Nelson Malborough Health Board: ‘Talking Heads’

1. Nelson Malborough Health Board:‘Talking Heads’ Tony Baldwin 23 May 2005 Overview of Electricity Industry

2. Outline • Energy overall • Electricity – current industry structure • Hydrology risk • Issues • Review of reforms

3. Caveat Some graphs and data is four years old. Shows trends, but is not up to date

4. Energy overall

5. Energy by fuel type – 2003 Source: MED

6. Energy by sector – 2003 Source: MED

7. Source: MED 2002

8. Outlook for gas Source: MED 2002

9. Energy Intensity in the Economy Source: MED 2001

10. Electricity – Current structure

11. Special characteristics • Governed by laws of physics • Once injected to grid, cannot identify who owns electron • Flows not dedicated from station to consumer (except for Comalco) • Amount generated must always equal amount consumed • Demand is relatively inelastic in short term. Spot prices are volatile • Shortages (lack of fuel or mechanical outages) create high prices

12. Wholesale Market: This is where generators sell and retailers buy electricity. Direct users Large industrials like Comalco (15% of total production) Retailers: NZ has five main electricity retailers.

13. Consumer costs Potentially Competitive Retail – 22% Distribution – 35% Monopoly Transmission – 13% Generation – 30% Potentially Competitive Source: MED

14. Electricity flows – 2001 On-site co-gen Other 3% Losses Other generators 17% 18% Other industry Commerical, Incl transport 21% Hydro 64% 3 SOEs + Contact 80% 35% Residential 7% Geothermal 26% Large industry Fossil fuels 24% TYPE OF FUEL GENERATOR CONSUMER Source: MED

15. Generation + customer shares Source: MED + Transpower, as at 2001

16. Transmission network

17. Transmission constraints Transfer to West Coast Transfer from Canterbury to Nelson, Marlborough Transfer between Waitaki Valley and Canterbury Transfer between Clutha and Waitaki Valley Transfer between Clutha and Southland Potential Constraints South Island Situation – Future

19. Line company charges

20. Government Ownership • Generation: • Govt SOEs = 63% • Transmission: • Govt SOE = 100% • Lines: • Trust/Local Govt = 98%

21. Pricing process

22. Demand

23. Matching Supply + Demand Oil Wind Coal Single Gas Combined Cycle Gas Hydros Clearing price

24. Spot prices $/MWh 48 trading periods during 21 May 05 At Haywards grid off-take point 240 grid nodes that are priced Source: Comit

25. Spot price changes

26. Hedging Generator pays Purchaser Price Hedge price Spot price Purchaser paysGenerator Time

27. Contract prices Cents/kWh Source: Comit

28. Hydrology risk

29. Hydro Storage Capacity Source: MED

30. Hydrology – inflow monitoring

31. Hydrology – storage monitoring

32. Hydrology risk

33. Spot price + hydrology risk

34. Issues

35. How to deal with hydro shortages? • Who is responsible for ‘insuring’ against risk of shortage? • Should prices be allowed to rise to reflect scarcity? • Cope with shortages by reducing demand or building back-up stations?

36. Role of Government? • Should Govt pay for or underwrite new generation investment? • Should Govt manage prices? • Should the Commission ensure security of supply?

37. What new supply? • No to wind – Wgn and AK projects declined • No to using water – Waitaki and Wanganui rights limited • No to new transmission lines – Waikato farmers • No to coal – Kyoto Accord + carbon tax • No to gas – lack of new supply • And no to price rises! So what new supply?

38. Impact of CO2 charge

39. Review of reforms

40. Pre-1987 Generation Transmission Distribution Retail Government-owned (NZED) Centrally planned + operated Bulk suppy tariff Electricity Supply Authorities + Councils

41. 1987 - 1994 Generation Transmission ECNZ Transpower Distribution Retail Internal ‘spot’ price 1987 corporatised into an SOE 1993 stand-alone SOE 1992 corporatised into Electricty Companies

42. 1996 – 98 Generation Transmission ECNZ (SOE) Transpower Distribution Retail External ‘spot’ price Contact Energy (SOE) NZ wholesale market Electricty Companies

43. 1998 – 2004 Generation Transmission Distribution Retail Transpower Electricity Companies (mainly trusts) Meridian (SOE) Meridian Mighty River Power (SOE) MRP External ‘spot’ price Genesis (SOE) Genesis Contact Energy (sold to investors) Contact Trustpower + others (private) Others NZ wholesale market

44. 2004 – Generation Transmission Distribution Retail Transpower Electricity Companies (mainly trusts) Meridian (SOE) Meridian Mighty River Power (SOE) MRP Commission Genesis (SOE) Genesis Market rules Contact Energy (private) Contact Trustpower + others (private) Others

47. Why reforms? • Achieve better new investment: • Investors, not tax or rate payers, taking risk; • Right size, type and timing of new stations • Achieve more pressure on costs and prices

48. Why split lines? • Cross-subsidies from lines to new generation – • AK was a bad offender • Three new stations – uneconomic – propped up by lines charges • ‘Empire building’ • Some also obstructing retail competiton

49. New investment

50. Track record in planning