More regulatory policy initiatives in the electricity market

The Government has recently introduced or proposed a further series of policy initiatives, all aimed at promoting renewable generation as the best means of addressing New Zealand's response to climate change. This includes:

• the proposed National Policy Statement for Renewable Electricity Generation;

• the establishment of a Senior Energy Officials Group to oversee the implementation of energy efficiency measures;

• an enhanced role for the Electricity Commission in relation to energy efficiency, renewable generation activities and the purchase of reserve power; and

• a proposed further relaxing of the current restrictions on lines companies investing and operating renewable generation projects and selling the output to customers within their local area network.

In this article, partner Garry Downs, senior associate Louise Hill and solicitor Sukhdeep Johal set out the key aspects of these new policy initiatives and consider how they "fit" with the regulation of the electricity industry.

Introduction

With the introduction of the New Zealand Energy Strategy the Government signalled its intention to overhaul the policies surrounding the electricity industry with the intention of "advancing sustainability and economic transformation and helping New Zealand respond to climate change". The recent introduction of the new Government Policy Statement on Electricity Governance in May 2008 and the proposed National Policy Statement for Renewable Electricity Generation are part of that package.

Linked with these developments are the amendments to the Electricity Industry Reform Act 1998 (EIRA). The Commerce Committee examined the proposed EIRA Amendment Bill and recommended that it be passed with a number of suggested amendments. Overall the amendments are welcome and are intended to simplify the amendments being made to the EIRA. (For further commentary on the EIRA see the article "Amendments to the Electricity Industry Reform Act 1998" in this issue of Commercial Quarterly.)

Efficiency?

Given the Government's promotion of renewable energy, the recent developments in the policy and regulatory areas of the electricity industry are targeted at that objective. We have the New Zealand Energy Strategy (Energy Strategy), the New Zealand Energy Efficiency and Conservation Strategy (E & C Strategy), proposals for treatment of the electricity industry in the Government's emissions trading scheme, the Government Policy Statement on Electricity Governance, the proposed National Policy Statement for Renewable Electricity Generation, and the amendments to the EIRA. To implement these policies and to ensure appropriate regulation of the electricity industry we have the Electricity Commission and the Energy Efficiency and Conservation Authority (EECA). Also having input on electricity matters are the Commerce Commission, the Ministry of Economic Development, the Ministry for the Environment (through the Resource Management Act) and the Ministry of Consumer Affairs.

The Government established the Electricity Commission in 2003 with the principal objectives of ensuring that electricity is produced and delivered to all classes of consumers in an efficient, fair, reliable and environmentally sustainable manner and promoting and facilitating the efficient use of electricity. The Government Policy Statement on Electricity Governance states that maximising the contribution of cost-effective energy efficiency and conservation is a key means to achieving the vision set out in the Energy Strategy for a reliable, resilient system delivering New Zealand sustainable, low emissions energy services.

The Government has established a Senior Energy Officials Group to oversee the implementation of the Energy Strategy and the E & C Strategy and to coordinate the development of priority energy efficiency programmes. This group is led by the Ministry for Economic Development and includes the Electricity Commission as well as other relevant agencies such as Ministry for the Environment, the Ministry of Transport, the EECA and the Department of Building and Housing. According to the Government Policy Statement on Electricity Governance, the group has responsibility for ensuring a coordinated and cohesive programme, and for providing a forum in which to address matters relating to consistency of programmes with energy policy and the government's broader climate change and sustainability objectives, and for coordinating stakeholder engagement. It is unclear, however, to what extent this group will have any authority in relation to the various agencies and commissions.

Government Policy Statement on Electricity Governance

In May 2008 the Government introduced a new Government Policy Statement on Electricity Governance (Governance Policy) which replaces the earlier versions of this document. The reason for the 2008 review is to address the Energy Strategy. As stated in the foreword to the Governance Policy, "the [Electricity] Commission has a critical role to play in taking the [Energy Strategy] from strategy to vision". The amendments to the Governance Policy reflect developments over the past four years, and in particular the Energy Strategy. The Governance Policy sets out the objectives and outcomes the Government wants the Electricity Commission (the Commission) to give effect to.

