Electricity in NewZealand

contentsconsumers 2

retail 6

wholesale 10

transmission and system operation 14

generation 18

distribution 24

The Electricity Industry Act 2010 changed the shape and structure of the NewZealand electricity sector.Under the Act the Government is seeking to improve competition, reliable supply and efficient operation of the electricity sector for the long-term benefit of NewZealand electricity consumers. The statutory objective of the Electricity Authority reflects this goal.

The market reforms undertaken by the Government in pursuit of this objective include the establishment of the Electricity Authority as an independent Crown entity, to provide greater certainty and predictability about how the market will be governed and operated, as well as reducing risks of intervention, and improving investor perceptions about market risk.

Besides sharpening the focus on improving competition, reliability and efficiency, the Act requires the Authority to undertake specific functions to enhance market performance. These include proactive market monitoring, greater stakeholder involvement in developing the Electricity Industry Participation Code and market facilitation measures under which the market operates, and increased information and educational activity.

Electricity in NewZealand is part of a range of communication initiatives which the Authority will be using to help develop a shared sense of the nature, needs and achievements of the countrys electricity sector. It is intended for a general readership.

The publication provides an overview of NewZealands electricity system in the new era ushered in by the Electricity Industry Act 2010. It outlines core market components and physical assets, and the inter-relationships between them. These features will change dynamically as the Authority pushes ahead with the priority issues, such as customer switching and market development, with which it is tasked under the Act, and as technology and the environment in which the electricity system must operate evolve.

Those seeking more specialised industry information with which to evaluate opportunities, or to assist in decision-making in this evolving environment, are referred to the Authoritys website, www.ea.govt.nz.

Brent LaytonChairElectricity Authority Te Mana Hiko

Photography: The assistance of Contact Energy, Fonterra, Girdwood Photography, Mighty River Power and Transpower is acknowledged.

foreword

160,00075,00040,000

commercial consumers

industrial consumers

agriculture, forestry and fishing consumers

PURCHASE

34%

PURCHASE

5%

residential consumers

1.7million 18largely throughPURCHASE25%PURCHASE

36%

What is electricity?Electricity is energy produced by the flow of electrons along a conductor, such as copper or aluminium found in power lines. It is a secondary energy source produced from other forms of energy. Commonly in NewZealand this is the kinetic energy of falling water from dams. The force of the falling water drives turbine blades to spin huge magnets at very high speeds inside massive coils of conducting wire, and the moving energy, or electricity, that is produced flows into the national transmission network.

Wind turbines create electricity in a similar way. Fossil fuels produce electrical energy through burning the chemical energy stored in gas, coal or oil to produce steam which, under pressure, drives turbines and generators.

The force applied to electrons to make them flow is known as voltage and the rate of flow is known as current. A comparison can be made with water through a pipe. Voltage equates to the pressure applied to make the water flow, and current is the rate at which it flows through the pipe.

Power is the rate at which electrical energy is produced or used, and is measured in Watts (W), kilowatts (kW) or megawatts (MW). Kilowatt hours (kWh) are used to measure electricity use over time. For example, using a 1 kW bar heater for an hour will consume 1 kWh of electricity. Average NewZealand household use is about 8,000 kWh per year.

Ministry of Consumer Affairs (consumer policy)

Ministry of Economic Development (energy policy)

Electricity and Gas Complaints Commission (consumer issues)

$6BILLIONANNUALLY

MORE THAN

18retailersElectricity in NewZealand

Electricity Authority (market design and performance)

Commerce Commission (grid investment approval)

Purchases are met by generation dispatched on the national grid1grid owner7buying on the electricity market operated by serviceproviders

SYSTEM OPERATOR

METERING EQUIPMENT OWNERS

METERING STANDARDS

ENERGY HEDGE MARKET

DATA MANAGEMENT

CLEARING

INFORMATION

REGISTRY

MARKET ADMIN-

ISTRATION

RECON- CILIATION

PRICING

Key dates1886 The first high-voltage electricity transmission line is built,

running between Skippers Canyon in Central Otago and a mining company six kilometres away.

1888 Reefton is the first town in the southern hemisphere to have a public electricity supply.

1914 The first major state hydro scheme at Coleridge begins generating power.

1923 Government calls tenders for Arapuni, which is commissioned six years later, initiating hydro development on the Waikato River.

1949 Commencement of Roxburgh Dam construction starts the development of the Clutha River hydro system.

1958 The State Hydro-Electric Department becomes the New Zealand Electricity Department (NZED).

Wairakei power station, the second geothermal generating plant in the world, is commissioned.

1965 The North and South Islands are linked by sea floor electricity cables across Cook Strait.

1987 NZED is corporatised as the Electricity Corporation of New Zealand (ECNZ), which trades for a time as Electricorp.

1994 ECNZs transmission business is split off as Transpower.

The Metering and Reconciliation Information Agreement (MARIA) is established to facilitate the bi-lateral trading of electricity between buyers and sellers.

1996 ECNZ is split again, with a new generation business, Contact Energy, being formed.

A wholesale spot electricity market, the New Zealand Electricity Market (NZEM), is established.

1999 Contact Energy is privatised.

The remainder of ECNZ is split, with the major assets divided between Mighty River Power, Genesis Energy and Meridian Energy, and the minor assets sold off.

2003 The Electricity Commission is established to manage the New Zealand electricity market.

2010 The Electricity Commission is replaced by the Electricity Authority, tasked with governing the electricity market under the new Electricity Industry Act 2010.

