Expanding into the New Zealand electricity retail market? The broad contours of the New Zealand system

Expanding into the New Zealand electricity retail market? The broad contours of the New Zealand system

AU Energy Compliance

Last week, New Zealand’s electricity regulator announced that “consumer choice has reached record levels, with 47 different retail brands now supplying New Zealand households”.[1] With so many new entrants into the New Zealand retail market (12 in the last year), it is worth taking a look the general features of the New Zealand electricity system and retail market and how they contrast with Australia’s.

New Zealand electricity retail market
Photo by Jasper van der Meij on Unsplash
By Dr Drew Donnelly, Compliance Quarter.
  1. The New Zealand grid and wholesale market

As in Australia, the retail market has been traditionally dominated by several ‘gentailers’, vertically integrated organisations with separate generation and retail arms. Five gentailers, Contact Energy, Genesis Energy, Mercury Energy, Meridian Energy and TrustPower together produce about 95% of New Zealand’s electricity.

Also as in Australia, generation, transmission, distribution, retailing and market operation are distinctly regulated roles and functions. In the Australian National Energy Market (NEM), offers from generators are settled in an independently operated wholesale spot market. In New Zealand, Transpower (who is also the owner of the transmission network) is the physical system operator. A group of private entities contracted to provide expert market operation roles such as ‘Pricing Manager’, ‘Clearing Manager’ and ‘Reconciliation Manager’.[2]

Sitting alongside the wholesale market are derivatives markets (both ‘over-the-counter’ and exchange-traded) to enable hedging. As in the NEM, a tome of mandatory rules governs the operation of the wholesale market and the roles of participants: The Electricity Industry Participation Code (the Code) is New Zealand’s version of the Australian National Electricity Rules.

Overseeing the system is the regulator, the Electricity Authority, which is analogous to a hybrid of the Australian Energy Regulator and Australian Energy Market Commission in that it both sets the rules for market participants and monitors compliance.

  1. Differences in retail regulation between Australia and New Zealand

One very clear regulatory difference between the New Zealand electricity system and Australia’s, are the rules governing retailers. Overall, retail regulation in New Zealand is far less prescriptive, with few mandatory obligations specifically for electricity retailers. While there are some obligations for retailers set out in the Code (such as the requirement to compensate customers in some circumstances), and protections from general consumer law, New Zealand does not have a mandatory set of rules governing retail rights and obligations analogous to Australia’s National Energy Retail Rules. In its place, New Zealand has a set of voluntary guidance including:

Furthermore, unlike some Australian states, there are no standard contract offers with regulated (or ‘notified’) prices. Note, however, that retailers are required to provide customers with ‘low fixed charge tariff’ options of no more than 30c per day for customers that consume less than 8,000kWh (or 9,000kWh in certain parts of the South Island). Customers who take up this option then pay a higher variable charge than they otherwise would.[3]

Furthermore, generous Government subsidies direct to consumers go some way to achieving the same end as price regulation, such as the recently announced ‘Winter Energy Payment’. This will provide up to $700 a year for superannuitants and those on benefits for the payment of electricity bills.[4]

  1. Challenges for the New Zealand Market

As in Australia, surging electricity prices for consumers are a major concern. Earlier this year, the new Labour-NZ First Coalition Government announced a wide-ranging review of the electricity system. This comes off the back of an International Energy Agency (IEA) Report that showed that power prices in New Zealand had risen 50 percent since 2000 with consumers paying some of the highest rates across the IEA countries.[5] The review will consider, among other things, whether the ‘low fixed charge’ tariff and ‘Winter Energy Payment’ adequately target those in need.

One historic controversy, which may arise once more through this review, is whether the domination of so few generators in the market has lead to those generators exercising ‘market power’ to maximise profits, including withholding power at peak times.[6] Another issue that may arise, in some guise, is the former Labour policy of ‘NZ Power’ – a single buyer of electricity from the wholesale market aimed at cutting costs for consumers.[7]

If you think that we could be of any help in supporting compliance or licensing for your retail business in Australia or New Zealand, please get in contact with us.

[1] See https://www.ea.govt.nz/about-us/media-and-publications/media-releases/2018/6-april-2018-growth-in-electricity-brands-boosts-consumer-choice/.

[2] See https://www.ea.govt.nz/operations/market-operation-service-providers/.

[3] See http://www.mbie.govt.nz/info-services/sectors-industries/energy/electricity-market/electricity-regulatory-framework/electricity-industry-regulations/electricity-low-fixed-charge-tariff-option-for-domestic-consumers-regulations-2004.

[4] See https://www.workandincome.govt.nz/about-work-and-income/news/2017/families-package.html.

[5] See https://www.radionz.co.nz/news/national/349915/nz-electricity-industry-to-be-reviewed. For a discussion of the IEA report for Australia see https://www.compliancequarter.com.au/tag/international-energy-agency/.

[6] For a summary of the issue see  http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=10573622. An excellent set of counter-arguments to this claim is provided by the late economist (and my former economics lecturer) Dr Seamus Hogan at https://www.youtube.com/watch?v=x9sJpcU65hc.

[7] See http://www.labour.org.nz/no_excuse_for_power_price_hikes.

Two Billion Dollar Opportunities for Innovation in the Energy Market

AU Energy Compliance

Innovation in the Energy Market – If you believe the news, we are in the midst of an energy crisis. Ignoring the politicking, today we examine two areas of the energy market that are ripe for innovation. In our previous post, we spoke about the number of businesses now looking to become energy retailers. Much of this is driven by business models looking to innovate the energy market.

Innovation in the Energy Market
Photo by Marcus Wallis on Unsplash
By Connor James, Compliance Quarter.

Demand Management that People Care About

Countless providers offer an ‘app’ or device to help you manage your energy. Most of them fail.

The promise is simple—give people more power over how and when they use, store, or export energy. In doing so, savings can be achieved, inefficient appliances can be identified, and money can be made ‘trading’ energy back to the grid. Energy can be exported in a way that takes advantage of the volatility of pricing of energy in the wholesale electricity market.

AEMO has identified demand management as key to reduced consumption and to increased grid stability. In the water industry, demand management has had a significant and lasting effect.

There is a problem with many of the demand management apps currently available. People just don’t care. Individual consumers are time poor and have more than enough applications on their smart-phones.

The challenge is to make this process interesting, to automate it (perhaps using AI) and to embed it. A similar problem exists in the number of consumers who could be on a better energy deal but are not. It needs to be fixed but it won’t be fixed without consideration of useability.

Innovation in the Energy Market

Microgrids and embedded generation

Microgrids are embedded networks on a larger scale. They overcome the issue of network fees, arbitrarily charged to each household, and present an opportunity for embedded generation. Our current grid is built on centralisation and heavy reliance on transmission. This is ineffective.

Establishing microgrid community ‘hubs’ allows for decentralisation and increased ‘grid security.’ Voltage can be managed at an individual ‘hub’ level and energy can be traded between households and between hubs or communities. In establishing a network of hubs and connections, the money that traditionally goes towards network and transmission can be re-invested at the community level in areas such as energy efficiency.

There are challenges to be overcome with microgrids. Regulatory hurdles are the greatest challenge. Re-wiring a sub-burb requires a distribution licence or exemption and requires rights to use public space.

The above two examples are obvious. Some opportunities are not so obvious. One area of significant concern in the energy market is the management of hardship. There are too many customers being disconnected and too many customers who cannot afford to pay their bills. Find a way to solve that problem and you will have a real impact.

Compliance Quarter is always working with a wide range of energy retailers. For a confidential discussion contact us by clicking here.