An update on the Market Development Program

Phil BishopNew Zealand Electricity Commission

Presentation to the EPOC Winter Workshop3 September 2009

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Outline

• Background, strategic context and key elements

• MDP c.f. Ministerial Review• 10 MDP projects• Security of supply and efficient investment

• Timeline

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Background• MDP established to draw together and prioritise projects that are

focused on improving the performance of the electricity market• Market design review – 2007-08• Winter 2008 review – 2008-09• Commerce Commission investigation – 2005-09

• Underlying concerns (or perceptions?)

• Lack of confidence in security of supply

• Electricity prices are too high

• Visit the Commission’s website for further information

• http://www.electricitycommission.govt.nz/

• …/advisorygroups/mdag/index.html

• …/opdev/mdp

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MDP context – strategic priorities

Market Design Review

2008 Winter Review

Commerce Commission investigation

Strengthen competition

Improve investment/ supply signals

Improve market monitoring

MDP designed to reflect EC’s strategic priorities as reinforced by recent reviews

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MDP key elements

Retail monitoring & consumer information

Review distribution pricing

Smart metering / infrastructure

Locational hedge products

Clarify ownership of load control

Wholesale market monitoring & information

Frequency keeping & instantaneous reserves markets

Review transmission pricing

Capacity & scarcity mechanisms

Future of Whirinaki station

Retail competition

Wholesale competition

Security

MDP elements driven by strategic priorities and current legislative framework

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MDP c.f. Ministerial Review• MDP will culminate in proposed options for consultation

with participants, i.e. in accordance with the Act, and, if required, rule changes

• In contrast, the MR puts forward 28 recommendations:• 23 related to market arrangements• 5 related to governance structures

• There appears to substantial alignment between many of the MR recommendations and the MDP• Many of the MR recommendations exist as options

within the various MDP projects• Both MDP and MR represent an evolution of market

design and arrangements

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MDP – 10 projects• Capacity and scarcity - develop, assess and implement scarcity

pricing and/or capacity market mechanisms that will encourage efficient generation investment to supply energy at times of scarcity.

• Future of Whirinaki - subject to outcomes from the capacity and scarcity project, determine whether Whirinaki should be removed from the Reserve Energy Scheme and, if so, under what conditions.

• Locational hedges - develop and implement an effective mechanism that will allow participants to better manage locational price risk and thereby increase retail competition and improve hedge market liquidity.

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MDP – 10 projects cont’d• Market monitoring - develop and implement systems to:• improve the information available to wholesale market

participants;• strengthen the monitoring and assessment of the performance of

the electricity market, including the behaviour of participants in both the retail and wholesale markets;

• provide more accessible information on retail price comparisons to consumers; and

• improve the monitoring and provision of information on security of supply.

• Transmission pricing - review the allocation of transmission costs in order to enable efficient use of, and investment in, transmission assets, and to provide coherent signals through the electricity value chain.

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MDP – 10 projects cont’d

• Distribution pricing - investigate approaches to ensuring that distribution charges are set in a way that promotes efficiency and enhances competition in the retail electricity market.

• Demand-side initiatives - develop the Commission’s load control policy and undertake initiatives to improve levels of demand response (demand-side bidding and forecasting, dispatchable demand). The project also includes an assessment of the effects of property rights on efficient use of load management and whether rule changes are required for better outcomes.

• Extended load control - determine if interrupting residential hot water load by using frequency sensitive relays can reduce procured instantaneous reserves quantities and costs.

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MDP – 10 projects cont’d

• Multiple frequency-keepers - develop a system to coordinate multiple frequency keepers, including a nationally-based market instead of an island-based market.

• Part D rules and advanced metering - review and update Part D of the Rules on metering and metering equipment, and review the advanced metering guidelines to identify any changes needed to ensure a high quality advanced metering infrastructure.

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Security of supply and efficient investment• Three key areas of concern:• Incentive to retain and/or invest in peaking or hydro firming

plant;• The level of demand side participation; and• Management of dry year risk

• Underlying problem: alignment of incentives• Risks and rewards are not always in sync – costs able to be

passed onto others• Reserve energy scheme effectively imposes an implicit price

cap – depresses incentive for market to invest in plant that rarely runs

• Possible solutions• Scarcity pricing/compensation• Compulsory contracting mechanisms

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Interactions between MDP elements

Scarcity / Compulsorycontracting mechanism

Review dist’npricing/terms

Introduce locational

hedge

Increased market

monitoring

Improve ancillary servicemarkets

Modify Reserve Energy scheme

Demand sidemeasures

Review transmission

pricing

Facilitate customersearch/ switching

• Secure supply

• Effective wholesale competition

• Effective retail competition

Coherent MDP ensures:

Scarcity / Compulsorycontracting mechanism

Review dist’npricing/terms

Introduce locational

hedge

Increased market

monitoring

Improve ancillary servicemarkets

Modify Reserve Energy scheme

Demand sidemeasures

Review transmission

pricing

Facilitate customersearch/ switching

Scarcity / Compulsorycontracting mechanism

Review dist’npricing/terms

Introduce locational

hedge

Increased market

monitoring

Improve ancillary servicemarkets

Modify Reserve Energy scheme

Demand sidemeasures

Review transmission

pricing

Facilitate customersearch/ switching

• Secure supply

• Effective wholesale competition

• Effective retail competition

Coherent MDP ensures:

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MDP – intended timelineMDP Programme

Capacity and scarcity mechanisms

Locational hedging

Future of Whirinaki

Monitoring and Information

Transmission and distribution pricing

Transmission pricing

Distribution pricing

Load management/Demand participation

Advance metering recommendation to Minister

Part D review

Property rights

Dispatchable demand

Demand side bidding and forecasting

Ancillary services

Frequency keeping - multiple frequency keepers

Instantaneous reserves - extended load control

Key InitiationAnalysis and DecisionsImplementation*Possible implementation

*rules, software, operational development

2009 2010 2011

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Questions?