Ministry for the Environment (resource consent process)

from

5 28lines companiesfor supply to consumers by

and 34 embedded networks

major and 8 smaller, grid- connected generators, along with local distributed generation,

9.9% Geothermal

160,00075,00040,000

commercial consumers

industrial consumers

agriculture, forestry and fishing consumers

residential consumers

1.7millionRio Tintos smelter at Tiwai Point accounts for around

15%of New Zealands annual electricity demand.

0

60,000

80,000

70,000

40,000

50,000

30,000

20,000

10,000

1980 1990 2000 2010 2020 2030 2040 2050

GWhFIGURE 1 HISTORICAL AND FORECAST TOTAL NATIONAL ENERGY DEMAND

Historical demand

2008 SOO forecast

2010 SOO forecast

2

Total electricity consumption in NewZealand is near to 40,000 gigawatt hours (GWh) per annum.

Electricity demand has increased at approximately two percent a year since the 1970s. That trend is strongly related to economic growth and population size, and, based on Statistics NewZealand projections, demand is forecast to continue growing at that rate through to 2040 and beyond as shown in Figure 1.

Demand for electricity varies from moment to moment for which supply must change almost instantly. Consumption follows strong daily and seasonal patterns. At low demand times such as a summer night, total demand may be as low as 2,600MW, whereas at peak times (winter evenings) it can exceed 6,500 MW. While electricity use has historically been highest on cold winter evenings, some regions now have a summertime peak demand as a result of increasing

use of farm irrigation and domestic air-conditioning. Figure 2 shows annual electricity demand by region in 2009.

Electricity consumption by sector is shown in Figure 3 (next page). Commercial, agricultural and industrial users account for two-thirds of total demand, but as shown in Figure 4, less than 15 percent by customer numbers, as they have higher average consumption per customer.

consumers

Ministry of Economic DevelopmentThe Ministry of Economic Development (MED) provides the Government with policy advice on energy issues, including supply and demand, efficiency and conservation, and renewable energy strategy. www.med.govt.nz

FIGURE 2 ELECTRICITY DEMAND BY REGION FOR 2009

35.3% Other North Island

28.6% Auckland and Northland

36.1% South Island

Source: MED Energy Data File, 2010

3

For example, the single largest user (Rio Tinto Aluminium the smelter at Tiwai Point) accounts for

approximately 15 percent of NewZealands total electricity demand.

Ministry of Consumer AffairsThe Ministry of Consumer Affairs is tasked with developing consumer policy, including consumer protection, and administers a range of consumer legislation. It also provides information, education and advice for consumers and businesses. www.consumeraffairs.govt.nz

The other nine major industrial consumers rounding out the top 10 are CHH Pulp and Paper, KiwiRail (Ontrack), Methanex NZ, NewZealand Steel, Norske Skog Tasman, Pan Pac Forest Products, Southpark

Corporation, Whareroa Cogeneration and Winstone Pulp International.

Residential users make up about one-third of total consumption, with most residential demand being for water heating, space heating and refrigeration as shown in Figure 5.

Technological progress has an impact on electricity consumption as well as generation.

There has been growth in electricity-using technologies over time, such as computers and air-conditioning, but there have also been improvements in efficiency. For example, modern electric lighting, heating appliances and motors are significantly more efficient than their predecessors.

Electricity efficiencyAs demand for electricity continues to rise, as shown in Figure 1, in a generation constrained environment, improved electricity efficiency will play an increasingly important role in future security of supply and achieving sustainability objectives. Yearly savings in excess of 500 GWh are already being achieved in residential, commercial and industrial sector efficiency programmes and these

are gaining momentum.

For example, significant gains can be made for consumers, the economy and the environment through adopting more efficient lighting. NewZealand spends approximately $660 million each year on electricity for lighting. It is estimated that 2.65 million tonnes of greenhouse gas emissions are created annually in meeting NewZealands lighting needs.

consumersFIGURE 3 ESTIMATED ENERGY CONSUMPTION BY SECTOR (GWH) (37,728 GWH TOTAL IN YEAR ENDED DEC 2009)

Source: MED Energy Data File, 2010

FIGURE 4 CONSUMER ICPs BY SECTOR(TOTAL OF 1,956,741 CUSTOMERS IN YEAR ENDED MARCH 2009)

Source: MED Energy Data File, 2010

Source: EECA Energywise

34% Residential

5% Agriculture, forestry, fishing

36% Industrial

25% Commercial

FIGURE 5 AVERAGE FAMILY HOUSEHOLD ENERGY USAGE

3% Other appliances

7% Cooking30% Water heating

11% Refrigeration

8% Lighting

12% Electronics and other uses

29% Space heating

86% Residential

8.1% Commercial

2% Industrial

3.9% Agriculture, forestry, fishing

4

The Kema New Zealand Electric Energy-Efficiency Potential Study, prepared for the Electricity Commission, prioritised electricity efficiency savings opportunities and identified lighting as offering 40 percent of the cost-effective potential relative to supply-side alternatives, such as new generation and transmission upgrades.

Residential consumers living in average-sized homes can save up to $170 a year by replacing their existing lighting with energy-efficient options. Further, if every household used efficient lighting, NewZealand could reduce its annual energy consumption by as much as 1,200 GWh, which is equivalent to the total electricity usage in Waitakere and North Shore

cities for one year, or more than $278 million per year in residential power bills.

The website www.rightlight.govt.nz promotes the savings opportunities available to consumers from more efficient lighting.

Commercial buildingsTo date some 150 projects have been approved for upgrades or improvements to HVAC (heating, ventilation and air-conditioning) systems, enhancement of building management systems and refrigeration, or installation of monitoring and targeting solutions in commercial buildings. Results show annual savings trending towards 3040 GWh, which approximates the annual electricity usage of a town the size of Greymouth.

