Hodgson turns power switch on

By CHRIS DANIELS energy writer

The Government has climbed into the electricity industry boots and all with its decision to set up a powerful Electricity Commission to oversee the industry.

The commission could soon be levying up to $190 million a year from power consumers to pay for reserve generating capacity that would be used only in a one-in-60-year drought.

As well as setting up ways to avoid enforced winter power savings, the commission will have the power to force generators to offer long-term power contracts for a nominated portion of their capacity.

And it will be able to compel electricity retailers and big power users to hedge a set portion of their electricity, rather than relying on the wholesale spot market.

Also included in yesterday's announcement were details of more involvement in power generation by lines companies.

The commission will contract by tender for a quantity of new and/or existing generating capacity as a "security reserve".

Payments from the commission under these contracts will cover the cost of capital and maintenance costs of the plant and the cost of fuel.

The commission will then receive the spot price - which will be high - when this reserve electricity is sent into the national grid.

A prime candidate for this reserve capacity will be the 192MW, distillate-fired station to be built by Contact at Otahuhu or Whirinaki.

Energy Minister Pete Hodgson hinted at such a use for the new Contact station yesterday.

He also explained the logic behind allowing lines companies to become bigger generators.

"Just to ensure that market is nice and liquid for the Electricity Commission, we made sure the lines companies - generally speaking they are relatively cash rich - can now enter the market, " he said.

More Government changes to the electricity market, reducing the dominance of the big generator-retailers, are expected this year.

These may give the lines companies a greater role.

The commission's costs will be recovered through a levy on generators and retailers who buy and sell electricity through the wholesale market.

The levy will add up to half a cent a kilowatt hour to power bills - a $40 a year increase in the average household power bill.

Hodgson said the Government had settled on a "relatively simple" solution.

The new system was not a price cap because at a certain point - yet to be determined by the new commission - the reserve electricity would be released.

Crucial to the new system working properly would be the certainty that the reserve would not be used unless the country was suffering an especially dry year.

If it were used too freely, it would discourage investment in new generating capacity.

Hodgson said the market could not be expected to provide for these "very dry years".