipation of a major increase in electricity demand over the next 30 years, driven by vehicle electrification and process heating in combination with underlying base growth. The EA welcomed the GPS and shares the Government's "desire for consumers to have access to an electricity system that is competitive, efficient, secure and resilient".[3] The content of the GPS aligns with the EA's existing policy work programme, including to progress recommendations of the Market Development Advisory Group's 2023 report (MDAG Report).
We have highlighted the key elements of the GPS and what it might mean for the electricity sector:
- Updating the wholesale electricity market: The GPS says the wholesale electricity market needs updating to meet challenges from an increasing proportion of electricity being supplied from intermittent renewable sources and coordinating more participants in the market. The GPS requires changes to be implemented "without delay", including tranche one recommendations in the MDAG Report, such as:[4]
- improving short-term forecasts of demand and intermittent supply;
- improving transparency of hedge market activity;
- using pricing to optimise distribution investment, so to reflect network needs;
- developing measures to better enable demand-side flexibility (DSF) by consumers (discussed further below); and
- developing a plan for 'virtual disaggregation’, which would require gentailers to offer a minimum volume of flexible generation in the form of risk management contracts, as a back-up option if other measures to promote risk management are not effective.
- Efficient investment to strengthen transmission and distribution networks: An estimated $22 billion of investment is required this decade to enable electrification and integrate distributed energy resources as part of strengthening transmission and distribution networks. But the GPS reiterates that investment needs to be economically efficient – that it reflects demand, optimises new capacity, but avoids unnecessary cost increases for consumers and ensures network reliability.
- Roles in ensuring reliability and security of supply: The Government noted the importance of decentralised risk management – that individual wholesale market participants are responsible for managing their own supply risks in response to efficient price signals, and how to best "insure" against risks for their circumstances. The GPS sets expectations for different participants' roles:
- Wholesale buyers and sellers: To ensure they have sufficient risk management mechanisms in place, such as contract cover or demand-side response measures.
- Government and regulators: The Government, the EA and the Transpower (as system operator) will not step in to mitigate participants from their risk of not managing their own energy supply risks.
- Electricity Authority: To ensure that market outlook information is accurate, up to date and accessible to enable participants to accurately assess and manage risk.
- Transpower: To efficiently coordinate the utilisation of electricity generation, and demand-side offers available in the wholesale market by market participants in response to spot price signals.
- Spot price volatility: When recognising that the spot price provides important signals to the market, the GPS recommends that the EA provides improved periodic public information explaining the reasons for increased spot price volatility. Reporting in a quarterly seasonal outlook report was recommended by the MDAG report.[5] We note that the EA has been publishing 'Eye on Electricity' articles at least monthly to explain the drivers and impacts of changing wholesale electricity prices.
- Demand-side flexibility:[6] DSF allows consumers to shift the time or amount of their electricity consumption (eg to choose to consume electricity at a time of lower demand and price). The GPS recognises that DSF is a useful tool to manage price risk and support security of supply. Enabling DSF is also a priority recognised in the MDAG Report. The MDAG Report noted that there has been little incentive for DSF uptake in New Zealand, including due to the relative stability of electricity prices.[7] However, with increased wholesale price volatility recently and new technologies enabling dynamic response, DSF tools are likely to become more available in New Zealand.
- Competition: The GPS stated the EA's role in ensuring that market arrangements facilitate competition, including in relation to flexible supply, referring to competition issues discussed in the MDAG Report.[8] The GPS recognised that a market with effective competition includes (among other features):
- rules that are technology and solution neutral;
- competitive new entry and competing business models to drive innovation, delivering benefits to consumers overtime; and
- competition is not distorted by misuse of market power.
The EA considers the Energy Competition Task Force established with the Commerce Commission in August 2024 following the energy crisis will support the EA fulfilling its obligation to promote competition. The taskforce is to investigate ways to improve the performance of the electricity market and any recommendations that change market settings or regulations will go to public consultation before final decisions.
- Related key policy elements: The GPS also highlighted a range of the Government's existing policy measures and proposals that will impact on the electricity sector, which the EA should be considering, including:
- ensuring resource consenting processes for generation, storage and network infrastructure enable timely and efficient projects;
- recognising the critical role of fossil and green fuels in the electricity sector;
- carbon pricing under the ETS is the policy tool to drive decarbonisation;
- investigating the generation asset thresholds for electricity distribution businesses; and
- increasing customer data access under Customer and Product Data Bill to drive market competition and affordability. MBIE is underway consulting on designation of the electricity sector under this Bill.
The Government's alignment with the EA's reprioritised work programme, and strong endorsement for implementing the MDAG recommendations, means we expect any changes to the future design of the wholesale electricity market to largely reflect the workstreams recommended by MDAG.
To better understand what impact the electricity wholesale market review programme could have on your business, please get in touch with one of our experts.