Industrial sectorIndustrial motor efficiency initiatives focus on opportunities for accelerating replacement of NewZealands existing stock of three-phase motors with new versions complying with minimum energy performance standard MEPS 2006. This is complemented by programmes

aimed at optimising the efficiency of motor systems, such as the addition of controls to pumping and fan systems, use of adjustable speed drives, and auditing of the efficiency of compressed air systems.

In total, industrial efficiency initiatives have a target of achieving 140 GWh annual electricity savings within 10 years, which is enough to power around 15,500 homes a year.

Electricity and Gas Complaints CommissionThe Electricity and Gas Complaints Commission (EGCC) provides a free, independent dispute resolution service for consumers having difficulties with their electricity and gas suppliers.

EGCC can look into most complaints including billing, disconnections, damaged property and switching companies. It can also consider complaints about actions of staff or contractors while on land, as well as access to and use of land on which there is electricity or gas equipment. www.egcomplaints.co.nz

5

Auckland Gas CompanyBay of Plenty ElectricityBosco ConnectContact EnergyEnergy DirectEnergy Online

Genesis EnergyJust EnergyKing Country EnergyLloyd WensleyMercury EnergyMeridian Energy

OpunakePowershop NZPulse UtilitiesSimply EnergyTiny Mighty PowerTrustPower

18retailerssmart meters installed in NewZealand.By 2012 there will be

There are currently

400,000

1.3MILLION.

6

Apart from purchases on the wholesale market by 10 major industrial users, NewZealand consumers buy their power from 18 retailers, owned by the five main generators and smaller, independent retail companies.

The approximate market shares of larger retailers are shown in Figure 6.

The electricity market is a relatively new development. For most of its history electricity supply has been a state monopoly.

Until 1989, the Electricity Corporation of NewZealand (previously the NewZealand Electricity Department) functioned as the countrys sole generator and grid owner.

At that point, a period of deregulation began, which included Transpower being split off as a separate transmission business in 1994, and

the spot market being established in the same year.

The electricity market was self-regulating until 1 March 2004, when it began operating under the Electricity Governance Rules and the Electricity Governance Regulations, overseen by the Electricity Commission. A Ministerial Review in 2009 tightened the focus on market performance and, through the Electricity Industry Act 2010, provided for the electricity market to be governed by the Electricity Industry Participation Code (Code), overseen by the Electricity Authority, from 1 November 2010.

The Authoritys statutory objective is to improve competition, reliable supply and efficient operation of the electricity sector for the long-term benefit of New Zealand electricity consumers.

In pursuing this objective, the Act requires the Authority to address seven priority matters relating to payments to consumers and a floor on spot prices during shortages; assisting retailers to manage risks created by transmission congestion; facilitating active responses by large users to wholesale market conditions; hedge market liquidity; and standardising of distribution tariff structures and use-of-system rules.

retail

Electricity AuthorityThe Electricity Authority is an independent Crown entity established to promote competition, efficiency and reliability of supply, through market design, overseeing market operations and monitoring and enforcing compliance with market rules. www.ea.govt.nz

7

MW

retailMarket administrationThe Authority contracts out most of the services required to operate the retail and wholesale electricity markets, apart from the market administration function, which it performs itself.

The market administrator role encompasses a range of background, but important, operational obligations. These functions are of an oversight nature, rather than active processing of market data or provision of real-time market services as performed by most other service providers. Examples include appointing auditors of test houses and metering installations, maintaining a register of incumbent retailers, collating System Operator and Pricing Manager reports and specifying back-up procedures for use in the event of a failure of the market systems.

In the retail market, at present, the key services of registration and reconciliation are contracted to Jade Direct NZ Ltd and the NewZealand Stock Exchange (NZX) respectively.

RegistryThe Registry is managed by Jade Direct in accordance with Part 11 of the Code. This is a national database containing information on nearly two million points of connection on the network from which electricity is supplied to a site. Referred to as installation control points (ICPs), each ICP has a unique identifier, which is used in managing customer switching and reconciliation processes.

ReconciliationEnsuring participants are allocated their correct share of electricity generation or consumption is essential to operating an efficient market. To facilitate this as specified in Part 15 of the Code, the contracted Reconciliation Manager, NZX, receives and processes about 50 million metering data points on a monthly basis, reconciles them against a register of contracts and passes the data to participants.

24retail invoices are issued every year.

MILLION

25

20

15

10

5

0

Con

tact Energy

Genesis En

ergy

Mercury Energy1

Meridian En

ergy

2

TrustPow

er

Energy Online3

Bay o

f Plenty E

lectricity

King Cou

ntry Energy

Powershop

NZ

Bosco Con

nect

Auckland Gas Com

pany

Pulse

Utilities

Other

PERCEN

T OF MARKET

SHARE

RETAILER

FIGURE 6 RETAILER MARKET SHARE BY ACTIVE ICPs JULY 2020

1. Mercury Energy is a subsidiary of generator, Mighty River Power. 2. Meridian Energy customer numbers include Rio Tinto, which accounts for about 15% of national electricity demand. 3. Energy Online is a subsidiary of Genesis Energy.

8

The process involves a considerable amount of detailed analysis to process and correct data for inaccuracies. Reconciliation information is used in the electricity market settlement function performed by the Clearing Manager.

CompetitionThe Code promotes retail competition by specifying efficient switching processes and by allowing any party to be an electricity retailer provided minimum standards are met.

Although the extent of retail competition varies across the country, all customers have a choice of retailers. In some parts of NewZealand there are five or more competing retailers. By improving the flow of information through the system, switching has become faster, as Figure 7 shows, and now generally can be done conveniently over the phone with a new retailer.

