Investments

Until the radical reforms that began in the 1980s, electricity generation and transmission in New Zealand was a function of central government which set a bulk supply tariff each year. The industry was closely regulated, requiring most consumers to purchase from a local electricity supply authority which in turn purchased directly from the New Zealand Electricity Department. Wholesale prices generally reflected the expected long run marginal cost of generation, and retail prices were similar regardless of location.

Although this model generally met consumer demand for electricity supply, there was concern over its economic efficiency and the absence of competitive elements. The reforms of the 1980s and 1990s were intended to improve the efficiency of the industry and to introduce competition and choice for consumers. Restructuring of the industry has taken place in a number of stages and has evolved as the industry has adapted to the new competitive environment.

Initially industry reforms involved corporatisation of Government interests and then of the Electic Power Boards. This was followed by an information disclosure regime imposed on parts of the industry with monopoly characteristics, particularly the line businesses. Transpower was separated from the Electricity Corporation of New Zealand (ECNZ) in 1994, while Contact was separated from ECNZ in 1995 to introduce greater competition in the market. In the process, Contact received ECNZ’s operating geothermal assets including the Wairakei and Ohaaki power stations.

In 1996, a fully competitive wholesale electricity market was established, providing a price-setting wholesale electricity pool and hedge contracts. About three quarters of electricity is exchanged through the wholesale pool, and the remainder by term contracts established directly between generators and retailers and large consumers. A large proportion of spot market sales are covered by internal hedges for generators and retailers, or by external contracts. About 80% of all electricity sales are covered by fixed contracts and hedges, giving greater certainty to investors that they can price to reflect the marginal cost of supply. All generators bidding into the pool receive the price offered by the last generation unit necessary to match demand.

The Electricity Industry Reform Act came into force in 1998. The Act required ownership separation of distribution and transmission from retail and generation. This had a direct effect on geothermal generation investment as it had been many of the network companies that had been investing in geothermal stations (e.g. Bay of Plenty Electricity, Mercury, Top Energy, along with Taupo Electricity).

From a generation standpoint, another significant reform was a split of the Electricity Corporation of NZ into competing entities. Contact Energy (now a listed company) was initially split off in 1995 then was privatised in 1999, the remaining ECNZ assets were split into three State Owned Enterprises: Meridian Energy, Mighty River Power and Genesis Power. Of these entities, Contact Energy and Mighty River Power generate from geothermal energy. There are also several smaller generating companies in public and private ownership. Generating plant has also been constructed on industrial sites which allows export of surplus electricity back to the grid.

The changes in the market structure have been reflected in new patterns of investment and activity by different industry stakeholders. Investment in major new generating plant is commonly by consortia of electricity generators, purchasers, investors and technology providers. These arrangements apply particularly to geothermal projects in which there has been substantial investment by Maori-owned trusts.

Between 1999 and 2004 the industry had been essentially self regulating, but the mix of private and state owned companies responsible for generation, transmission and retailing was unable to agree on a set of rules for self governance. As part of a package of decisions on the security of electricity supply, the Government announced the establishment of an Electricity Commission in 2003. The commission was charged with ensuring that “electricity is generated, conveyed, and supplied to all classes of consumers in an efficient, fair, reliable, and environmentally sustainable manner”. The Commission has responsibility for much of the operation of the electricity market, although most of the industry functions as it did under self governance. In 2004, Government released the Policy Statement on Electricity Governance which sets out the objectives and outcomes that the Government wants the Electricity Commission to achieve.

In 2004 Government also passed the Electricity and Gas Industries Bill which was intended to set the legal framework for the next phase in the development of New Zealand’s electricity and gas industries, and encompassed all the decisions made by the Government during 2003 on electricity supply security and the governance of the electricity and gas industries. These related particularly to the depletion of the Maui gas field, vulnerability to dry hydro years, growth in demand for electricity and the need to make continuing progress towards a sustainable energy future. The Bill updated the Electricity Act to reflect the establishment of the Electricity Commission and the specific outcomes that the Government wanted the Commission to achieve, including security of supply and energy efficiency. The Bill also amended the Electricity Industry Reform Act to ease restrictions on line companies owning electricity generation (they can now own the greater of 50¬†MWe or 20% of their peak demand).