New commission to ensure power kept for dry years

12.30pm

A new scheme to provide reserve power for dry years is likely to cost consumers about $40 a year.

The Government announced today the establishment of a new seven-member Electricity Commission which will contract electricity generators to provide reserve power for release on to the market in dry years.

The cost to consumers of securing the reserve generation was estimated at less than half a cent per unit of electricity or $40 to the average consumer's annual power bill.

In a joint statement, Finance Minister Michael Cullen and Energy Minister Pete Hodgson said the seven-member Electricity Commission would be responsible for managing the electricity sector so that demand could be met without the need for national power conservation campaigns.

It would do this by contracting electricity generators to provide dry-year reserve generation capacity and fuel.

These reserves would be withheld from the market until dry years, when they would be released at a high price.

"Withholding reserve generation from the market in normal years will allow the market to operate as usual," Mr Hodgson said.

"A high price on reserve generation in dry years will ensure that investment in other new generation to meet normal growth in electricity demand is not deterred.

"It will also significantly reduce spot market volatility in dry years because prices above that of the reserve generation will be relatively rare."

Commissioners would be appointed within three months.

The reserve generation was expected to be built up within about three years.

Securing it was expected to cost electricity consumers "well under half a cent per unit of electricity," the ministers said.

"The cost is low because reserve generation is expected to comprise new plant with relatively low capital costs, plus heavily depreciated old plant. The fuel, though costly, will be rarely used."

The commission would have the power to recover the costs in the way it considered most efficient, for instance through a levy.

Mr Hodgson said people would be able to comment on the proposal for six weeks, with legislation implementing the changes expected in August or September.

Dr Cullen said that while New Zealand's hydro-dominated electricity system delivered cheap electricity it was vulnerable to dry years.

More reserve generation was needed but it was clear that the current electricity market did not encourage generators to hold such reserve plant.

Mr Hodgson said the Government's solution had been carefully designed to ensure that the wholesale electricity market would continue to deliver the price signals and opportunities it was supposed to.

Other changes in the package included:

* amending the law to allow lines companies to own reserve generation without limit and ordinary generation up to 25 megawatts or 10 per cent of their load;

* regulating lines charges to encourage the development of small generation projects connected to local lines;

* empowering the commission to require generators to offer long-term electricity hedge contracts into the market for a nominated proportion of their reliable capacity -- if it decides this is necessary to safeguard against under-investment in ordinary generation;

* making the commission responsible for improved modelling and forecasting of future electricity supply and demand;

* the commission will be responsible for establishing methodology to enable investment in the national grid to proceed; and

* the commission will be responsible for making demand side energy exchanges -- which allow consumers to sell electricity they have contracted for but do not need -- available nationwide.

- NZPA

Hodgson's statement

Discussion Paper: Reserve Generation

Herald Feature: Electricity