PowerswitchConsumer NewZealand, with the Authoritys support, provides a free web-based tool to help residential users to shop around.It shows the electricity retailers and tariff options available in each area and allows users to calculate their expected bills with different suppliers.www.consumer.org.nz/powerswitch

Data managementTraders retailers, generators and direct consumers are responsible for managing the data generated by more than 3.3 million conventional and advanced meters which gives NewZealand 99 percent coverage. In some cases traders engage external industry service providers to perform this function on their behalf.

Across the system more than 1.1 billion data points are settled annually.

60

50

40

30

20

10

0

FIGURE 7 AVERAGE BUSINESS DAYS FOR CONSUMERS TO SWITCH BETWEEN TRADERS

AVER

AGE DAY

S TO

SWITCH

Jan 06

Apr 06

Jul 0

6

Oct 06

Jan 07

Apr 07

Jul 0

7

Oct 07

Jan 08

Apr 08

Jul 0

8

Oct 08

Jan 09

Apr 09

Jul 0

9

Oct 09

Jan 10

Apr 10

Jul 1

0

In the last 12 months, some

314,000consumer ICPs switched retailers.

MeteringMetering is a critical part of retail market operations. The Code specifies requirements for meter performance and maintenance, including meter suppliers responsibilities and standards for accreditation of test houses. Twenty-two test houses are currently approved by the Authority to certify that metering systems are operating accurately and all are audited annually.

The roll-out of advanced metering in NewZealand is a significant technological advance being led by retailers. Although key technical aspects, such as data exchange protocols, are standardised, the roll-out is unregulated, voluntary and currently at no additional direct cost to consumers. Since 2005 when the first advanced meters were installed by Meridian Energy in central Hawkes Bay, the number of advanced meters has increased to 400,000 and traders are projecting about 1.3 million will be installed by 2012. By 2015, some 1.55 million are expected to be in use.

Advanced metering can give consumers the opportunity to analyse expenditure and control costs by running appliances at least-cost times of day, and will play an important part in the uptake of smart appliances and electric vehicles. It also enables distributors and retailers to manage their portfolios more cost-effectively, and to share infrastructure, spreading the cost of automating with other utilities such as gas and water. Ultimately, there is potential to defer investment in new generation, transmission and distribution assets, by better management of electricity demand.

9

7serviceprovidersElectricity AuthorityJade DirectNewZealand Stock Exchange (4 services)TranspowerElectricity purchased by retailers and major users on the wholesale market in 2010.$2.8BILLION10

Retailers, and a small number of customers, typically large industrial users, buy electricity directly from the spot market. These parties will typically also enter into financial contracts, often called hedges, which smooth out some or all of the volatility in spot prices. Jointly, the spot and hedge markets are the major components of the wholesale electricity market, which also includes the instantaneous reserves market and the ancillary services market.

Generators that are bigger than 30 MW or are grid-connected, compete in the electricity spot market for the right to generate electricity to satisfy demand, subject to transmission capacity. They do this by submitting offers through the Wholesale Information and Trading System (WITS). Each offer covers a future half-hour period (called a trading period) and is an offer to

generate a specified quantity at that time in return for a nominated price.

The System Operator (Transpower)uses a scheduling, pricing and dispatch (SPD) system to rank offers, submitted through WITS, in order of price, and selects the lowest-cost combination of resources to satisfy demand. The highest-priced generator actually required for a given half-hour sets the spot price for that trading period. Electricity spot prices can vary significantly across trading periods, reflecting factors such as changing demand (e.g. lower prices in summer when demand is subdued) and supply (e.g. higher prices when hydro lakes and inflows are below average). Spot prices can also vary significantly across locations, reflecting electrical losses and constraints on the transmission system (e.g. higher prices in locations further from generating stations).

Trades take place at approximately 285 nodes grid injection points and grid exit points across NewZealand every half-hour. Generators make offers to supply electricity at 59 grid injection points (GIPs) at power stations, while retailers and major users make bids to buy electricity at 226 grid exit points (GXPs) on the national grid.

Final prices at each node, taking account of grid losses and constraints, are processed and confirmed the following day.

The Authority is responsible for the effective day-to-day operation of the electricity market in accordance with the Code, with governance and compliance responsibilities, including market development, performance monitoring and breach investigation.

wholesale11

The Authority undertakes the function of Market Administrator and as with the Registry and Reconciliation functions (page 8) contracts service providers to perform the core wholesale market and system operation services.

NZX is contracted to provide three services: Pricing Manager, Clearing Manager, and the Wholesale Information and Trading System (WITS).

Pricing Changing demand and supply over the course of a day results in price differences each half-hour trading period. Prices also vary by location, reflecting the costs of getting electricity from source (generators) to destination (consumers).

As Pricing Manager, NZX is the service provider responsible for calculating and publishing the spot prices at which electricity market transactions are settled. These are referred to as final prices in the Code. Prices are derived using the same model the System Operator uses to dispatch generation. The model calculates prices at each node, in accordance with Section 13 of the Code for each trading period based on generator offer prices and quantities, demand and system conditions. These final prices are provided to the Clearing Manager to use in the clearing and settlement processes. The Pricing Manager calculates approximately 14,000 prices every day, which are published to market participants through WITS.

Clearing In its role as Clearing Manager, NZX is the service provider responsible for ensuring that wholesale market participants are paid, or pay, the correct amount for the electricity they generated or consumed during the previous month, in accordance with Part 14 of the Code.

This involves a number of tasks, the primary one being invoicing participants for the sale and purchase of electricity and related services. On a monthly basis, the Clearing Manager does this by combining the reconciled quantity information provided by the Reconciliation Manager, with half-hourly pricing information from the Pricing Manager, to determine the amounts owed to, and by, each market participant. On average, over the last five years, $310 million worth of electricity transactions passed through the clearing system per month.

