KEY POINTS:
New Zealanders look for two things above all from their electricity - certainty the lights will go on when they flick the switch and confidence they aren't paying more than they need to. This year both have been questioned.
The threat to security of supply this winter has come simply from a lack of the rain we rely on for most of our power.
From March to June this was the driest year since 1947 and the second driest since records began to be kept in 1931.
Despite these record low inflows into hydro lakes, we managed. Consumers were asked to "be prudent" but we went without involuntary power cuts. As one newspaper said: "It has not been that onerous making as little use of power as possible. It has even been virtuous."
Consumers weren't forced to cut back, and those who did saved on their power bills. Industrial consumers responded to high spot prices as you would expect - by cutting back their consumption.
Many, however, may have felt anxious at the thought that worse was to come and by the sense that "this keeps happening", that is we keep seeming to face calls to conserve.
In fact the recent pattern has been quite mixed.
The past few years have seen very low inflows (in 1992 and this year), very high (1998 and 2004), high (2000), medium (2002), and low (2001, 2003 and 2006).
Despite this variability, generators have continued to build new power stations. Currently 450 megawatts of new plant is under construction. Another 1100MW has received resource consent. A further 1200MW has been consented but is under appeal, and consents are being sought for a further 1500MW. That's a total of more than 4000MW compared to the current installed capacity of 9100MW, a potential 40 per cent expansion. Yet more is being spent on the transmission grid to ensure power gets to where consumers need it.
Meanwhile the Electricity Commission monitors the situation to make sure that enough is being built and maintains the Whirinaki power station to cover unusual events or conditions. In effect the system has a number of layers of insurance. But like all insurance policies, they come at a cost. In the case of Whirinaki, $25 million a year whether we use it or not. Any running costs are additional.
Because security of supply comes at a cost that consumers pay in the end, it makes sense to limit the number of Whirinakis on standby.
Since 2003 the task of balancing security and cost has rested primarily with the commission. Each year the commission determines whether we need to procure extra generating capacity or reserves for the following two years. As yet we haven't seen a need to procure more reserves.
In the commission's view, it's better that consumers are occasionally asked to "be prudent", than pay the cost of massive redundancies in plant and fuel each and every year to reduce even further the small risk of occasionally running short.
Because the commission cares about cost as well as security, we are also undertaking a far larger exercise to review aspects of the electricity market to see what can be improved.
Rather than further radical reform, our review identifies a range of options for incremental improvements: more competition, better information, more participation from consumers and more affordable electricity. Each of the options would contribute in some way to making our system more secure and fair in future.
Compared to other developed countries, our electricity is neither cheap nor expensive - we're in the middle. Over the past 10 years residential prices have risen in real terms. There are some good reasons for this. Increasing gas prices have pushed up generation costs and previous cross-subsidies between different classes of consumers have been removed.
The commission doesn't regulate power prices, but we can influence and keep downward pressure on them. Our market review has found significant differences in power prices and profit margins between different retailers and in different regions. In addition, it seems, few consumers are aware that they could save significant sums of money by switching to the lowest cost retailer in their area.
Some years ago switching retailers was problematic, but Recent refinements in systems and processes means that this is easy to achieve.
is no longer the case.
The commission believes that making more information available to consumers on the different price offerings from local retailers will improve competition and therefore keep electricity prices down.
The commission has identified other ways in which we could strengthen competition. The "market" system we (and most other countries) now use to facilitate competition between generators for the supply of electricity is still relatively new. Some people argue we would be better to return to a single large supplier (like NZED or ECNZ). That is not the commission's view, nor that of most we have consulted.
We think competition is important, not because it solves each and every issue, but because the clear lesson from other sectors and other countries is that consumers are better off with more competition rather than less.
Whatever the final outcome of the review, a body like the commission is needed to regulate the market. This is not a contradiction. Most of our economy operates within rules. Some are set by Parliament and some by agencies like the commission. When the Electricity Commission was established, the government's guideline was "as much market as possible and as much regulation as necessary". This description still makes sense. It is the framework within which the commission will continue to pursue the twin objectives of maximising the security and at the same time minimising the cost of electricity.
* David Caygill is the chairman of the Electricity Commission
