10. What Will Be the Impact on Security of Supply?
10. What Will Be the Impact on Security of Supply?
There are two aspects of security of supply. The first is the risk of failure in the transmission and distribution system. This will not be changed at all by the split. The second is security of energy supply.
The balance between supply and demand continually changes. This variability is accentuated because the New Zealand electricity system is highly dependent on hydro generation and hydro storage is relatively small. Hydro inflows are difficult to predict. Because of these factors, New Zealand will always be subject to a risk that adequate energy supply is not available.
The incentives on generators and retailers to assess and manage these risks are therefore very important.
At present, ECNZ manages most of the country's hydro storage and therefore effectively determines the value of hydro storage when it makes decisions to store or release water from storage lakes. The ECNZ split will alter the way these internal decisions are made.
After the ECNZ split, the new SOEs will be less able than ECNZ to manage risks internally because they have smaller and less diverse generation portfolios. They will need to use customer contracts to secure revenue and use other generators for back up supply.
This in turn will make the risks faced by participants in the market more explicit and the external management of these risks will require stronger commercial disciplines. It is possible that some market participants may not understand these risks as well as ECNZ managers in the short term, or may make less prudent decisions.
However, ERTU is confident that the emerging generating companies and emerging retail companies will have strong incentives to manage these risks appropriately. These incentives are not just financial but go to their core business activities: namely the provision of a secure reliable energy supply source for their customers.
As part of the current generation reforms, the Government has required market participants to acknowledge that management of this type of risk (often referred to as "dry year risk") is their responsibility. This responsibility is explicit in the current rules of the wholesale electricity market and has also been expressly acknowledged by most of the market participants.
The current surplus of generation is likely to exist for several years after the split and will assist security of supply during the transition to a more competitive electricity market.
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