The Clearing Manager also plays an important part in maintaining market confidence, and under the Code, it has the role of administering prudential requirements in the form of acceptable credit ratings or securities, for the purpose of ensuring purchasers of electricity or ancillary services can meet their payment obligations.

Rulings PanelAs with other matters, such as breaches and disputes between participants, prudential security decisions made under the Code may be appealed to an independent Rulings Panel. The Panel is appointed by the Governor-General on the recommendation of the Minister of Energy, after consultation with the Authority.

wholesale

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

2004

2005

2006

2007

2008

2009

2010

WHOLESALE MARKET PAYMENTS ($ MILLION). DRY-YEAR IMPACT 2008 IS CLEARLY EVIDENT.

12

The information system The WITS Manager operates the electricity market wholesale information and trading platform. It is the system used by electricity market participants to upload their bids and offers. WITS also delivers pricing, scheduling and other market data to participants and other parties. Operation of the system as required by Part 13 of the Code, is contracted out to NZX.

WITS also offers a free-to-air service providing price, demand and hydrology information for general interest. www.electricityinfo.co.nz

The Market AdministratorIn October 2004 when the existing Market Administrator Service Provider Agreement expired, rather than contract this function out again, the Electricity Commission assumed the role itself. As the Market Administrator today, the Authority provides several operational and administrative services, mostly in regard to the retail market.

The hedge marketThe wholesale hedge market allows parties to agree contracts to partially or fully offset prices paid on the spot market.

Traditionally, the hedge market in NewZealand has operated through over-the-counter (OTC) contracts, where buyers negotiate directly with sellers to agree on a price. These contracts can be customised and offer flexibility for both parties.

Energy Hedge was established in 2004 and is used by the five large generators as a trading platform for more standardised OTCs.

Recently, buyers and sellers of electricity have been able to contract on the futures market operated by the Australian Stock Exchange (ASX). These exchange-based contracts are standardised and participants may move more to these in future.

LOCAL GENER- ATORS

DIRECT CONSUMERS

GRID EXIT POINTS (GXPs)

CONSUMERS DISTRIBUTION TRANSMISSION GENERATION

SYSTEM OPERATOR (Transpower)

METERING EQUIPMENT OWNERS

METERING STANDARDS (Test Houses)

ENERGY HEDGE MARKET

DATA MANAGEMENT

(Traders)

RECON- CILIATION (NZ Stock Exchange)

CLEARING(NZ Stock Exchange)

WHOLESALE INFORMATION

(NZ Stock Exchange)

REGISTRY(Jade Direct)

MARKET ADMIN-

ISTRATION(Electricity Authority)

GRID INJECTION POINTS (GIPs)

PRICING(NZ Stock Exchange)

13

transmission and system operation

poles carry

of transmission lines in the national grid.

towers and

16,00012,000

25,000

km

Source: Transpower Asset Management Plan, 2010

1grid owner Transpower14

The national grid is owned and operated by Transpower, a state-owned enterprise.Subject to review and approval of investment proposals by the Commerce Commission, Transpower builds new grid investments and is responsible for all transmission development processes, such as obtaining resource consents and access rights and undertaking construction.

Under the Electricity Industry Act 2010, Transpower is also responsible for acting as System Operator, in accordance with Part 7 and Part 8 of the Code, and is required to co-ordinate supply and demand resources to maintain real-time security.

Ensuring real-time security requires the System Operator to schedule and dispatch electricity so that a balance between electricity supply and

demand is continuously maintained. It does this by issuing dispatch instructions to generators regarding how much electricity to generate so that injection of electricity into the system matches off-take by electricity consumers at each moment in time. If balance is not maintained, power quality will deteriorate and generators could automatically disconnect from the power system, causing further deterioration of power quality and in extreme situations, blackouts for consumers.

In addition to real-time dispatch, the System Operator role also involves significant investigating and planning activity, over periods ranging from years to minutes ahead of real time. Examples of this are coordination of generation and transmission outages, facilitating commissioning of new generating plants and procurement of essential ancillary services through

contracts with generators, retailers and distributors.

Ancillary servicesThere are five ancillary services.

Frequency keeping is carried out by generators that can quickly change output to match load fluctuations in consumer demand. System frequency must be kept within limits so that equipment, such as manufacturing plant, is not tripped.

Instantaneous reserve is interruptible load or spare generating capacity that is used to cover the largest potential event, such as the loss of a large generation plant or the HVDC link between the North and South Islands.

Over frequency reserve is a service that automatically reduces the level of generation injected into the grid to stop an unplanned rise in frequency.

transmission and system operation15

Voltage support is the service that injects reactive power into the system to increase or decrease voltage at the point of injection.

The black start service is provided by certain generators with the capacity to restart their generation plant with no electrical input if the system has blacked out. Generators without this capability require power from the grid to restart their generating plant.

Security of supplyAs part of its responsibility for monitoring security of supply, the System Operator is required to assess the supply outlook over the next decade, and evaluate factors such as planned generation, transmission constraints, forecast growth in demand, and fuel stockpiles.

The System Operator is also involved in routinely monitoring short-term security (up to 18 months ahead) and providing the industry and consumers with information on factors, such as risks to hydro lake storage and changes in electricity consumption patterns.

Reflecting the national importance of assured power supply, the Electricity Industry Act 2010 requires the formation of a Security and Reliability Council.

Members of the Council are appointed by the Authority from publicly nominated sector specialists and provide independent advice to the Authority on performance of the System Operator and electricity system, and reliability-of-supply issues.

