What is the Authority's role in the electricity markets?
Electricity is a unique commodity that must be produced at the exact moment and in the precise quantities that consumers demand it.
The Authority is an independent Crown entity. As the industry regulator the Authority develops and oversees the Electricity Industry Participation Code (Code) which governs all aspects of electricity generation, supply and demand.
The three-fold objective of the Authority's existence is to promote:
- reliable supply; and
- efficient operation of the electricity industry, for the long-term benefit of consumers.
In pursuing this objective, the key functions performed by the Authority are:
- registering industry participants
- developing and administering the Electricity Industry Participation Code 2010 (Code)
- enforcing compliance
- facilitating market performance through information, best-practice guidelines, and related services
- undertaking sector reviews
- acting as Market Administrator and contracting market operation service providers
- promoting consumer switching; and
- monitoring sector performance against the Authority's statutory objective.
In addition, the Electricity Industry Act 2010 specifies seven priority projects for completion by the Authority by 1 November 2011.
Although operating as an independent regulator, the Authority must have regard to Government Policy Statements presented in Parliament by the Minister of Energy and Resources.
The Authority may also undertake a review of a specific electricity industry issue at the request of the Minister.
How do the markets work?
New Zealand's electricity market is made up of wholesale and retail functions. Wholesale functions include bidding (purchasers), offering (generators), scheduling and dispatch (System Operator), pricing (Pricing Manager) and clearing and settlement (Clearing Manager). Retail functions include the registration of consumers, enabling consumers to switch easily between suppliers (Registry Manager) and the counting of electricity purchases and sales (Reconciliation Manager).
The electricity market was self-regulating until 1 March 2004, when it began operating under the Electricity Governance Rules and the Electricity Governance Regulations, overseen by the Electricity Commission. Following a Ministerial Review in 2009, from 1 November 2010 the electricity market is governed by the Code, overseen by the Electricity Authority. The Electricity Authority contracts out the services required to run the electricity retail market to a number of market operation service providers.
The wholesale market is made up of sellers (generators that are offering electricity for sale) and buyers (retailers and large users that bid for electricity). Trades take place at a number of nodes across New Zealand every half-hour. Generators make offers to supply electricity at grid injection points, while retailers and some major industrial users make bids to buy electricity at grid exit points.
All offers and bids go into the Scheduling, Pricing and Dispatch model database which is operated by the System Operator. This model takes generators' offers and purchasers' bids, together with other factors such as the state of the electricity grid and plant outages which could impact on supply and demand, and schedules (or forecasts) the generation profiles of each generator and prices for each node for every half-hour trading period for up to 36 hours ahead. The System Operator is Transpower, a state-owned enterprise responsible for ensuring electricity supply security and quality. Transpower also takes on the roles of scheduler, predicting likely demand to help generators make bids, and dispatcher, in charge of matching demand and supply. The Pricing Manager uses the same model to calculate final prices which are used to settle trades. The Clearing Manager pays generators for their generation at the market clearing price and invoices all retailers for their off-take.
The Wholesale Information and Trading System market operation service provider operates the electricity market wholesale information and trading platform (WITS) used by electricity market participants to upload their bids and offers. WITS also delivers pricing, scheduling and other market data.
The electricity hedge market allows participants to protect themselves against energy price risk and differences between the different nodes on the grid. For example, the price at one node could be very high because it is a long way from available generation.
Most consumers buy their power from an electricity retailer, rather than the wholesale electricity market. The Electricity Authority's role in overseeing the operation of the retail electricity market is to administer the sections of the Code that govern metering arrangements, customer switching and reconciliation.
The Registry, run by the Registry Manager, is a national database that contains information on every point of connection on a network from which electricity is supplied to a site. These points of connection are referred to as installation control points (ICPs). Each ICP has a unique identifier. Through the use of ICPs, the registry helps to manage the customer switching and reconciliation processes.
While the extent of retail competition varies across the country, customers have a choice of retailers. In some parts of New Zealand there are five or more competing retailers. Furthermore, the switching process has become easier and faster over time, and can generally now be done over the phone with the new electricity retailer.
Consumer New Zealand provides a free web-based tool to help residential users to shop around. The tool is available at Powerswitch website and shows the electricity retailers and tariff options available in each area. It also allows user to calculate their expected bill with different suppliers.
The reconciliation system, run by the Reconciliation Manager, determines the industry's wholesale cash flow by allocating the value of electricity to participants. It ensures generators get paid for what they generate and retailers pay for what their customers use.
Distribution of electricity from the grid exit points to the end consumers' premises is the responsibility of distributors, or lines companies. Some major industrial users are directly connected to the grid, such as New Zealand Steel and the Rio Tinto Aluminum Smelter.
How does the Authority ensure that the Code is appropriate for the market?
The Authority consults extensively with stakeholders and uses its influence to seek mutual solutions before imposing regulation. Good communication with stakeholders, at the consultation stage and when regulations are promulgated, is an essential part of the process. It is Authority and Government policy that the Authority remains open to hearing a range of stakeholder views. It also draws on advice from a range of advisory groups and technical working groups.