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Papers Show Renewable Energy will be losers!

Electricity Commission Papers show Energy Efficiency and Renewable Energy will be losers!

"Energy efficiency providers and small-scale renewable energy suppliers will be the losers from the Government's Electricity Commission proposal, said Mrs Molly Melhuish, for the Sustainable Energy Forum after reviewing background papers prepared by officials prior to Government's 20 May decision. The papers were released yesterday following an Official Information request.

The papers show that the Electricity Commission will be a strictly political office. It will act as a "Crown Agency" directed to implement government policy rather than just having to take regard of it. "This seems particularly dangerous, as the Electricity Commission will be both intervenor and regulator " said Mrs Melhuish.

"Any change of Government would allow a change to the "policy settings" and market rules creating uncertainty for industry."

"The only aspect that is certain is that the sunk costs of boilers, turbines and wires which are built as part of the reserve capacity investments, will remain to suppress other more sustainable alternatives."

As a Crown Agency the Electricity Commission will be even less independent of Government than EECA or the Commerce Commission.

In the briefing papers, Treasury officials noted "All the options [for ensuring long-term reserve capability] are likely to increase the average price of electricity and reduce the volatility of wholesale spot prices, with these changes being more market the greater the amount of reserve capacity built into the system. ... the net impact on economic growth prospects is uncertain." (p.2)

The background papers also note: "...the [central purchaser] option may start with reserve capacity purchase only, but is likely to end up with the central purchaser becoming the coordinator of all demand and supply." [footnote, p. 6]

"... It is likely that the [central purchasing entity - the Commission] will adopt a risk-averse approach to its mandate of ensuring sufficient reserve generation capacity ... in the longer term experience suggests that, with administrative pricing and central decision making, an inappropriate level of reserve capacity is likely." [p. 7]

Treasury favoured options requiring the auctioning of hedge contracts each Spring, with mandatory participation for generators. This would have allowed any participants, including Government, to bid in, while progressively improving the liquidity of forward markets. The papers point out that vesting contracts, a mechanism used by ECNZ in 1996-1999, are a good example of these mechanisms - they worked well. BUT when ECNZ was split the new generators didn't renew them.

The papers also include a handwritten note from the Energy Minister, Pete Hodgson, commenting on Treasury's concerns, and expressing his view that "a little army of peakers [is] available which are low capital cost and high running cost", and that he expected these to cap spot prices at 15-20c/kWh, and should not to be called on at less than 10-13c/kWh. He also commented that these peaking generators "may need to be owned (or operated) centrally to avoid gaming."

SEF contends that these figures are far too low to allow market support for other solutions such as energy efficiency and small renewable energy projects.

Of major concern for the Sustainable Energy Forum identified in the papers, is that while demand-side management was called for by a small "technical experts' group" in February this aspect was almost totally ignored thereafter. The Government's 20 May decision was that the Reserve Market would specifically exclude any demand-side management solutions.

"Government rejected the mandatory hedge contracts option that would have reduced the market power of the large generators. Government concluded that legislation would provide for this option - but that it "should be only drawn on if required". More information on the cabinet papers is available at http://www.med.govt.nz/ers/electric/supply-security/cabinet/ policy-settings/policy-settings.pdf

Having read these background papers the Sustainable Energy Forum submission will be rejecting the Reserve Contract system in its entirety, and will be calling on Government to set up the Electricity Commission as an Independent Crown owned Entity. It should not invest in boilers, turbines or wires without giving demand-side investments (energy efficiency, small-scale renewabale energy and demand response) an equal opportunity to challenge high spot prices.

SEF will also call for electricity market rules and policies to be developed through a fully consultative process, and NOT behind closed doors as was done before the May 20 announcement.

"The Government decision as it stands will continue the shattering boom-bust cycle for energy efficiency companies and small-scale renewable energy equipment suppliers. They are swamped with work when there are shortages, but many are forced to leave the country to find work once power surpluses return" concluded Mrs Melhuish.

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