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

Electricity 25.4%

Oil48.8%

Gas8.2%

Coal9.2%

Other renewables5.7%

Geothermal (direct use)2.7%

Source: MED

6

Energy by sector – 2003

Domestic transport 41.6%

Residential 11.5%

Commercial9.4%

Industrial 33.0%

Agriculture4.5%

Source: MED

7

Primary Energy Supply of Gas by Use 2000-2025

0

50

100

150

200

250

1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025

Gas

Use

(PJ

pa)

Reticulation Cogeneration Electricity Gen Petrochemicals

Source: MED 2002

8

Outlook for gas

Gas Supply and Demand Projections

0

20

40

60

80

100

120

140

160

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

Gas

Qua

ntiti

es (P

J pa

)

Required

Kupe

Pohokura

Rimu

Mangahewa

McKee

TAWN

Kapuni

Maui

Total Demand

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.

Retailers:NZ has five main electricity retailers.

Direct usersLarge industrials like Comalco (15% of total production)

13

Consumer costs

Monopoly

Potentially Competitive

Potentially Competitive

4.32

1.79

4.9

3.1 Retail – 22%

Distribution – 35%

Transmission – 13%

Generation – 30%

Source: MED

14

Hydro

Fossil fuels

Geothermal

Other3%

3 SOEs+ Contact

Other generators

On-site co-gen

Largeindustry

Residential

Commerical,Incl transport

Other industry

Losses

26%

7%

64%

80%

17%

24%

35%

21%

18%

TYPE OF FUEL GENERATOR CONSUMER

Electricity flows – 2001

Source: MED

15

Generation + customer shares

0%

5%

10%

15%

20%

25%

30%

Contact Genesis Meridian MightyRiver

Power

TrustPower

Other

Generation capacityCustomer share

Source: MED + Transpower, as at 2001

16

Transmission network

© Transpower 2002

Major loads in North(Auckland)

Major generationin South

(hydro, run-of-river)

HVAC systemin each island

220kV backbone(yellow )

350kV HVDCinter-island link

110kV and low er(red)

17

Transmission constraints

South Island Situation – Future

Transfer to West Coast

Transfer from Canterbury to Nelson, Marlborough

Transfer between Clutha and Waitaki Valley

Transfer between Waitaki Valley and Canterbury

Transfer between Clutha and Southland

Potential Constraints

18

Ownership of Distribution Companies Ownership No of companies

100% trust or co-operatively owned

22

100% owned by local body

5

Mixed ownership - majority owned by local body or trust

3

Mixed ownership - majority owned privately

1

Source: MED 2000

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

0

2

4

6

8

10

12

14

Supply

Demand

Matching Supply + Demand

Hydros

Oil

Single Gas

Combined Cycle Gas

CoalWind

Clearing price

24

Spot prices

50

55

60

65

70

75

80$/MWh

48 trading periods during 21 May 05At Haywards grid off-take point240 grid nodes that are priced

Source: Comit

25

Spot price changes

Daily Average NZEM Haywards Reference Price1 October 1996 to 07 October 2002

0.0

50.0

100.0

150.0

200.0

250.0

300.0

350.0

400.0

Oct

96

Apr

97

Oct

97

Apr

98

Oct

98

Apr

99

Oct

99

Apr

00

Oct

00

Apr

01

Oct

01

Apr

02

Oct

02

Ene

rgy

Pri

ce ($

/MW

h)

Daily Average Yearly Average

26

Hedging

Price

Purchaser paysGenerator

Generator paysPurchaser

Hedgeprice

Time

Spot price

27

Contract prices

May-04

Jun-04

Jul-04

Aug-04

Sep-04

Oct-04

Nov-04

Dec-04

Jan-05

Feb-05

Mar-05

Apr-05

5

6

7

8

9

10

11

12

13

14

1 Year

2 Years

3 Years

Cents/kWh

Source: Comit

28

Hydrology risk

29

Hydro Storage Capacity

Source: MED

30

Hydrology – inflow monitoring

31

Hydrology – storage monitoring

32

Hydrology riskNZ Total Cumulative Inflows as at 24 April 2003

0

5,000

10,000

15,000

20,000

25,000

3-Jan

17-Ja

n

31-J

an

14-F

eb

28-F

eb

14-M

ar

28-M

ar

11-A

pr

25-A

pr

9-May

23-M

ay6-J

un

20-Ju

n4-J

ul

18-J

ul

1-Aug

15-A

ug

29-A

ug

12-S

ep

26-S

ep

10-O

ct

24-O

ct

7-Nov

21-N

ov

Tota

l Cum

ulat

ive

Inflo

ws

(GW

h)

Mean 19762001 20031 in 20 Dry 1 in 20 Wet

1 in 20 Wet

Mean Inflows

1976 Inflow Year

2001 Inflow

1 in 20 Dry

Total GWh inflows to date from 1 January: - 1976: 5,348 GWh 2001: 5,170 GWh - Mean: 7,228 GWh 2003: 5,035 GWh

