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Making progress in the electricity sector

Hon David Parker
Minister of Energy

19 October 2006

Speech notes

Making progress in the electricity sector
Address to the Electricity Networks Association AGM.
10.15am Te Papa, Wellington.


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

This sector is of critical importance to our society, which is why the public is justly very interested in energy issues, and why this government places a high priority on the industry functioning well.

First – of particular interest to your group will have been the joint announcement with my colleague, Commerce Minister Lianne Dalziel, that electricity supply provisions will be included in the current review of Parts 4 and 5 of the Commerce Act.

This review was announced earlier this year, and we recently decided to include Part 4A as well.

As you know, Parts 4 and 5 relate to the control of goods and services, and authorisations and clearances respectively.

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

The Commerce Act provisions must be consistent, in order to give regulatory certainty for business and investors.

Also of interest will be the decision to look at the question of merits reviews of Commerce Commission decisions as part of this exercise.

All interested parties will have a full opportunity to comment when the discussion documents are released early next year, and I encourage you all to take part in the consultation process.

Final policy decisions should be made by late 2007, but any resulting legislative amendments will not come into effect until 2008 at the earliest.

This review will not, therefore, affect the outcome of current regulatory processes governing electricity lines businesses.

Without wanting to prejudge the outcome of the review of Part 4A, let me say a few words about 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.

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.

But we do 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.

Turning now to another item close to your hearts – the issue of electricity lines companies investing in generation, and retailing the electricity generated.

You’ll all know about the Ministry’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 now 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.

Another topic of interest 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.

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

Submissions closed on October 10th, and many of you will have something to say on this topic.

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 early next year, and I will follow the outcome with interest.

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

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.

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.

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 now putting in place very strong policy frameworks upon which to build a robust energy sector over the decades ahead.

I recently attended the launch of the new Land Code, as an addition to the Electricity and Gas Complaints Commissioner Scheme.

From the beginning of this month, land owners and occupiers with complaints about electricity and gas distribution and transmission companies have access to an independent and free complaints resolution service, in the same way that consumers have had since January 2002 for electricity and April 2005 for gas.

A significant feature of the new land code is that land owners and occupiers do not need to have a land agreement or a contract with the distribution and transmission companies to make a complaint.

I appreciate the work undertaken by the Land Code Working Group to enable this expansion of the scheme to cover land owners’ and occupiers’ disputes.

I would like to extend my thanks to the ENA and all the lines companies for your considerable work in developing the land code and signing up to it.

I will take this opportunity to remind you of your responsibility for the actions of your contractors.

You must therefore ensure that your contractors, and the owners and occupiers that they deal with, are aware of the scheme and the services that are associated with it.
It is pleasing to see that Transpower has become a member of the scheme, which is particularly important given the scheme’s inclusion of land issues.

Finally, I would like to talk briefly about the development of the New Zealand Energy Strategy, the terms of reference for which were announced in July.
One of the main issues is how to address climate change – a serious problem facing all countries.

Given the imperative for the world to reduce greenhouse gas emissions, and the expectation that emissions will carry an economic cost to the country in future, it is vital that New Zealand alter its growing emissions path.

Modelling suggests that New Zealand’s energy-related greenhouse gas emissions would increase by 30 percent in the next 25 years under a “business-as-usual” scenario.

It is in neither our environmental nor our economic interests to allow our emissions to grow unchecked in this way.

The draft NZES will propose and seek stakeholder feedback on a goal to reduce energy-related greenhouse gas emissions relative to business-as-usual, including the means by which to achieve this.

But even if there were no such thing as climate change, we would want to be more careful about our energy use.

The era of cheap power in New Zealand is over.

The historically low prices have meant relatively low levels of investment in energy efficiency at residential, commercial and light industrial levels.

The draft Strategy will consider how we can more effectively manage the energy we use.

It will therefore consider changing behaviour around capital and technology investment decisions, and consumer lifestyle choices; look at making available technologies particularly suited to New Zealand’s conditions; and ensure that energy efficiency is duly considered in the upgrade, design, location and management of activities, processes, buildings and infrastructure.

As part of this, we are working on a replacement National Energy Efficiency and Conservation Strategy, as a subset of the draft Energy Strategy.

Its specific focus is promoting more efficient use of energy and renewable sources of energy.

It's important to note the co-benefits of many of the initiatives that have been announced, or are being developed.

For example, insulated, warmer homes mean healthier families with lower power and medical bills. More efficient, well-tuned cars mean cleaner air, a healthier environment and lower fuel costs.

At the core of the Energy Strategy remains reliable access to the energy resources needed to support a vibrant economy.

The draft Strategy will aim to address uncertainties around investment in energy infrastructure.

Clarity in areas such as climate change policy and regulation will help facilitate timely and cost effective investments over time.

Similarly, it will be important that the Strategy is clear about the role of renewables and thermal fuels in the transition to New Zealand’s sustainable energy future.

At some stage greenhouse gas emissions will bear a cost, which will provide incentives to change to production and consumption activities and capital investments with a lower emissions profile.

The New Zealand Energy Strategy will consider the extent and the means by which we can meet the demand for energy services while avoiding increasing greenhouse gas emissions.

It will be necessary to show a preference for new generation to be renewable, at least until such time as clean technologies, such as carbon capture and sequestration, are proven to be both practical and economic.

I believe that New Zealand is well positioned to secure an enduring competitive advantage from utilising our renewable energy resources.

Compared with other countries, New Zealand’s significant endowment of high quality renewables are advantageous because they potentially provide us with:
 First – a cost-effective option to meet our growing energy demand without increasing greenhouse gas emissions; and
 Secondly – insulation against fluctuations in imported fossil fuel prices, through increasing the proportion of renewables in our stationary and transport energy mix.

To this end, the Strategy will consider various incentive options to support the development of additional cost-competitive renewable energy sources.

The Strategy will also address deployment hurdles for low- and zero-carbon energy alternatives by providing more planning certainty, and by creating a more dynamic environment for energy innovation.

There has been strong and wide-ranging interest in the development of the Strategy.

More than 140 people attended a workshop in late August, with good representation from the energy sector, industry, non-governmental organisations, central and local government, and interested members of the public.

In addition, the Ministry received 50 direct submissions on the terms of reference, and a summary of the feedback received has now been released on the Ministry’s website.

While there was a high degree of consistency in the feedback, there were also differences between different stakeholder groups in their approach to the various trade-offs inherent in an overall energy strategy.

It is important to recognise that we’re not aiming for complete consensus in developing a New Zealand Energy Strategy: in such a complex area, that would be unrealistic.

What’s essential, however, is that the final Strategy sets a clear and sustainable long-term direction for New Zealand's energy security and greenhouse gas emissions.

It must give increased certainty to energy users and investors as they plan for New Zealand’s energy future.

We are now pulling together a draft Strategy, informed by the feedback to date, and following its publication there will be a consultation with as broad a range of people as possible.


ENDS

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