6. Security of Supply
Background
54. A key priority of the Government is to maintain security of electricity supply. Shortage risks and periods of high spot prices need to be well managed to ensure that businesses and the wider community have confidence in ongoing security of supply. In the Government's view, security of supply is vital to achieving its objective of sustainable economic development.
Key requirements of Security of Supply
55. Key requirements for security of supply, and confidence in security of supply, are that:
- Sufficient generation capacity is built or energy efficiency improvements made to meet ongoing demand growth
- Hydro and thermal generating capacity and fuels are appropriately managed, to deal with the risk of shortages, including extended dry hydro periods
- The system has sufficient capacity (plant and fuel and/or demand response) to cope with extreme dry sequences, periods of low wind speed and other unexpected supply disruptions
- Quality information and forecasts of thermal fuel availability, the hydro system (including lake levels and spill), wind flows and generation capacity are available
- The national grid and distribution lines meet specified reliability objectives. (Transmission and distribution issues are covered in separate sections)
- Opportunity exists for electricity consumers to manage exposure to high spot prices. (Hedge market transparency and liquidity are covered in separate sections.)
Security of Supply Objective for the Electricity Commission
56. A function of the Commission under the Electricity Act 1992 (s172O) is to use reasonable endeavours to ensure security of supply, without assuming any demand reduction from emergency conservation campaigns, while minimising distortions to the normal operation of the electricity market.
57. To provide a measure of security of supply, to date government policy has been to assess security of energy supply against a "1 in 60 dry year" standard. Following a substantive review of the reserve energy policy in 2007, the "1 in 60 dry year" is replaced by a standard expressed in terms of "winter energy margin" (the margin between forecast capacity to supply in a mean hydro year and forecast demand).
58. Accordingly, to meet the security of supply objective, the Government wants the Commission to use reasonable endeavours to ensure that the generation and transmission system is capable of maintaining a mean winter energy margin of 17 percent for New Zealand overall, and 30 percent for the South Island. This new standard will provide a level of security similar to the 1 in 60 standard, but provides a measure that is clearer, and easier to calculate and understand.
59. The Commission should also develop and set security standards for adequacy of capacity to meet peak demand.
60. The Commission should work with stakeholders to identify industry contingencies, and develop strategies consistent with the operation of the electricity market to manage supply and demand during such contingencies.
Security of Supply Policy
61. The Commission should develop, consult on and publish a security of supply policy. The security of supply policy should include:
- the information and forecasts to be made available
- details of how the Commission will monitor energy margins during the year and whether the market will deliver adequate new capacity
- the procurement and utilisation policies for reserve energy
- the steps that the Commission will take at various stages during a contingent event such as an extended dry sequence, and the emergence of risks relating to peak capacity.
62. The objective of publishing the policy is to provide a high degree of certainty to market participants about how the Commission intends to meet its security of supply objectives.
63. The Commission should put in place and publish protocols to manage potential conflicts between its roles as a contractor for reserve energy and as a regulator.
Information, Forecasting and Monitoring
64. The Commission should undertake and publish detailed supply and demand modelling and forecasting at least annually. The objective is to provide well-researched information on both short-term and long-term security of supply, including the likely availabilities of fuels and new generation options under various scenarios.
65. To establish the need for additional reserve energy (see below), the Commission should look out 3 to 5 years (given consent and construction timelines for new capacity), collect information, develop a baseline that makes assumptions about which known projects are likely to proceed, and identify any "shortfalls" year by year.
66. The Commission is expected to be active in monitoring resource availability to meet demand and, in particular, determining whether the market is consistently failing to deliver new capacity sufficient for an adequate energy margin and to meet peak demand.
67. If the Commission determines that the market is consistently failing to deliver sufficient capacity, it should use the powers available to it to make recommendations to the Minister on any arrangements or policies that it considers necessary to provide better outcomes.
Hydro Storage Guidelines
68. To help ensure security of supply, the Commission should develop and publish a set of hydro storage guidelines providing its estimate of the hydro storage levels that reflect different levels of shortage risk. These guidelines should take into account the expected availability and use of thermal generation, transmission constraints and other factors that may impact upon security of supply.
69. The Commission should consult with interested parties in developing the hydro storage guidelines.
70. As part of the hydro storage guidelines, the Commission should have an emergency storage guideline that would trigger a range of emergency response measures, including a conservation campaign. The emergency storage guideline should be set on the basis that there is a significant probability that emergency blackouts may be required if other emergency response measures are not put in place.
Reserve Energy
71. If the New Zealand or South Island mean year energy margin is unlikely to be met by market participants, the Government wants the Commission to contract for, but not own, reserve energy (generation and contracted demand response) to maintain the desired energy margin. This is to be the Commission's primary means of meeting its security of supply objective.
72. Any reserve energy procured to ensure security of supply should also be available to help cope with other unexpected supply contingencies, such as serious grid, plant or fuel supply disruptions.
73. In contracting for reserve energy the Commission should seek to:
- minimise the risk that reserve energy affects the incentives for market participants to:
- respond to higher prices
- construct new capacity
- enter into hedge and other contracts
- invest in demand-side management
- maximise static and dynamic efficiency.
74. Contracted demand response should form part of the Commission's portfolio of reserve energy, provided this is practicable and the Commission is confident that the reduction in demand is additional to normal demand-side responses to higher prices.
75. Reserve energy should be offered to the system operator for dispatch at 20c/kWh or the contracted variable payment rate, whichever is the higher.
76. The Commission should determine, for each contracted form of reserve energy, a storage guideline level at which it would expect reserve energy to be operating. If storage falls below a particular storage guideline level, and the relevant reserve energy is not being dispatched, the Commission may choose to offer that reserve energy for dispatch at a lower price in order to preserve hydro storage and to reduce shortage risks.
77. If the hydro storage guidelines are consistently breached and thermal generation is not being used appropriately to preserve hydro storage, the Commission should investigate the reasons and consider what action, if any, would be desirable.
Emergency Management
78. Although the Government wants the Commission to manage the electricity sector to minimise the risk of supply shortages, it recognises that there will be infrequent circumstances where there is a material risk of shortage. To manage such circumstances, the Commission should establish an emergency response plan that identifies and includes a range of measures to cover contingencies more severe than those allowed for within the mean winter energy margin. Such measures are to include conservation campaigns.
79. The Commission is also expected to put in place contingency arrangements to provide for the scheduling of outages, including rolling outages in the extreme event that blackouts are required to ensure a balance between supply and demand. The Commission should recommend regulations and rules if required.
Levy
80. The Commission should receive any spot price revenue arising from the dispatch of reserve energy. Net costs should be recovered by way of a levy which is administratively simple and applies to all consumers based on wholesale purchases on an equal basis.
81. Over time, the levy should aim to recover the net costs that the Commission incurs for reserve energy (that is, operating and capital payments less any revenue received from the sale of reserve energy).
Review
82. The Commission should undertake a review, in consultation with interested parties, of the security standards and policies set out in this section, and make recommendations to the Minister of Energy on the outcome of that review by the end of 2012.
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