Hon Pete Hodgson Speech Notes

Shaping The Future Of The Electricity Sector

[Address to BIIA conference "Electricity Industry Reform", Te Papa, Wellington.

Good morning.

I sometimes wonder where the conference industry would be without the electricity industry. For about a decade now I think it's been possible to schedule a conference on electricity reform every six months or so without the slightest fear that anyone would ask: What reform?

A key milestone in this Government's reforms arrived last week — on Tuesday to be exact — when the legislation that began life as the Electricity Industry Bill finally received the Governor-General's signature. This is the new law arising from the Government's Power Package decisions, our response to the Caygill Inquiry into the electricity industry.

The legislation and the Government Policy Statement on electricity issued last December together shape the future of the electricity sector. They are designed to deliver a fair deal to all electricity users, and to promote environmental sustainability and energy efficiency. They are designed to shape the kind of electricity system I want to see for New Zealand. Let me briefly outline a few of its more important features.

It includes a wholesale electricity market that involves active, real-time demand-side participation, so that buyers can directly benefit from reducing demand when wholesale prices rise.

Systems will be in place that make it easier for wind and solar generation — and other distributed generation — to feed into the market.

The publication of amalgamated hedge prices will increase transparency and the possibility of a secondary hedge market. Retailers and large consumers will have better information, which they will be free to ignore at their peril.

A process for deciding on and requiring the removal of transmission constraints will be in place.

Price control will apply to any lines companies abusing their monopoly power.

Consumers who want to switch will be able do so in a timely manner — and if they can't, the company at fault will risk a fine.

Consumers who need them will have the option of low fixed charges and higher variable charges, so that households can see real reductions in their power bills if they conserve electricity.

And an independent process will be in place for resolving consumer complaints about electricity companies.

There are many other changes afoot, and everyone will have their own ides about which matter most. But you will have heard the word 'consumer' several times in that short list I just gave you.

I want to remind you that the government's overall policy objective for electricity is consumer-focussed. Domestic consumers, in particular, need better service from the industry — and I think the industry knows that.

It is in the industry's hands to deliver the improvement that is necessary. The Government accepted the Ministerial Inquiry’s proposal to extend the existing self-governance arrangements, rather than replace them with central government regulation.

That still holds. Our belief in industry solutions where possible and regulatory solutions where necessary is as firm as ever.

But you will be aware that the number of voices raised publicly in favour of regulation is swelling, in response to the pressures of the current electricity situation. The electricity industry is not a popular one in 2001. The wholesale electricity market is viewed with widespread suspicion and incomprehension. Those of you with stakes in that industry and that market must make them work for New Zealanders, or New Zealanders will decide the current arrangement is intolerable.

I genuinely hope that neither I nor any future Minister of Energy will need to use most of the regulation-making powers established by the new legislation. I know the industry does not want to see them used. Whether they are used or not is a choice that can be determined to a large extent by the industry itself. The improvements that will avoid regulation are yours to make.

A significant milestone on that road has been reached by the industry with the release of draft rules for the new governance arrangement. The Electricity Governance Establishment Project led by David Caygill is a major undertaking, as anyone who has tried to read the rulebook – or even just pick it up – will appreciate.

I know that some concerns about the draft have been voiced from user groups. But that is what drafts are for. The outcome is what interests me most. I have confidence in the process and an expectation that concerns voiced will be dealt with in a robust and appropriate manner.

But I must say that some other industry initiatives in response to the Government Policy Statement are not progressing as rapidly as I would like.

I have been frustrated with the delays in establishing the consumer complaints scheme. I know that some of them, such as the Chief Ombudsman's refusal to have the Ombudsman title used, have been beyond the industry's control. I know that some of those involved with the project have been diverted by genuinely pressing issues with their businesses.

But the delay is increasingly difficult to defend. Consumers need and deserve a complaints resolution scheme that is accessible, efficient and fair. I expect the industry to get on with establishing the office as quickly as possible once the rules are finalised. I mean weeks, not months.

Companies are also moving too slowly in making low fixed charge tariffs available to consumers. These tariffs are available in the main centres, although not always promoted at the same level as other tariff options. At last report, low fixed charge options meeting the government's requirements were not available at all in 20 of the 43 network areas nationwide.

Retailers commonly say they have not moved because the local lines companies have not moved, and they say so with some justice. Last week I wrote to 15 line companies that have still not offered satisfactory low fixed charge options, reminding them that I will – and now can – regulate if necessary. The industry should be very clear that this issue is now one I will be bringing up at ever shorter intervals.

Targeted price control for lines companies is not a matter we have left to self-regulation. The legislation just passed, amending the Commerce Act, fills the most glaring gap in the reforms of the previous government.

While the Commerce Commission has an inquiry into electricity line business pricing already under way, it will now be able to advance that work with certainty about its statutory powers under the revised Act. That process will also involve widespread consultation. I am sure John Belgrave will provide a valuable update on the Commission's progress when he speaks later today.

Before I move off reform issues to some remarks on the current electricity supply situation I want to say a few words about climate change. This is a policy issue that challenges the ways we use energy more than any other.

Last week I reconfirmed New Zealand's intention to ratify the Kyoto Protocol next year and identified September 2002 as the specific date. The agreement achieved at the recent World Conference on Climate Change in Bonn has made it possible for us to proceed with the domestic policy development necessary for ratification. We will be consulting widely on a policy package and working towards having framework legislation passed by Parliament next year.