In addition, the Electricity Industry Act 2010 calls for the introduction of a scheme under which retailers will be required to make payments to consumers in the event of a public conservation campaign and enforced power cuts. The aim is to have a customer compensation regime implemented for winter 2011.

transmission and system operation

substations,1741,000

2,300

over

and

transformers converting low voltage electricity to high voltage for transmission on the national grid and back to low voltage for end use

circuit breakers protecting circuits from damage caused by overload or short circuit.

Source: Transpower Asset Management Plan, 2010

16

Benmore

Haywards

Bunnythorpe

Islington

Kikiwa

Stratford

Huntly

Otahuhu

Whakamaru

Tiwai

Source: Transpower NewZealandNote: A more detailed transmission map is available at www.gridnewzealand.co.nz/maps

Substation

350 kV (HVDC)

110 kV

220 kV

50 kV, 66 kV

LINE CAPACITY

Transmission network

Commerce CommissionThe Commerce Commission is responsible for evaluating and approving capital expenditure proposals prepared by Transpower for investment in the national grid, and for overseeing efficiency, quality and pricing of electricity lines services.www.comcom.govt.nz

17

519% Mighty River Power

23% Meridian Energy

5% Other independents and on-site generators

21% Contact Energy

7% TrustPower 25% Genesis Energy

FIGURE 8 PERCENTAGE OF GENERATION BY GENERATION COMPANY, AS PER ASSET TRANSFERS SPECIFIED BY THE ELECTRICITY INDUSTRY ACT 2010

of electricity generation from renewables90%2025.

Government energy policy targets

by

9.9% Geothermal

NewZealands five major generation companies produce more than 90 percent of the countrys electricity.

Two of these, Contact Energy and TrustPower, are publicly listed companies, Contact Energy having been created through the first split of ECNZ in 1996. The other three, Genesis Energy, Meridian Energy and Mighty River Power, are state-owned enterprises created from the second split of ECNZ in 1998.

Jointly, these major generators own 98 power stations. In addition they operate another 70 power stations on behalf of other owners.

Other hydro, cogeneration, geothermal and wind generators operate another 32 power stations.

Of these 200 power stations, 50 are grid-connected, 19 provide a

combination of grid-connected and partially embedded capacity and 131 are embedded, connecting into local distribution networks or providing on-site supply. Some of these embedded generators are relatively large. White Hill, for example, has a capacity of 58MW and is the 38th largest plant in New Zealand. Another three embedded generators Rotokawa, Tararua 1 and Tararua 2 have capacity in excess of 30MW. The map on page 21 shows the location of grid-connected generating stations over 10 MW in size and Table 1 (page 22) provides details on these plants.

More than half of NewZealands electricity is generated from hydro-electric stations. With the addition of other renewable sources of energy geothermal, biomass and solar and wind some 73 percent of NewZealands electricity generation came from renewable energy resources

in 2009. The Governments Energy Strategy aims to lift this to 90 percent by 2025.

Other fuel types in the generation mix are coal, diesel and gas. Also, some industrial sites produce heat and electricity for industrial processes, in a process known as cogeneration. Often excess cogenerated electricity is exported into distribution networks or to the national grid.

Because NewZealands hydro storage lakes can only hold enough water for a few weeks of winter energy demand, hydro generation is sensitive to the level of inflows from rainfall and snowmelt. For this reason, when inflows are low for a sustained period, alternatives such as coal must fill the place of reduced hydro generation. Averaged over the last three years and 2010 to date, 55.6 percent of electricity was produced at hydro stations,

generation19

18.8 percent by gas-fired power stations, 9.9 percent geothermal, 9.3 percent by coal/gas-fired stations, 3.3 percent cogeneration, 2.9 percent wind power and less than 0.2 percent other sources. Hydro generation has ranged between 52 percent and 65 percent of total annual generation over the last five years. Figure 9 shows how generation by fuel type has changed over time.

Wind power in NewZealand generates a small but rapidly growing proportion of the countrys electricity. At the moment, wind supplies around three percent of NewZealands electricity needs, although the proportion of wind generation is expected to rise significantly as important wind developments in the South Island come on line.

Some predictions see the share of electricity from wind reaching 15 percent in 2030. Looking further out, the general rule of thumb is that winds annual contribution will settle at around 20 percent. This is because the uneven strength of wind and its intermittent nature mean wind output needs to be balanced by availability of other generation.

There are a number of new generation technologies under development in NewZealand and internationally. Tidal and wave power are examples of emergent technologies that might become commercially viable in the future. Tidal power uses the predictable movement of tides to generate electricity, whereas wave power uses the energy of ocean surface waves.

Because of the different characteristics of generation types, as summarised in Table 2 (page 23), a mix of plant types rather than reliance on one fuel source, location or technology is desirable.

generation

The greatest capacity

is provided by Huntly 16.

9,0001,448

Total generating capacity of the NewZealand electricity system is about

MW

MW

20

Ministry for the EnvironmentThe Ministry for the Environment (MfE) oversees the framework of the Resource Management Act 1991 (RMA) which governs resource consents for construction projects and other developments. MfE is also involved in renewable generation and electricity transmission policy development. www.mfe.govt.nz

Clyde

Roxburgh

Waipori

Teviot

WaitakiAviemore

Ohau C

Coleridge

Highbank

Cobb

Mangahao

Te Apiti

Tararua

Kapuni

Whareroa

Patea

Southdown

Ngawha

Otahuhu

Glenbrook

Huntly

Ohau BOhau A

Tekapo BTekapo A

Manapouri

Whitehill (embedded)

