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Parker: Energy Trusts of NZ spring conference

Hon David Parker
Minister of Energy

28 September 2006

Energy Trusts of New Zealand spring conference
Keynote address, James Cook Grand Chancellor Hotel, Wellington, 12.30pm.

Good afternoon.

Thank you for giving me this opportunity to meet with you and make some comments on various issues relating to our energy sector.

Your Chair, Ken Gilligan, has suggested a few topics, and I will start with those.

First – the issue of electricity lines companies investing in generation and retailing the electricity generated.

You’ll be aware of the Ministry of Economic Development’s second discussion paper of last May on this matter.

That paper considered the merits of a number of changes to the 1998 Electricity Industry Reform Act, which separated the ownership of electricity lines and supply businesses.

We are considering what we should do to get better coordination between electricity lines and generation operations.

The object is to increase the efficiency of the overall market by giving lines businesses greater opportunities to invest in generation.

The options canvassed in the paper included allowing lines companies to trade in electricity hedges; relaxing some arms-length separation rules for lines companies involved in generation; and clarifying parts of the Act to help reduce uncertainties about how the legislation is applied in practice.

It is, of course, important that we balance any changes against the possible risk of lessening competition in the electricity market.

Submissions on that paper closed at the end of May and I am expecting, soon, to receive from the Ministry a report on these submissions and the options open to the government to progress this initiative.

Another topic that’s had a rather lengthy “gestation” period has been the development of a framework under which distributed generation initiatives can proceed.

An essential outcome is to ensure that the use of new electricity technologies and renewables is facilitated, and that developers of distributed generation projects do not face barriers.

Regulations of this nature are never easy to draft with the accuracy required, and it does tend to be a time-consuming and iterative process.

Recently, however, the Ministry released a second discussion paper and a set of draft regulations on distributed generation, for consultation and comment.

Submissions are due on those by October the 10th.

On the question of transparency of electricity billing for domestic properties, the Electricity Commission is monitoring the uptake of the model retail contract, which includes the transparency provision.

The Commission has a performance measure in its current Statement of Intent, which requires it to review the uptake of model retail contracts.

This will be done by assessing actual contracts against the Commission’s guideline by 30 June next year.

That review will provide us with information to help decide on the need, or otherwise, to introduce regulations in this area.

I am optimistic that the electricity retailers will “come to the party” without the need for regulation but, as I say, the backstop is there in case it is needed.

Turning now to competition issues, you will probably be aware that the Commerce Commission is undertaking an investigation, under Part II of the Commerce Act, into the wholesale and retail electricity markets.

This includes the question of whether or not the big electricity generator-retailers have market power and are abusing it to keep new players out.

This investigation is expected to be completed by the end of the year, and I will follow the outcome with interest.

Irrespective of the outcome of this investigation, I continue to share some of the concerns that have been expressed to me about the current electricity market arrangements.

Turning for a moment to regulation of lines companies, it seems clear to me – and the International Energy Agency in its recent report on New Zealand agreed – that a higher degree of regulation than was provided for back in 1998 was, and always will be, necessary for lines companies and Transpower.

Indeed, I'm told that we were the last developed country in the world with a comparable electricity system to reach this view.

We do need to ensure that there is some control on prices of monopoly services.

Likewise, there must be some constraints on over-engineering of, or under-investment in, the transmission grid and distribution lines.

This is intended to encourage appropriate investment in electricity transmission and distribution infrastructure.

At the same time, we should be permitting lines companies to earn a competitive rate of return and to invest in other areas – for example, telecommunications – where their existing infrastructure is suited to providing additional services.

We need to take care that those additional services do not impose extra costs on electricity consumers.

Neither must they introduce unfair cross-subsidised competition for existing providers of those additional services.

Of course, regulation of monopolies does lead to tensions between the regulator charged with monitoring prices, and the regulated entity trying to maximise value for shareholders.

We've seen recent examples of this.

All of these factors were taken into account in the recent draft amendments to the Government Policy Statement to the Electricity Commission, and the statement under the Commerce Act to the Commerce Commission, which we announced a few weeks ago.

Taken together, these are intended to encourage investment in electricity transmission and distribution infrastructure.

They recognize the importance of supply diversity for major load centres to reduce the frequency and extent of interruptions, and to speed restoration of supply when breakdowns do occur.

They should also facilitate generation and retail competition by minimizing transmission constraints.

And – they should support the use of renewable energy forms that are typically located remote from the major markets.

Several weeks ago I also announced that where the regulation of lines companies is concerned, we will be reviewing that part of the Commerce Act related to electricity supply provisions.

We had already announced a review of Parts 4 and 5 of the Act, and it makes sense to me to include Part 4A as well – given that the review may have implications for Part 4A.

As you will know, Part 4A allows for individual electricity lines businesses to be placed under regulatory control, if they breach thresholds set by the Commerce Commission.

You may also wish to make a submission on this review when the time comes.

In another recent initiative, we have launched work on a nationally consistent framework to support and protect electricity transmission across New Zealand under the Resource Management Act.

I am confident that we are putting in place very strong policy frameworks upon which to build a robust energy sector over the decades ahead.

You will also have read about the development of a New Zealand Energy Strategy, the terms of reference for which were announced in early July.

I am sure that with input, cooperation and goodwill from all sectors of the energy industry, we will achieve in the Strategy a blueprint for future development, which will stand us in good stead for several decades to come.

I expect that we will have a first draft of that Strategy available for consultation and comment within the next couple of months.

A subset of that Strategy will be a revised National Energy Efficiency and Conservation Strategy, work on which is progressing in parallel.

This replacement Strategy is expected to include an economy-wide action plan, with specific programmes and targets to enable New Zealand to realise the economic and environmental benefits that come from energy efficiency and renewable energy.

One feature of the existing strategy is the government’s commitment to improving the insulation in our homes.

Nearly one million New Zealand homes were built before insulation became mandatory in 1977. Three hundred to four hundred thousand remain virtually un-insulated.

For many, the cost of retrofitting insulation is a barrier to doing it.

EECA’s EnergyWise home grants programme targets this group with energy efficiency measures that result in warmer, healthier homes.

In the last year, 8,800 homes have had energy efficiency measures and insulation installed.

This brings the programme’s total to more than 25,000.

Many of you have helped us achieve this through your co-funding of these projects throughout the country.

Thank you for this generous support, which has made a real difference to the lives of New Zealanders.

As a country, we still need to do far better on energy efficiency in the residential sector.

As a final comment, if I were to prioritise our major intentions for the electricity sector over the next few years, they would have to be:

First – ensuring continuing security of supply, which must always take top priority;

A close second – promotion and acceleration of energy efficiency initiatives;
And thirdly – substantial progress across a number of the major initiatives that will be embodied in the New Zealand Energy Strategy, including the need to minimise the economic and environmental risks that climate change poses.

I acknowledge the role of the ETNZ and constituent trusts.

Collectively you care for and control assets of more than $5 billion.

At a local level, trusts are active in their respective communities including, as I have mentioned, work in the important area of energy efficiency.

Nationally your profile is lower – but in closing I would like to acknowledge the work of the ETNZ in contributing to debate and discussion on the important issues that we all face in the energy sector.

Thank you.


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