The global response to climate change will be deeply relevant to the electricity sector in its roles as both client of the fossil fuel industry and competitor with it. Input cost structures will shift. The economics of generation technologies will shift. Carbon trading will become a routine part of doing business in the energy sector.

The most valuable thing I can say to the New Zealand business community about climate change – and I take this chance to say it to this particular section of the business community today – is to be alert to the opportunities that will be opened up for New Zealand by the implementation of the Kyoto Protocol. It is going to be a powerful force for change in an economy that still based far too much on the wasteful use of energy.

I wish we were already much further down the road of energy efficiency and conservation than we are. But we have started. I will be releasing the final draft of New Zealand's first ever National Energy Efficiency and Conservation Strategy on September 27. We should have had one years ago, but at least we'll have one soon.

There are people in the industry showing leadership as well, like Mike Underhill of WEL Energy who has probably bent the ears of many of you on the subject of energy efficiency. But where is our energy efficiency industry? The list in the Yellow Pages is sadly short. I wish it was not so often up to Mike and EECA to fill the energy efficiency slot at forums like this one. But I predict the Kyoto Protocol will be changing that before too long.

Similarly I predict the Protocol will help drive a significant expansion in our use of renewable energy sources. The electricity legislation just passed significantly opens up the scope for that expansion, particularly by line companies. There is now no limit on the amount of generation line companies can invest in, using new renewable energy sources. The Government policy statement puts some pressure on, requiring the market rules to facilitate the use of new electricity technologies and renewables.

Now to the current electricity situation. It is on everyone’s mind, so it is time for me to say a few words about it.

The hydro lakes have not yet reached the crisis levels they sunk to in 1992, and given the response so far to my call for New Zealand to save power I am optimistic that we will avoid blackouts. If people maintain the 10 percent saving they have achieved in recent days, and we do not have major thermal plant failures, we should get through Spring with the lights on.

Continued savings are crucial, however. Inflows to the hydro lakes this year are the lowest they have been since records began 75 years ago and there are no signs of a break in the weather pattern. We have to bail ourselves out of this because the rain gods will not. The government's power-saving publicity campaign began on Sunday night and will run over the next several weeks, to remind New Zealanders that ongoing savings are necessary.

I am all too aware that a growing number of businesses already feel they face a crisis – not of supply, but of price. Those directly exposed to the wholesale market have been squeezed hard for weeks. Many who are not directly exposed are finding their costs going up markedly as fixed-term contracts expire and they seek to negotiate new ones.

That is an uncomfortable but inevitable result of the wholesale market. The market has served commercial electricity users well in recent years, delivering low spot prices through warm, wet winters. It is perfectly understandable that those who have enjoyed those prices should be rather less happy now that a dry, cold winter has sent prices up.

I think I have made it pretty clear by now that I have no intention of reacting by capping prices, which would make a nonsense of the market. It is a market that this government inherited, not one we voted for, but having inherited it we have a responsibility to make it work as well as it can. That is what the Caygill inquiry and subsequent government policy are about.

Capping wholesale prices neither increases supply nor reduces demand. Those who note that Australia has a cap should also recall that it is currently set at 500 cents a unit and next year will rise to 1000 cents a unit. Our daily average peak, so far, is a little over 40 cents.

Dry-year risk is a fundamental feature of our electricity system. Having more than 60 percent hydro generation makes New Zealand electricity amongst the cheapest in the developed world, but the price of that benefit is the risk of the kind of situation we face now. As a geologically young country we have long, narrow lakes that provide limited storage for hydro systems. For as long as we have a hydro-dominated system, which is for the foreseeable future, we will continue to face this risk.

The wholesale market is a relatively recent development, to be fair, and this is only its third winter with the industry in its present form. Even so I have been surprised by the number of businesses exposed to wholesale prices that have been caught this year with their hedges down. Hedging against the risk of a dry winter is a pretty basic precaution in this country. Perhaps this will be the most valuable lesson some players will take away from this year's experience.

In the meantime I am convening regular meetings of industry participants and stakeholders to take stock of the situation as it unfolds, and discuss how best to manage it. These meetings have made very useful progress in developing strategies to increase supply and reduce demand. I have been encouraged by the level of co-operation and goodwill around the table.

This is a good opportunity to thank the participants publicly for their efforts. There is no shortage of agendas swirling around, but as a group we have stayed focussed and achieved a lot.

Inevitably questions have been raised as to whether there are fundamental problems with the electricity market. Many New Zealanders have written to me in recent weeks saying they believe it is seriously flawed. When we are through the risk period I expect there will be a case for some kind of post-mortem to be carried out, although I have no firm plans as yet for what form that would take.

Few would doubt, I think, that the wholesale market needs to evolve a bit more before it fully serves New Zealand’s needs. But many of the questions are not new and many are in the process of being addressed.

The voting powers in the new draft market rules, for example, are currently being debated. The legislation and the Government Policy Statement require the industry to further develop rules that will ensure the market includes much better demand side participation.

It is in everyone's interests to develop a thicker and more transparent hedge market and I am confident that will happen. We are already seeing what may be the beginnings of a secondary hedge market, as a result of current demand for contracts, and I will be interested to see how that develops.

Electricity is still an industry in transition from the radical reforms of the 1990s to what will hopefully be a more stable future. Reform in coming years should, I think, mean adjustment and steady improvement, rather than more upheaval. Those adjustments will still give us all plenty of work, however. So I guess we'll all be seeing each other again at another electricity reform conference before too long.

Thank you.

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