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• February 2002 Version
• Attachment 2

• Electricity

• Regulatory Framework

• Government Policy Statement

• "Dry-Year" Risk
• Government's Objectives
• Expectations and Principles

This document is issued as an attachment to the Government Policy Statement entitled "Further Development of New Zealand's Electricity Industry," dated February 2002.

"Dry-Year" Risk

1. A key risk to the security of electricity supply in New Zealand is climatic uncertainty. We rely heavily on hydro generation and New Zealand has limited water storage capacity. Unusually low rainfall, or "dry years", can create electricity shortages. The economy will continue to face this risk for the foreseeable future.

Government's Objectives

2. The Government's objective is to provide a framework which will ensure that dry-year and other supply risks are managed prudently at least cost to the economy.

3. Previous governments' Policy Statements concerning the management of dry-year risk have emphasised:

• the expectation that electricity industry participants should ensure that they take responsibility for managing dry-year and other supply risks; and
• that the government will not step in to protect those who fail to provide adequate protection.

4. If industry participants did not take such action, and a government stepped in, the likelihood of future supply shortages would increase as a result of weaker incentives on buyers and sellers of electricity to arrange appropriate risk management strategies.

5. It is timely to reiterate the current Government's expectations of industry participants and the principles that should be observed in managing electricity supply risks.

Expectations and Principles

1. Dry-year and other supply risks should be managed in such a way as to minimise overall costs to the economy.
2. Responsibility for managing risks relating to supply rests with market participants.
3. Generators are responsible for providing protection against supply risk at a quality and quantity that is demanded by their customers and established in contracts.
4. Spot and contract prices in the wholesale market should signal the changing risks of a dry year.
5. A range of mechanisms is available to industry participants to manage dry-year and other supply risks, within and outside the wholesale market.
6. The trade-off between the costs of supply and protection measures should be made by those at risk.
7. The wholesale market rules should not be biased against any particular protection mechanism.
8. The Government is not expected to step in to protect wholesale buyers who fail to put in place adequate protection arrangements.

6. The Government expects that retailers will communicate to their customers the level of service (including the security of supply) that they are offering. This is so that consumers will have the information they need to make informed choices.