33

Spot price + hydrology risk

0

500

1000

1500

2000

2500

3000

3500

1/01

/03

15/0

1/03

29/0

1/03

12/0

2/03

26/0

2/03

12/0

3/03

26/0

3/03

9/04

/03

23/0

4/03

7/05

/03

21/0

5/03

4/06

/03

18/0

6/03

2/07

/03

16/0

7/03

30/0

7/03

13/0

8/03

Stor

age

(GW

h)

$0

$50

$100

$150

$200

$250

$300

$350

$400

$450

$/M

Wh

Storage Price

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 + operatedBulk suppy tariff

Electricity Supply Authorities + Councils

41

1987 - 1994

ECNZ Transpower Distribution Retail

1987 corporatised into an SOE

1992 corporatised into Electricty Companies

Internal ‘spot’ price

1993 stand-alone SOE

Generation Transmission

42

1996 – 98

ECNZ (SOE)

Transpower Distribution Retail

Electricty Companies

External ‘spot’ price

NZ wholesale market

Contact Energy (SOE)

TransmissionGeneration

43

1998 – 2004

Meridian (SOE)

Transpower

Electricity Companies

(mainly trusts)External ‘spot’ price

NZ wholesale market

Contact Energy (sold to investors)

Mighty River Power (SOE)

Genesis (SOE)

Trustpower + others (private)

Generation Transmission Distribution Retail

Meridian

Contact

MRP

Genesis

Others

44

2004 –

Meridian (SOE)

Transpower

Electricity Companies

(mainly trusts)

Market rules

Contact Energy (private)

Mighty River Power (SOE)

Genesis (SOE)

Trustpower + others (private)

Generation Transmission Distribution Retail

Meridian

Contact

MRP

Genesis

Others

Commission

45

46

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

Forecast Accuracy Over Time

Forecast made in year

Fore

cast

Error

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

1956 1961 1966 1971 1976 1981 1986

2 Years 5 Years 10 Years

Track record in planning

51

Electricity Consumption Growth and Restrictions

Year End March

% p

er a

nnum

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

1946 1951 1956 1961 1966 1971 1976 1981 1986 1991

Per Capita Consumption

Restrictions

History of shortages

52

POWER STATION CONSTRUCTION COSTS March 1990 $

Capital Standardised Estimated Comm Cost Power Cost1 Overrun Year $Million $/Kw c/kWh Cost Delay

Hydro Schemes Roxburgh 1956 737 2,303 5.2 Whakamaru 1957 418 4,184 9.3 Atiamuri 1958 291 3,461 10.2 60% Ohakuri 1962 322 2,874 8.7 Aratiatia 1965 227 2,707 8.9 Benmore 1966 943 1,746 4.6 -20% Aviemore 1968 454 2,063 5.3 -30% Manapouri 1970 4.6 80% Tongariro Scheme 1975 13.7 60% 5yr Upper Waitaki 1979 8.4 0% Clyde 1992 1,573 11.3

New investment record

Source: John Culy, NZIER

53

Costs of poor investment

• If too soon or wrong size or wrong location or costly fuel – often made invisible

• If too late or too little, very visible – becomes major political issue – but not necessarily more costly than too much too soon

54

New Stations Since 1996• Not due to lack of investment appetite:

– over $1 billion of generation installed since market began in 1996

New generation capacity by status

0

100

200

300

400

500

600

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

MW

Under consideration

Committed

Onstream

new investment.xls

Average capacity growth needed to

meet demand

Wholesale marketbegan operation

55

Prices

56

Objectives

• Prices to reflect costs

• Downward pressure on costs

• Test of success if not whether prices went down – but lower than would have been under old system

57

International price comparison

Japan* 31.9 45.1Italy* 20.8 35.6Turkey 19.2 20.3Austria * 18.9 40.5Germany * 16.3 38.5Switzerland 16.2 25.4Portugal 15.5 27.8Netherlands* 14.0 39.6Australia * 13.6 19.4Spain * 13.5 34.6Belgium * 13.3 40.5UK* 12.6 23.9Hungary 12.1 16.0Ireland 12.0 24.8Greece* 11.9 21.7Mexico 11.3 17.2France * 11.3 31.2USA 11.1 21.3Norway 10.2 16.9Canada* 9.3 14.4Denmark 9.2 46.9Finland 8.9 17.9Sweden * 8.3 24.5New Zealand 6.5 13.7

Country Industry Residential

Source: MED – 2000 [?]

Aim is to protect our competitive position

58

Pre-reform price plans

20.00

30.00

40.00

50.00

60.00

70.00

80.00

90.00

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

$ M

Wh

Actual (96$)

ESANZ Proposal

ECNZ Proposed Tender ReservePrice 1996

NZIER ECNZ Intact

59

Real Electricity Prices for Consumers1990 - 2002

800

900

1000

1100

1200

1300

1400

Dec

-90

Dec

-91

Dec

-92

Dec

-93

Dec

-94

Dec

-95

Dec

-96

Dec

-97

Dec

-98

Dec

-99

Dec

-00

Dec

-01

Dec

-02

Inde

x of

Pric

es

Farm Electricity Prices

Household Electricity Prices

Commercial Electricity Prices

Retail Reforms Announced

Wholesale Market Introduced

Post-reform prices

60

Price components

Source: MED

61

Average consumer prices