The key amendments to the Energy Strategy include:

• Contribution to programme design, delivery and monitoring

  A new section relating to the Energy Strategy and the E & C Strategy. The Government expects the Commission to contribute to programme design, delivery and monitoring. The Commission will need to make provision for delivering these actions in its planning processes and accountability documents, such as the Output Agreement and Statement of Intent.

• Monitoring compliance for low income and vulnerable consumers

  In the area of consumer protection, the Commission is tasked with monitoring compliance with the guideline on arrangements to assist low income and vulnerable consumers to ensure that, amongst other things, any consumer who is dependent on electricity for critical medical support will not be disconnected for reasons of non-payment. This is clearly in response to the death of Folole Muliaga in May 2007.

• Liaising with the Gas Industry Company

  The Government requires the Commission to work closely with the Gas Industry Company to establish a single independent complaints resolution scheme that includes both electricity and gas, because the size of the gas market does not justify a separate scheme, many of the same companies are involved in both sectors, and many customers buy electricity and gas from the same retailer. The Commission is required to work with the Gas Industry Company to "coordinate approaches to approval and governance of an electricity and gas consumer complaints scheme".

• Energy efficiency

  The electricity efficiency section of the Governance Policy has been revised and "beefed up". The Governance Policy states that "maximising the contribution of cost-effective energy efficiency and conservation is a key means to achieving the vision set out in the Energy Strategy for a reliable, resilient system delivering New Zealand sustainable, low emissions energy services". A principle of the Energy Strategy is that investment in energy efficiency measures should occur where this is cheaper than the long-term costs of building extra generation and network capacity, including environmental costs. It is the Government's intention that EECA be the primary service delivery agency for energy efficiency programmes in this section. The Commission is required to work closely with the EECA, to ensure that the Commission's activities complement the work of the EECA and that duplication of effort is avoided. The Commission is required to draw on the expertise of the EECA in the management of energy efficiency programmes in designing, administering and delivering its programmes. The Government requests that the Memorandum of Understanding between the EECA and the Commission be reviewed to clarify the respective roles of each agency and to reflect the Government's intentions described in this section of the Governance Policy.

• Facilitating the development of renewable energy resources

  The Government also sets out in the Governance Policy its policy and objectives in relation to renewable energy, which the Commission is required to give effect to. The Governance Policy states that "encouraging the development of renewable energy resources is a key part of the Government's Energy Strategy for managing climate change and long-term energy security". The Government's objectives in relation to renewable electricity energy now include the objective that the specification of the grid planning processes and approval criteria should allow grid upgrade plans to facilitate the efficient and timely development of renewable generation resources, taking into account any difference in lead times for transmission and generation investment.

• Integrating wind generation with other generation sources

  The Commission is required to investigate the extent to which hydro and other generation sources can be integrated fully with intermittent wind generation in order to ensure that the maximum economic potential of wind generation can be achieved. This work should also include consideration of the changing role of older thermal generation plants.

• New "winter energy margin" to meet security of supply

  Significant changes have been made in the area of security of supply. In particular the "1 in 60" dry year standard has been replaced by a standard expressed in terms of "winter energy margin", which is the margin between forecast capacity to supply in a mean hydro year and forecast demand. In order to meet the security of supply objective, the Commission is required to use reasonable endeavours to ensure that the generation and transmission system is capable of maintaining a mean winter energy margin of 17 percent for New Zealand overall and 30 percent for the South Island. The Governance Policy states that this new standard will provide a level of security similar to the 1 in 60 standard, but provides a measure that is clearer, and easier to calculate and understand.

• Security standards for peak demand

  The Commission is also required to develop and set security standards for adequacy of capacity to meet peak demand.

• Monitor resources to ensure market delivers consistently

  The Commission is expected to be active in monitoring resource available to meet demand, and, in particular determining whether the market is consistently failing to deliver new capacity sufficient for an adequate energy margin and to meet peak demand. If the Commission determines that the market is consistently failing to deliver sufficient capacity, it should use the powers available to it to make recommendations to the Minister on any arrangements or policies that it considers necessary to provide better outcomes.

