Vector chief executive Simon Mackenzie says: "The electricity system has evolved from the regulation and market structure that started in 1998. It’s now a completely different world." Photo / NZME
It’s been 26 years since far-reaching reforms were introduced for the New Zealand electricity sector.
Now, Vector chief executive Simon Mackenzie says it is time for a change.
The 1998 Bradford reforms, named after then-Energy Minister Max Bradford, have outlived their usefulness, he says.
Mackenzie, who has decades of experience in the sector, says the demands on the system are now more complex than ever and the idea that forces alone can deliver solutions is unrealistic.
He says the sector is “sliced and diced” and that a whole-of-system approach is required to get the country through the challenges of the next few decades.
Bradford’s reforms introduced sweeping changes to electricity generation, distribution and retail.
The outcomes sought were vigorous competition wherever possible and effective regulation of natural monopoly businesses.
The reforms saw the splitting of state-owned power generator ECNZ into three state-owned enterprises: Huntly and Tongariro (Genesis); the Waikato hydro stations (Mercury); and Waitaki and Manapouri (Meridian). They also covered the ownership separation of line and energy businesses.
Vector is New Zealand’s largest distributor of electricity and gas, owning and operating networks spanning the Auckland region, and its returns from both are strictly regulated because of its monopoly position.
The NZX-listed company has more than 612,000 electricity connections and is growing at a rate of 15,000 connections a year.
Through Vector Fibre, the company builds, monitors and maintains a fibre network for businesses.
It also has Vector Technology Solutions, an energy products and solutions business, which develops digital solutions for the energy infrastructure sector.
Mackenzie says there is more to the company than just its lines business.
Last year, Vector sold half its New Zealand and Australian metering business to investment vehicles managed and advised by QIC Private Capital. The transaction resulted in a one-off gain of $1.5 billion, which Vector used to pay off debt.
“We started that business about 14 years ago and that grew to a value of $2.5b by investing in New Zealand and Australia,” Mackenzie said.
“And now, with 50% owned by QIC, it has a very positive growth trajectory over in Australia as they look to roll out smart meters over there.”
Vector is 75% owned by community vehicle Entrust, which distributes an annual dividend to 356,000 Auckland households.
The company has struck up a global alliance with Amazon Web Services, with which it is co-developing digital platforms for the processing of data and analytics for energy systems.
Mackenzie says the complexity of the market has increased globally.
Solar power and electric vehicle charging come with material problems, which is why Vector has gone all-in on digital.
“There is no way that it is even humanly possible for a control room operator to basically understand how these devices switch on or off.”
He says heavy investment is needed to manage whole systems as demand becomes more complex.
“All our analytics show that, if we don’t have that ability to talk to these devices and schedule them under certain conditions, then there is a chance that, by 2040-50, the cost of investing in the network would have tripled as opposed to doubled, which is huge money.”
While complexity is on the rise, Vector is acutely aware of the potential challenges of climate change.
It has developed a relationship with Florida Power and Light, a power company that has proven adept at managing hurricanes.
Mackenzie says the sector is ripe for reform.
For a start, he says generation needs to be closer to where the load is.
“The electricity system has evolved from the regulation and market structure that started in 1998. It’s now a completely different world.”
He argues that the world has moved on since Bradford’s reforms, which created the likes of Mercury and Genesis from the breakup of ECNZ.
“Yes, there was a bit of growth but there was no major transition that was being sought for the decarbonisation of transport or industry.
“Cyber security was not really a thing.
“The structure of the system was sliced and diced pretty much into generation, transmission, distribution and retail, with retailers also being part of the generation mix.
“So it has lost that whole-of-system perspective, and that’s what we think is one of the biggest problems now.”
Mackenzie points out that New South Wales has a strategy for the whole energy system and the UK is doing the same thing.
He says there is not much point building a generation facility somewhere near the bottom of the South Island when a transmission upgrade is required to bring it north.
“So there is no whole-of-system cost analysis.
“The regulation is pretty outdated now, as is the market structure.”
Vector has long called for the creation of a ministry of energy.
“It’s not around creating a new bureaucracy.
“It’s around saying let’s bring together the Electricity Authority, what’s happening with regulation, what’s happening with the Ministry for Business, Innovation and Employment [MBIE].
“We don’t have an energy strategy, which is mind-boggling when you think about the dependency that the country has.”
Secondly, no one is asking whether the system is operating cost-effectively.
“It’s all very much by subset, and we don’t think that’s a good way to go for our energy transition.”
Mackenzie says that, as people’s reliance on electricity has become greater, so has their intolerance of outages.
“That is a real, fundamental thing that you can see changing, and it’s a combination of the increased reliance that people have on electricity, such as people working from home.
“That criticality is just amplifying.”
The advent of private solar power in other markets has added more complexity to the market, particularly when it comes to “exporting” power back into the system, he says.
“There is almost this belief system that markets will solve everything, but it’s been proven that it’s not working in lots of jurisdictions now.
“I’m not saying that markets are not good things.
“I’m saying that they sometimes don’t meet the needs or the dynamics of what you are trying to manage.”
When problems in the sector arise, a Band-Aid approach is taken “because there is no clear strategy and no real thinking about the system”.
The talk in the industry tends to be about intermittency: how the system keeps generating power when the hydro lakes are low and when the wind stops blowing.
“There needs to be an integrated view around how we get the data and analytics, and how we make sure that the system is fit for purpose as we go forward – the policy settings, everything.
“We can manage intermittency with control systems and digital platforms, but what I don’t understand is that you have in Australia – with a lower rate of renewable energy supply than New Zealand – that they have gone to a 5-minute market to manage intermittency and yet we still have a 30-minute market.”
“That’s saying to me that there are problems with the thinking around what we are doing to manage the system.
“If it goes calm, we lose about 700 megawatts of wind power from the system and that can happen quite quickly. Then you have dry-year risk.
“There is a belief that the market will deliver, but what I’m saying is that there is no one stepping back and asking, ‘Is that really going to happen?’”
The Bradford reforms were fine for their time and place.
“But 26 years on, there has to be a look at it.
“The question needs to be asked, is this the style and structure that is going to serve us for the major challenges of the next 10 to 15 years?”
Jamie Gray is an Auckland-based journalist, covering the financial markets and the primary sector. He joined the Herald in 2011.
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