Taranaki CC

See Inset

Whirinaki

TuaiKaitawa

Matahina

Ohaaki

Nga Awa Purua

Wheao and Flaxy

Arapuni

Karapiro

Te Rapa

Kaimai Scheme

Edgecombe

Rotokawa

KinleithWaipapa

Maraetai

Whakamaru

Poihipi

AratiatiaMokai

Wairakei

Ohakuri

AtiamuriAniwhenua

Rangipo

Tokaanu

Kawerau

Benmore

West Wind

Location of electricity generators in NewZealand

TYPE OF GENERATION

HYDRO

GAS

COAL

DIESEL

WIND

OTHER (BIOMASS/WASTE HEAT)

GEOTHERMAL

COGENERATION

Piripaua

21

TABLE 1 INFORMATION ON CURRENT, GRID-CONNECTED GENERATING PLANTS (10 MW OR GREATER)

FUEL TYPE PLANT NAME OWNERS/OPERATORS CAPACITY (MW)

COGENERATION Glenbrook Alinta ENZ 112

Kapuni Bay of Plenty Energy NGC JV 25

Kawerau cogeneration Norske Skog Tasman 37

Kinleith Genesis Energy 28

Whareroa Todd Energy 70

GEOTHERMAL Kawerau geothermal Mighty River Power 100

Mokai Tuaropaki Power Company (Mighty River Power) 112

Nga Awa Purua Mighty River Power/Tauhara North No 2 Trust 132

Ohaaki Contact Energy 70

Poihipi Contact Energy 55

Wairakei Contact Energy 181

HYDRO Arapuni Mighty River Power 197

Aratiatia Mighty River Power 78

Atiamuri Mighty River Power 84

Aviemore Meridian Energy 220

Benmore Meridian Energy 540

Clyde Contact Energy 432

Cobb TrustPower 32

Coleridge TrustPower 45

Kaitawa Genesis Energy 36

Karapiro Mighty River Power 90

Manapouri Meridian Energy 840

Mangahao King Country Energy Todd Energy JV 42

Maraetai Mighty River Power 360

Matahina TrustPower 72

Ohakuri Mighty River Power 112

Ohau A Meridian Energy 264

Ohau B Meridian Energy 212

Ohau C Meridian Energy 212

Patea TrustPower 31

Piripaua Genesis Energy 42

Rangipo Genesis Energy 120

Roxburgh Contact Energy 320

Tekapo A1 Genesis Energy 25

Tekapo B1 Genesis Energy 160

Tokaanu Genesis Energy 240

Tuai Genesis Energy 60

Waipapa Mighty River Power 51

Waipori TrustPower 84

Waitaki Meridian Energy 105

Whakamaru Mighty River Power 100

Wheao and Flaxy Scheme TrustPower 24

THERMAL (DIESEL) Whirinaki1 Meridian Energy 155

THERMAL (COAL AND GAS) Huntly Genesis Energy 1,448

THERMAL (GAS) Otahuhu B Contact Energy 380

Southdown Mighty River Power 175

Taranaki CC Contact Energy 385

WIND Tararua 3 TrustPower 93

Te Apiti Meridian Energy 90

West Wind Meridian Energy 143

1. Showing asset transfer under Electricity Industry Act, 2010

22

TABLE 2 GENERATOR TYPES

TYPE OF PLANT ENERGY SOURCE CHARACTERISTICS

HYDRO Water pressure drives a turbine connected to an electricity generator

Expensive to build, but low running cost

Generation affected by inflows from rainfall/snowmelt

Some environmental impact due to construction and/or operation, but no greenhouse gas emissions from operation

Location dictated by hydro resource availability

GEOTHERMAL (E.G. WAIRAKEI)

Steam from deep underground is piped to the surface to drive a turbine connected to an electricity generator

Relatively high upfront cost but modest running cost

All NewZealand geothermal sources produce some greenhouse gases

Must be located near source of underground heat or steam

WIND Wind turns a large rotor which is coupled to an electricity generator

Expensive to build but low running cost

Difficult to forecast output accurately and output may vary from minute to minute

Construction and operation have some environmental impact

No greenhouse gas emissions during operation

GAS- OR COAL-FIRED STEAM PLANT (E.G. HUNTLY)

A boiler heated by burning fossil fuel creates steam, which drives a turbine connected to an electricity generator

Lower upfront cost than renewables, but more costly to run due to ongoing fuel bill

Less vulnerable to forces of nature in short term provided fuel supply is secure

Less efficient in fuel conversion than newer combined cycle technology

Emits greenhouse gases/other pollutants

COMBINED CYCLE GAS TURBINE (CCGT) (E.G.

OTAHUHU CC)

Burning of gas is used to drive a turbine which is connected to an electricity generator. Heat from turbine exhaust is used to create steam, which is also coupled to a generator to produce electricity

Upfront cost lower than renewables and most steam plant

Higher fuel conversion efficiency than steam plant

Less vulnerable to forces of nature in short term provided fuel supply is secure

Relatively small footprint provides locational flexibility

Emits greenhouse gases

OPEN CYCLE TURBINE (E.G. WHIRINAKI)

Burning of gas/distillate is used to drive a turbine which is connected to an electricity generator

Relatively low upfront cost

Relatively low fuel conversion efficiency resulting in higher variable operating cost

Flexible to operate can respond to system changes at short notice

Small footprint provides locational flexibility

Emits greenhouse gases

BIOMASS (E.G. KINLEITH)

Burning of waste such as bark/sawdust is used to create steam, which drives a turbine connected to an electricity generator

Relatively expensive to build

Relatively low fuel cost if utilising low-value waste but can require supplementation from gas/coal etc

Location influenced by availability of fuel source (transport cost can be significant for waste products)

Modest greenhouse gas emissions if main fuel source is renewable

Source: NewZealand Energy Data File, 2010

45,000

40,000

35,000

30,000

25,000

20,000

15,000

10,000

5,000

0

1975

1976

1977

1978

1983

1979

1984

1980

1985

1981

1986

1987

1988

1989

1990

1991

1982

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

GWh

FIGURE 9 ANNUAL ELECTRICITY GENERATION BY FUEL TYPE (10 MW OR GREATER)

HYDRO

GAS

COAL

WIND

GEOTHERMAL

BIOENERGY

OTHER THERMAL

23

150,000kmsof local lines linking consumers into the national grid.

