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Until the radical reforms that began in the 1980s,
electricity generation and transmission in New
Zealand was a function of central government which
set a bulk supply tariff each year. The industry
was closely regulated, requiring most consumers
to purchase from a local electricity supply authority
which in turn purchased directly from the New
Zealand Electricity Department. Wholesale prices
generally reflected the expected long run marginal
cost of generation, and retail prices were similar
regardless of location.
Although this model generally met consumer demand
for electricity supply, there was concern over
its economic efficiency and the absence of competitive
elements. The reforms of the 1980s and 1990s were
intended to improve the efficiency of the industry
and to introduce competition and choice for consumers.
Restructuring of the industry has taken place
in a number of stages and has evolved as the industry
has adapted to the new competitive environment.
Initially industry reforms involved corporatisation
of Government interests and then of the Electic
Power Boards. This was followed by an information
disclosure regime imposed on parts of the industry
with monopoly characteristics, particularly the
line businesses. Transpower was separated from
the Electricity Corporation of New Zealand (ECNZ)
in 1994, while Contact was separated from ECNZ
in 1995 to introduce greater competition in the
market. In the process, Contact received ECNZ's
operating geothermal assets including the Wairakei
and Ohaaki power stations.
In 1996, a fully competitive wholesale electricity
market was established, providing a price-setting
wholesale electricity pool and hedge contracts.
About three quarters of electricity is exchanged
through the wholesale pool, and the remainder
by term contracts established directly between
generators and retailers and large consumers.
A large proportion of spot market sales are covered
by internal hedges for generators and retailers,
or by external contracts. About 80% of all electricity
sales are covered by fixed contracts and hedges,
giving greater certainty to investors that they
can price to reflect the marginal cost of supply.
All generators bidding into the pool receive the
price offered by the last generation unit necessary
to match demand.
The Electricity Industry Reform Act came into
force in 1998. The Act required ownership separation
of distribution and transmission from retail and
generation. This had a direct effect on geothermal
generation investment as it had been many of the
network companies that had been investing in geothermal
stations (e.g. Bay of Plenty Electricity, Mercury,
Top Energy, along with Taupo Electricity).
From a generation standpoint, another significant
reform was a split of the Electricity Corporation
of NZ into competing entities. Contact Energy
(now a listed company) was initially split off
in 1995 then was privatised in 1999, the remaining
ECNZ assets were split into three State Owned
Enterprises: Meridian Energy, Mighty River Power
and Genesis Power. Of these entities, Contact
Energy and Mighty River Power generate from geothermal
energy. There are also several smaller generating
companies in public and private ownership. Generating
plant has also been constructed on industrial
sites which allows export of surplus electricity
back to the grid.
The changes in the market structure have been
reflected in new patterns of investment and activity
by different industry stakeholders. Investment
in major new generating plant is commonly by consortia
of electricity generators, purchasers, investors
and technology providers. These arrangements apply
particularly to geothermal projects in which there
has been substantial investment by Maori-owned
trusts.
Between 1999 and 2004 the industry had been essentially
self regulating, but the mix of private and state
owned companies responsible for generation, transmission
and retailing was unable to agree on a set of
rules for self governance. As part of a package
of decisions on the security of electricity supply,
the Government announced the establishment of
an Electricity
Commission in 2003. The commission was charged
with ensuring that "electricity is generated,
conveyed, and supplied to all classes of consumers
in an efficient, fair, reliable, and environmentally
sustainable manner". The Commission has responsibility
for much of the operation of the electricity market,
although most of the industry functions as it
did under self governance. In 2004, Government
released the Policy Statement on Electricity Governance
which sets out the objectives and outcomes that
the Government wants the Electricity Commission
to achieve.
In 2004 Government also passed the Electricity
and Gas Industries Bill which was intended to
set the legal framework for the next phase in
the development of New Zealand's electricity and
gas industries, and encompassed all the decisions
made by the Government during 2003 on electricity
supply security and the governance of the electricity
and gas industries. These related particularly
to the depletion of the Maui gas field, vulnerability
to dry hydro years, growth in demand for electricity
and the need to make continuing progress towards
a sustainable energy future. The Bill updated
the Electricity Act to reflect the establishment
of the Electricity Commission and the specific
outcomes that the Government wanted the Commission
to achieve, including security of supply and energy
efficiency. The Bill also amended the Electricity
Industry Reform Act to ease restrictions on line
companies owning electricity generation (they
can now own the greater of 50 MWe or 20%
of their peak demand).
See Also Other Investment Climate
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