Ministry of Economic Development Home| Contact MED|


Jump to Site Navigation Links
 
 
 

Links to this page were:

Section Subnavigation Links:

Key Themes from Submissions


This Document is Archived


Cabinet Paper: Findings and Recommendations

Hon Pete Hodgson, Minister of Energy
[ Last Updated 20 February 2006 ]


How Effective Were Existing Market Arrangements in Responding?

17. Opinion was divided on whether the market had responded effectively to the events of winter 2001.

18. Those that thought it had not performed well said that spot prices had reached unreasonably high levels. They pointed out that Government intervention, appealing to public goodwill, had been necessary to achieve savings. Industrial consumers exposed to the spot market considered they had been unfairly disadvantaged relative to customers protected by hedges and retail contracts.

19. Those that thought the market had performed effectively said spot prices had risen in response to supply limitations and increased demand, sending signals about the need to bring on all available supply and reduce consumption. They argued that benign market and environmental conditions during the preceding few years had made some electricity purchasers complacent, leading to a low level of risk preparedness.

20. Comments about existing market arrangements included:

  • reserve generation capacity is inadequate;
  • market behaviour of the marginal generators in setting the wholesale price was not appropriate (although opinion was strongly divided);
  • the lack of mechanisms to promote demand-side participation and responses in the wholesale market is of concern;
  • transmission constraints create market barriers. Grid investment and constraint management tools are inadequate;
  • the market for hedge cover and other risk management instruments is at best immature, and at worst controlled by net generators;
  • vertical integration of generator/retailers limits market competition and availability of hedges (although opinion was divided); and
  • market efficiency is hampered by the inability of participants to make informed decisions because of limited access to key information.

21. The majority of submissions were of the view however that the market was more effective than past arrangements at signalling and managing constrained supply and increased demand.

What Changes Should Be Made to Market Arrangements?

22. Suggested solutions ranged from relatively small adjustments (such as improving access to information) to radical redesign of the market or doing away with market arrangements altogether.

23. A key debate was over the need for greater or lesser regulation of the market in the public interest. A number of submitters opposed greater regulation and argued that the market provides the best means of managing risk and sending signals to suppliers and consumers.

24. Changes to market arrangements proposed by submitters included:

  • increasing the supply of reserve generation, including creating market incentives for generators (including renewable and distributed generation), establishing various insurance schemes and imposing legislative requirements on generators;
  • further break-up of state owned generating companies;
  • the introduction of real time pricing as a means of facilitating demand-side management (although opinion on effectiveness was divided);
  • better incentives for transmission investment and a long-term strategic approach to investment including a review of the treatment of transmission rentals;1
  • development of contingency plans to cope with constraints in times of supply shortage and to deal with extreme market circumstances generally;
  • mandatory offer of hedges to improve retail competition (although opinion on effectiveness was divided);
  • development of financial transmission rights (FTRs) as a means of hedging against transmission loss and constraint risks (although opinion on effectiveness was divided);
  • separation of the generation and retail arms of vertically integrated companies, to improve competition and liquidity in the hedge market (although opinion on effectiveness was divided);
  • a comprehensive review of the New Zealand Electricity Market (NZEM) rules and/or the structure of the market (although others argued against significant reform at this early stage of the market's existence);
  • a review of the marginal clearing price system;2
  • imposing price caps to reduce consumer price volatility (although opinion on effectiveness was divided); and
  • increasing the availability of market information, to improve market efficiency, demand-side management and generator offering behaviour.

1Rentals arise from the difference between payments for energy by buyers at offtake nodes and receipts by generators (which in turn arises because losses and constraints on the transmission system are calculated using marginal costs not actual costs). These rentals are currently received by Transpower and passed on mainly to distributors (generators and large commercial customers also receive a proportion). Although this approach is contentious in the industry, officials do not believe that a clearly superior approach is available.

2At present all generators successfully offering into the market for despatch are paid the market clearing price (i.e. the price offered by the highest successful generator) not what they actually offered. Officials consider that the current arrangement is more efficient than "pay as offered" pricing.


Back to Top



Jump to main page content.