An update on the Market Development Program

1. An update on the Market Development Program Phil Bishop New Zealand Electricity Commission Presentation to the EPOC Winter Workshop 3 September 2009

2. Outline • Background, strategic context and key elements • MDP c.f. Ministerial Review • 10 MDP projects • Security of supply and efficient investment • Timeline

3. 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

4. MDP context – strategic priorities MDP designed to reflect EC’s strategic priorities as reinforced by recent reviews

5. MDP key elements Retail competition 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 Wholesale competition Security MDP elements driven by strategic priorities and current legislative framework

6. 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

7. 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.

8. 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.

9. 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.

10. 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.

11. 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

12. Interactions between MDP elements

13. MDP – intended timeline

14. Questions?