Speech to the Electricity Engineers’ Association Conference
Hon Hekia Parata
Acting Minister of Energy and Resources
Speech to
ELECTRICITY ENGINEERS’ ASSOCIATION CONFERENCE
SkyCity Conference Centre, Auckland
Good morning
Thank you for the opportunity to meet with a group of dedicated electricity professionals and to open your 2011 Conference today.
Last year when my colleague, Hon Gerry Brownlee, addressed you, he talked about the various challenges facing the electricity industry and what we were doing about tackling these challenges.
At that time we’d had an in-depth look at all aspects of the electricity market by way of a major review, taken on board the views set out in the extensive range of submissions in response to the review, and had a bill on its way through Parliament.
We were also in the process of setting up the new Electricity Authority.
There’s been a lot of water under the bridge since then, so let me review a few of the highlights, starting with a few high-level comments on the Energy part of my portfolio.
You may recall that a draft Energy Strategy was released for consultation in July of last year, and the final version will be reviewed by Cabinet in the coming weeks.
The strategy will outline the Government’s priorities for the energy sector over the medium term, including our commitment to the aim of 90 percent of our electricity generation coming from renewable energy sources by 2025.
We want to see progressively more of our electricity being generated from renewable sources, in order to help meet demand and reduce our greenhouse gas emissions.
Over the March quarter renewables made up 79 percent of our electricity generation, attributable to strong hydro inflows and generation from new wind and geothermal sources.
This, combined with the use of gas over coal at the Huntly power station, resulted in the lowest quarterly electricity generation emissions in ten years.
We have policies favourable to renewable energy – for instance, the Emissions Trading Scheme, which encourages renewables in preference to fossil fuels by introducing a price on carbon.
In other words, we are not prioritising fossil fuels over renewable energy sources, although fossil fuels will continue to play an important role in the global economy.
Around half of the energy we currently consume is from petroleum, and we cannot just turn off the tap in our journey to a lower carbon economy.
It is the diversity of energy sources that is the basis of New Zealand’s comparative advantage.
We need to continue to develop both our renewable and non-renewable resources, and improve our energy efficiency to manage our environmental responsibilities and realise our economic opportunities.
Having set out the wider policy context, I want to now focus to the electricity sector.
The new Electricity Industry Act came into force on 1 November last, and the new Electricity Authority got its feet under the table for the first time.
While it was charged with continuing some of the work that the former Electricity Commission had underway, overall it was slimmed-down with far fewer objectives and functions than the former Commission.
We actually anticipated the coming-into-force of the Act by persuading the major participants to work together to put in place a more liquid electricity hedge market, one of areas of weakness of the previous arrangements.
A hedge market is particularly important to enable new retailers, including lines businesses and new generators, to enter the market.
The Authority is monitoring the hedge market liquidity, which is still insufficient, but significant progress has been made.
The new Authority came into existence late last year following a very tidy and well managed transition resulting from hard work by a large number of people.
In summary, the Authority, which has been established as an independent Crown Entity, is responsible for five high-level actions:
• making and administering the rules governing the electricity industry through an Electricity Industry Participation Code;
• monitoring compliance with the code and other provisions in the Electricity Industry Act and regulations and take enforcement action;
• undertaking market facilitation measures such as education and providing guidelines, information and model arrangements;
• industry and market monitoring, and carrying out reviews, studies and inquiries into matters relating to the industry; and
• contracting for market operation services and system operator services.
A major recommendation of the 2009 Ministerial Review was to abolish the reserve energy scheme and sell the Whirinaki plant.
The review had concluded that the reserve energy scheme reduced security of supply by encouraging market participants to rely on the former Electricity Commission to ensure security.
It also discouraged investment by electricity generators in peaker plants.
Just before Christmas we decided to sell the diesel-fired electricity generation plant at Whirinaki instead of transferring it to Meridian Energy as originally planned.
Meridian had advised that it did not want the plant, and we considered that the electricity market would be best served by selling the plant on the New Zealand market by open tender.
