Energy Insight - September 2009 |
Publish date:
The hue and cry over the Ministerial Review of the Electricity Sector has subsided since its release on August 12 and we are rapidly approaching the end of the consultation period after which, presumably, something will actually happen.
To recap, there are four main recommendations:
- replace the Electricity Commission with a Market Authority;
- allow lines companies back into retailing;
- compensate consumers if they face conservation campaigns; and
- reallocate the various generation assets amongst the SOEs.
The dissolution of the Commission was predictable, but the other three are more interesting to consider.
The reason for the lines company split was originally expressed as “encouraging competition” for which read: “prevent cross subsidies between supply and distribution”. The ownership split and subsequent sale of supply businesses (primarily to generators) certainly achieved this aim. However, this also severed the lines companies relationships with end consumers and saw the loss of the infrastructure needed to run a retail business. Allowing lines companies back into retailing creates several problems. First, the company will need to rebuild its retail capability with no incumbent base of retail customers, unless of course the generators want to sell them a block or two. Secondly, the lines companies will need to buy most or all of their electricity from the generators, who are also competing retailers, and then on-sell it to the same end consumers. Thirdly, the original cross-subsidy problem is recreated and will require a major rethink of how lines companies are regulated beyond what is currently underway. Put simply, the Government risks creating a problem for itself and it is unlikely to be practical or attractive for lines companies to re-enter this arena anyway.
The compensation payments issue is an interesting one. On the face of it, consumers are making savings anyway through reducing energy usage, albeit not voluntarily. If the compensation payment is high enough however, it places a powerful incentive on generators to avoid the need for conservation campaigns or at least limit the proportion of affected consumers. Market mechanisms can be powerful drivers of behaviour and, if successful, this could provide strong incentives for generators to develop contractual arrangements to manage supply security.
The idea of asset reallocation seems to have similar aims to the compensation payments but gives generators the physical means of managing supply security. In principle, transferring something like the Huntly Power Station to Meridian makes a lot of sense. Right now, Huntly and other thermal plants provide back-up to hydro during dry years – putting both under the same management seems sensible. As usual, the devil is in the detail. Where assets end up, and the capability of the recipients’ management to run the plant they receive is critical to the success of these arrangements. The irony is that there is nothing an asset reallocation would achieve that could not be achieved more flexibly and cheaply by contractual arrangements between generators.
The review has a way to run yet but the recommendations seem to be broadly heading in the right direction. It looks as if the sector is in for another period of change and development but this time around, most of it sensible. This makes for a refreshing change!
We would like to ensure this alert provides you with the insights you are looking for, so we welcome your feedback and suggestions.
Kindest regards,
Paul Callow
Energy Sector Group Leader
Deloitte
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