• Contracting for reserve energy to maintain the desired energy margin

  The Commission still has an obligation to contract for, but not own, reserve energy to maintain the desired energy margin if it considers that the New Zealand or South Island mean year energy margin is unlikely to be met by market participants. The previous limit placed on reserve energy of 1200GWh has been removed. The Government has continued to emphasise, however, that in contracting for reserve energy the Commission should seek to:

• minimise the risk that reserve energy affects the incentives for market participants to respond to higher prices, construct new capacity, enter into hedge and other contracts, and investment in demand side manage; and

• maximise static and dynamic efficiency.

• Determination of a storage guideline level

  The Commission should determine, for each contracted form of reserve energy, a storage guideline level at which it would expect reserve energy to be operating. If storage falls below a particular storage guideline level, and the relevant reserve energy is not being dispatched, the Commission may choose to offer that reserve energy for dispatch at a lower price in order to preserve hydro storage and to reduce shortage risks.

• Emergency response plan

  In addition to the Commission's task of managing the electricity sector to minimise the risk of supply shortages, the Government recognises that there will be infrequent circumstances where there is a material risk of shortage. To manage such circumstances, the Commission is required to establish an emergency response plan that identifies and includes a range of measures to cover contingencies more severe than those allowed for within the mean winter energy margin. Such measures are to include conservation campaigns.

• Other "tweaks" to the Governance Policy

  The Government has also reviewed and made some "tweaks" to areas of the Governance Policy relating to system operation and wholesale and related markets, transmission, distribution, interrelationship with the Commerce Commission, distributed generation, and retail.

Proposed National Policy Statement for Renewable Electricity Generation

In August 2008 the Government introduced a proposed National Policy Statement for Renewable Electricity Generation. This policy statement sets out an objective and policies to enable the sustainable management of renewable electricity generation under the Resource Management Act 1991. The preamble to the proposed policy statement states that the contribution of renewable electricity generation, regardless of scale, towards addressing the effects of climate change plays a vital role in the wellbeing of New Zealand, its people and the environment. The Government recognises, however, that development that increases renewable electricity generation capacity can have environmental effects that span local, regional and national scales, often with adverse effects manifesting locally and positive effects manifesting nationally. Adopting a nationally consistent approach to balancing the competing values associated with the development of New Zealand's renewable energy resources will provide greater certainty to decision-makers, applicants and the wider community.

In essence, the proposed policy statement recognises that the current regime for decision-making under the Resource Management Act in relation to proposed new renewable generation projects requires a focus on local impacts (often negative when considering the building of a power station), and little regard for the national benefit of such projects. The proposed policy statement attempts to ensure a consistent approach to assessment of these projects and ensure national benefits be taken into account.

The policies set out in the proposed policy statement include:

• decision-makers must have particular regard to the national, regional and local benefits relevant to renewable electricity generation activities. These benefits may include maintaining or increasing electricity generation capacity while avoiding, reducing or displacing greenhouse gas emissions, and maintaining or increasing security of electricity supply at local, regional and national levels by diversifying the type and/or location of electricity generation;

• when considering measures to avoid, remedy or mitigate the adverse environmental effects of renewable electricity generation activities, consent authorities must have particular regard to the constraints imposed on achieving those measures by (amongst others) the nature and location of the renewable energy source, the local of existing structures and infrastructure, and logistical or technical practicalities associated with development, operating or maintaining the proposed renewable electricity generation activity;

• when considering proposals to develop new renewable electricity generation activities, decision-makers must have particular regard to the relative degree of reversibility of the adverse environmental effects associated with proposed generation technologies;

• by 13 March 2012, local authorities are to notify a plan change, proposed plan or variation to introduce objectives, policies and (where appropriate) methods, into policy statements and plans to enable activities associated with:

• the identification and assessment by generators of potential sites and energy sources for renewable electricity generation;

• research-scale investigation into emerging renewable electricity generation technologies and methods; and

• the development and operation of small and community-scale distributed renewable electricity generation.

Comment

The proposed policy is welcomed. We consider it takes the right factors into account. The question is whether those factors have the appropriate weightings attributed to them. For example, should reversibility be given more consideration over security of supply or vice-versa? We think this is a legitimate debate for the industry to have.

For further information, please contact:

Garry Downs
Partner

Enquiries and information

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