The tender has been handled by the Ministry of Economic Development and Treasury, and negotiations are likely to be finalised in the next couple of months.
In December we also announced details of virtual asset swaps between the three state-owned electricity generator-retailers: Genesis Energy, Meridian Energy, and Mighty River Power.
The rationale for this was a geographic imbalance, with Meridian having little generation in the North Island and Genesis and Mighty River Power have none in the South Island.
This had resulted in weaker competition between retailers than is desirable, and the virtual asset swaps were intended to allow consumers greater choice and encourage the SOEs to compete more as truly nation-wide suppliers, putting downward pressure on price increases.
The virtual asset swaps came into force on 1 January 2011 and will last for 15 years.
These virtual asset swaps complement the transfer of Tekapo A and B power stations from Meridian to Genesis, which took place at the beginning of this month.
The changes address dissatisfaction with the sector’s performance – in particular with price increases above underlying increases in generation costs and insufficient generation to deal with dry years.
It is all about balancing the short-term impact of the changes for the SOEs with the long-term interests of the New Zealand economy.
I thought that it would also be useful to look at a few of the Authority’s longer-term projects, just to give you a feel for the broader picture.
You will no doubt be aware of the new campaign which began at the end of May, encouraging New Zealanders to shop around for electricity.
Frankly, as a nation, we have not been very good at that.
It seems that we will happily trot between retailers to seek out the best deal for, say, flat screen television sets or home appliances, but when we only have to pick up the phone or do a bit of research on the internet, it too often gets put in the “too hard” basket.
So we need to motivate people to look seriously at their electricity costs and do something about them.
The Authority’s campaign provides consumers with information about switching electricity suppliers, the ease of switching, and the potential savings that can be made from switching.
The campaign is about consumers taking control of their electricity bill by encouraging them to shop around for the best prices.
We know from our research that residential consumers can make significant savings by switching to the cheapest available retailer.
There are some sizeable “quick wins” available to consumers, which they can learn about from new “what’s my number” website for the sake of spending just a few minutes.
The average annual saving for households switching to the cheapest retail option in their area was estimated to be $150 last year – nationally that would equate to savings of $240 million.
We must improve choice for electricity consumers and help them put competitive pressure on electricity retailers to provide better value for money.
The government has budgeted up to $15 million over three years to achieve this, to be spent jointly by the Ministry of Consumer Affairs to upgrade and promote the Consumer Powerswitch website and by the Authority to develop and administer programmes to facilitate switching.
Turning to the wholesale end of the electricity market, most of you will have heard about the spike in wholesale prices which occurred on 26 March this year, and I won’t take time to review the details.
Suffice to say that determining whether this event constituted an Undesirable Trading Situation, or UTS for short, has been an interesting and challenging time for the Authority.
As you will know by now, the Authority published its decision last week to the effect that a UTS did develop on 26 March 2011, because if left unchanged the events on that day might threaten trading on the wholesale electricity market.
This turn could preclude the maintenance of orderly trading or proper settlement of trades, and which could threaten the generally accepted principles of trading and the public interest.
The Authority has therefore proposed resetting offer prices at the Huntly power station to a maximum of $3,000 per Megawatt-hour on 26 March.
The full rationale for Authority’s decision is of course available on its website for those of you with a close interest in these matters.
Whether you agree or disagree with the Authority’s finding, the point I wish to make is that we have an independent regulator which is resourced to monitor the market, carefully consider the evidence objectively, and then make the hard calls when needed.
The Authority is extremely busy, with a whole raft of other work on its plate, and I will touch on just a couple of items.
The Authority is required to introduce price floors to cope with electricity scarcity situations which inevitably arise from time to time.
The underlying aim is to achieve efficient incentives for investment in “last resort” generation and demand response capability.
The Authority has been consulting on a range of price floors, and also on introducing requirements for spot market purchasers to disclose their financial exposure to spot prices.
The final arrangements resulting from this work are likely to be implemented following the HVDC Pole 3 commissioning.
