Lynne Taylor, Energy Sector Leader, PWC
Our electricity market continues to be characterised by increasing reliance on renewable generation sources and growing awareness and utilisation of new technologies.
ENERGY CONSUMPTION TICKED up slightly in the year to June, but expectations are that consumption overall will continue to decline, as distributed generation and energy-efficient lighting and appliances become more ubiquitous.
For the first year since 1996, over 80 percent of the country’s electricity generation has been contributed by renewables. This has been driven by increasing investment in geothermal and wind and closure of thermal power stations. In March, Mighty River Power announced it would close its gas-fired Southdown power station in Auckland by the end of 2015. Contact Energy closed its Otahuhu B power station in September, effectively replacing it with a new geothermal power station in the Waikato.
Continuing this trend, in August, Genesis Energy announced the last two coal-burning units at Huntly power station would shut down in 2018.
These decisions reflect trends of flattening demand and increasing competitiveness from renewable energy sources. Concerns have been raised that the closures of thermal power stations will increase risks of power shortages in dry years and the scale of this risk is not certain, but what is clear is that the large generators will not retain unprofitable plant just to cover a potential dry year risk.
The closures of thermal plant have occurred even though, in August, New Zealand Aluminium Smelters and Meridian Energy reached agreement on the electricity price for supplying Tiwai Point smelter. This deal, which included Contact Energy supplying a portion of the smelter’s demand, has kept Tiwai Point open until at least 2018 yet the future of the smelter remains uncertain.
Exciting technology developments continue apace in the electricity sector. New products such as solar panels, small-scale batteries and electric vehicles are becoming increasingly affordable for consumers and are growing very fast, although total numbers deployed remain low. If they position themselves well, energy companies could capture real value from becoming trusted partners to consumers, as they invest in new products and seek to get the best value from them.
The transformation of the energy sector is being driven by large-scale global trends including rapid emergence and adoption of new technologies, climate change and resource scarcity, increasing competition (including in parts of the market that have always been natural monopolies) and increasing customer demands for choice and control over their energy use.
There remains real uncertainty about the nature, rate and impact of the changes that will occur. Some consider transformative disruptive change will happen soon as key tipping points are reached. Others think that the impacts of new technologies can be managed reasonably well within current market and regulatory structures. A challenge for decision-makers is whether they act now in response to perceived technology changes and business disruptions, or wait for more information.
Smart meters continue to be rolled out rapidly across the country and the number deployed has grown at around 20 percent per year for the past three years. With the number of smart meters reaching critical mass attention is becoming focused on the services that can be provided using the meter data and capability that is now available.
With the 2015 Paris Climate Change summit due to get underway at the time of writing, there seems to be increasing optimism that an agreement will be reached. The implications of any deal for New Zealand’s energy sector are yet to be seen, but a strong deal could increase the push towards renewable generation and also towards electric vehicles – in other words, accelerate trends we are already seeing.
Broadly we see the electricity sector being transformed from a top-down centralised system to one that is much more interactive, but also decentralised and fragmented. We expect that growth will become more dependent on innovation, with success coming to those companies that use innovative technologies, services and business models to gain competitive advantage.
A live issue is whether electricity prices send the right signals for consumers to encourage efficient energy use and decisions on investing in new technologies.
Energy transformation has not yet translated into significant political change or debate. The year has seen no major government policy shifts; the government seems content to monitor the market and to allow regulators to continue their initiatives. Labour Party leader Andrew Little has again indicated that the central buyer policy the party took to the last election will not be progressed, mainly because of its complexity.
Major gas transaction
In November, the largest gas transaction in the past decade took place, with Vector selling its gas distribution business, excluding Auckland, and its gas transmission business to First State Funds for $952.2 million. Maui Development has also put its gas transmission pipeline up for sale, raising the prospect that the two regulated gas transmission pipelines could be owned by the same party, which could deliver real efficiencies in the gas sector.
The regulatory cycle of reviews for sectors regulated under Part 4 of the Commerce Act continues. The focus in 2015 and 2016 is the statutory review of the Input Methodologies, which is due to be completed in December 2016. The Input Methodologies are the rules that underpin the Commerce Commission’s decisions on the prices that regulated companies can charge consumers and so directly affect the prices of electricity and gas. Key issues for debate are whether the regulatory settings remain appropriate in the face of technology change in the electricity sector and whether regulated companies should bear the risk of losing revenues due to changes in demand.
Overall, the current review has demonstrated that the Part 4 regime is now reasonably well established – most issues on the table can be seen as incremental improvements to tackle particular issues, not wholesale changes to the regulatory landscape. This should help regulated companies and consumers have more certainty regarding how the regulations will operate and be applied.
Pricing is the other big regulatory issue facing the electricity sector, with the Electricity Authority considering reforms to the Transmission Pricing Methodology and distribution pricing structures. These issues are complex and any changes could have wide-reaching implications.
Any reforms to distribution pricing will take time to develop, consult on and implement and this needs to be allowed for. The low-user fixed charge regulations are a barrier to reform as they impede the ability of energy companies to introduce efficient prices, particularly prices that encourage demand response. They are also poorly targeted – they tend to benefit consumers who use less electricity than average, but these consumers are not necessarily those on lower incomes.