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Electricity sector changes should be treated with caution

Electricity sector changes should be treated with caution

First published in Energy and Environment on October 31, 2019.

The BusinessNZ Energy Council has warned the Government to be cautious about making changes to the electricity sector without thinking through the potential unintended consequences.

It also said institutional arrangements alone would not deliver the Government’s desired outcomes.

The Government and officials are currently working through the implications of the Electricity Price Review and Cabinet’s response. The political imperative is to reduce household power price pressure, while reducing emissions.

Another review of institutional arrangements is also to be undertaken.

The Council said it supported the Review’s focus on the consumer and favoured a more competitive electricity market.

“But understanding the conceptual gap between what the market can reasonably be expected to deliver, and the outcomes the Panel wishes to achieve speaks to the identification of problems and the allocation of appropriate, matching solutions. Even with cost-reflective, efficient prices, outcomes can emerge that are undesirable for some consumer groups.”

Some of EPR’s recommendations were relatively straight-forward fixes, like phasing out low fixed charge tariff regulations.

“Things like establishing a consumer advocacy council, setting up a fund to help households in energy hardship become more energy-efficient and offering extra financial support for households in energy hardship are all no-brainers.”

However, some recommendations, many related to the wholesale market, were “not easy fixes and must be carefully considered”.

The Council agreed with the EPR there are no obvious signs of excessive profits being taken by companies operating in the electricity sector, and the sector’s structure is not a significant contributor to the issue of energy hardship, which remains a serious issue.

The Authority already has several initiatives underway to address many of the EPR recommendations like improving access to information and data, enabling new technologies and business models across the electricity sector and enhancing competition.

The Council said: “Incentives to invest and to create an affordable, secure electricity system do not come from the passing of laws or regulations, or from Government Policy Statements but from clear, predictable and stable regulatory and investment environments. The price all consumers pay for their electricity is primarily determined by the wholesale market.”

But there were also wider factors outside of the electricity market, like implications of a tight gas market, the likely increase in carbon prices, uncertainty around the consenting of renewable electricity generation projects and water reforms.

“Caution is required - any work on the sector’s governance and purpose must identify clear problems. Any outcome must be an institution independent of government if it is to retain the confidence of market participants.”

Following on from the Review the Government is beginning work on a further review to “explore new institutional arrangements” in the energy sector.

Energy and Resources Minister Megan Woods told Ministers she believed the most significant recommendation of the ERP in relation to preparing for a low-emissions future was to “explore new institutional arrangements to ensure coordination of energy policy, regulation, and programmes”.

Woods said increased demand for electricity, more transmission grid connected renewable generation, widespread use of EVs, and the use of solar panels and battery technology would bring change.

“These changes must be well managed in order to avoid unnecessary price increases and to support the Government’s decarbonisation objectives… This will require a more co-ordinated approach among electricity regulators and other government agencies. One of the Review’s most significant recommendations in this area is to review the institutional arrangements for energy policy and regulation to ensure clear, coordinated planning and implementation of energy related work programmes.”

Woods proposed to report back to Cabinet in the near future with further detail on the scope and timeframe for this review, with consideration given to “maintaining investment confidence, which is critical to our goals to accelerate investment in renewable electricity generation and to maintain security of supply, and. coordinating the changes to electricity regulatory settings with my broader renewable energy strategy work programme.”
First published in Energy and Environment on October 31, 2019.

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