The Authority is also required to introduce mechanisms to manage spot price risks caused by constraints on the national grid.
It is therefore consulting on what is known as an inter-island Financial Transmission Right, which is a market-based mechanism for managing such locational price risks.
There are still several design features to be finalised, but work should be complete late this year.
Many of you will be working in small to medium businesses, so it is timely to mention a recent Government initiative of interest to such enterprises.
Small to medium companies will get financial help to boost competitiveness and reduce costs from energy savings through the new “Energising Business” programme run by the Energy Efficiency and Conservation Authority, or EECA.
It is estimated that the programme will assist around 180 companies to increase profitability and competitive advantage by helping them invest in energy efficiency.
Improved energy use has enormous benefits for business – reduced costs, improved productivity and a stronger brand and reputation.
This programme will help many smaller businesses, which after all are the lifeblood of our economy, realise these benefits.
The findings and the successes will be shared to help others build stronger, more resilient businesses through smart energy use.
The Government is investing $1.46 million in the programme, which is expected to deliver nearly $2 million in energy savings to participating businesses each year.
Under the programme, companies spending less than $300,000 a year will receive 33 percent of the cost of identifying and implementing energy-saving initiatives – up to a maximum of $30,000 per project.
Organisations with energy management expertise have been contracted to deliver the programme, targeting different technologies and business types across the country.
Of course, no small business is like another, and “Energising Business” programme reflects that.
EECA has partnered with experienced energy experts, and organisations with strong regional business links, to deliver a service that will best meet diverse companies’ needs.
From Southland to Auckland, companies are already signing up to find their energy-saving potential and start capitalising on it.
For example, the EcoSmart programme run by the Employers’ and Manufacturers’ Association in partnership with Auckland Council is already fully subscribed with 50 companies participating.
As well as general energy efficiency support for small to medium companies, “Energising Business” will target EECA’s priority business sectors – that is, food production and tourism.
Further programmes targeting key sectors and regions are scheduled to be rolled out.
Turning to my responsibilities for the safety in the electricity and gas sectors, I would like to recognise your significant contributions to the work undertaken in conjunction with my officials in the Energy Safety Division of the Ministry.
On the standards front, I note your contribution to the development of New Zealand and joint standards, and the important role of chairman of New Zealand’s international standards co-ordination committee.
New Zealand relies on standards infrastructure for both safety and trade facilitation.
On the public safety front, you have shown leadership in the development and implementation of guidelines for safety management systems, which are a feature of the new regulatory environment.
Your input into the review of certification and fees covering work in both the electricity and gas sectors has been appreciated.
This also applies to your technical input into the review of the Electricity and Gas Safety Regulations being carried out to fine-tune the 2010 regulations applying to both sectors
All of these inputs represent a significant professional engineering commitment to promoting and maintaining safety across the breadth of the electricity and gas sectors that provide an important energy source for the country.
In these sectors, where technology and energy conservation initiatives and developments are occurring at very fast pace indeed, such input is vital and appreciated.
Finally, let me conclude by referring to an initiative which neatly spans my Energy and Women’s Affairs portfolios – namely, the recent move by the Institution of Professional Engineers New Zealand to encourage more women into engineering.
IPENZ, along with officials from the Ministry of Women’s Affairs, has developed a business plan which aims to increase the number of women in engineering.
The “Women in Engineering” business plan is about taking action to increase the number of women studying engineering, and ensuring that women can have rewarding engineering careers.
It fits well with ensuring that women are fully engaged in the economy, which is one of our key priorities.
As I’m sure you are aware, New Zealand needs more engineers, and a 2009 report suggested that an additional 1700 or so engineers would be required over the next five years.
With the devastating series of earthquakes in Christchurch, that need across a range of engineering disciplines is now greatly heightened.
These tragic events have meant that developing our engineering workforce is more crucial than ever.
Thank you for inviting me to open your Conference. I’m sure that you’ll have a successful and enjoyable couple of days.
ENDS
For more information contact: Julie Ash 04 817 9825/ 021 940 357