28local lines companiesAlpine EnergyAurora EnergyBuller ElectricityCentralinesCounties PowerEastland NetworksElectraElectricity AshburtonHorizon Energy DistributionMainpower

Marlborough LinesNelson ElectricityNetwork TasmanNetwork WaitakiNorthpowerOrionOtagoNetPowercoScanpowerThe Lines Company

The Power Company/ Electricity Invercargill JV

Top EnergyUnison Networks VectorWaipa NetworksWEL NetworksWellington Electricity LinesWestpower

24

Although some of the largest distribution companies that own the local lines networks in New Zealand are publicly listed, most are owned by local trusts or other local bodies.

Distribution networksThere are 28 distribution networks transporting power to consumers through overhead wires and

underground cables. The distribution networks also include substations, which convert electricity into lower voltages for end use.

Apart from the 10 major industrial users listed on page 4, connected directly to the national grid, consumer premises in NewZealand are connected to a distribution network. Generally this is to a local network connected to the national grid,

but there are also 34 secondary, or embedded, networks (such as airports and major retail complexes) that are connected to a local network and in turn supply consumers.

There are also a growing number of embedded generators that connect directly to distribution networks rather than the national grid. Currently there are more than 130 embedded generators of significant size.

distribution

FIGURE 10 NUMBER OF CONNECTIONS BY EMBEDDED NETWORK OVER 200 ICPs

NUMBE

R OF CONNEC

TIONS

Nelson Electricity

WEL Networks

Westfields NewZealand

Kiwi Income Property Trust

AMP Capital Investors

Tuihana Networks

Auckland Intl Airport

Mainpower Lend Lease Investments

DISTRIBUTION COMPANY

10,000

8,000

6,000

4,000

2,000

0

25

local distribution networks

COMPANY

1 Top Energy

2 Northpower

3 Vector

4 Horizon Energy Distribution

5 Counties Power

6 WEL Networks

7 Waipa Networks

8 The Lines Company

9 Powerco

10 Eastland Network

11 Unison Networks

12 Centralines

13 Scanpower

14 Electra

15 Nelson Electricity

16 Marlborough Lines

17 Network Tasman

18 Buller Electricity

19 Westpower

20 Mainpower

21 Orion

22 Electricity Ashburton

23 Alpine Energy

24 Aurora Energy

25 The Power Company/ Electricity Invercargill JV

26 OtagoNet

27 Network Waitaki

28 Wellington Electricity Lines

1

2

3

59

6

7

8

9

11

12

13

14

16

15

1718

19

20

21

22

23

27

26

24

25 24

25

10

4

28

FIGURE 11 NUMBER OF CONNECTIONS BY DISTRIBUTION COMPANY

NUMBE

R OF CONNEC

TIONS

550,000

500,000

450,000

400,000

350,000

300,000

250,000

200,000

150,000

100,000

50,000

0

Vector

Powerco

Orio

n

Wellington

Electricity Lines

Unison Networks

WEL

Networks

Aurora En

ergy

Northpo

wer

Electra

Cou

nties P

ower

Network Tasm

an

The Po

wer Com

pany

Mainp

ower

Alpine En

ergy

Top En

ergy

Eastland

Network

Horizon

Energy Distrib

ution

Marlborou

gh Lines

The Lines C

ompany

Waipa Networks

The Po

wer Com

pany/

Electricity Invercargill JV

Electricity Ashbu

rton

OtagoNet

Westpow

er

Network Waitaki

Centralines

Scanpo

wer

Buller E

lectricity

DISTRIBUTION COMPANY

Source: Electricity Networks Association

26

Three-phase power as used in NewZealand is the most common distribution method worldwide.

As well as being an efficient means of transporting electricity, it provides a steady, reliable power supply for compressors, pumps and other motorised industrial equipment. There are also economic advantages for power plants, with copper coil requirements and generator size being optimised.

The three phases of alternating current (a.c.) produced by the generator pulse on the three wires at intervals one-third of a cycle apart, producing more even power output.

This assists in the smooth running and lifetime of industrial machinery.

On a typical power pole, as illustrated, each cross-arm will have four ceramic insulators one for each of the three-phase wires and one for the neutral wire, which provides for single-phase connection to individual residential properties.

As household lighting, heating and appliances use single-phase power, the three-phase power may be split, with house one on the first wire, house two on the second, house three on the third, and house four back on the first wire again, in each case with a neutral wire as well.

Multiple cross-arms allow additional circuits to be carried to supply larger numbers of households. Although district plans usually require electricity in new subdivisions to be delivered by underground cables, conversion costs, plus the fact that poles often carry other services such as telecommunications, mean that most existing overhead wires will continue to be used.

On average, distribution network costs account for about 25 percent of NewZealanders annual expenditure on electricity, at around $1.5 billion.

Three-phase power

One set of four wires through ceramic insulators

Phase wires

Neutral wire

27

ActThe Electricity Industry Act 2010 provides the framework for regulation of the industry, including the Electricity Industry Participation Code.

BenmoreBenmore power station injects electricity into the southern end of the HVDC link, or Cook Strait cable. Half-hourly prices at the Benmore node generally reflect half-hourly prices across the South Island. Benmore, along with Haywards, the North Island HVDC connection point in the Hutt Valley, and Otahuhu, are the three key reference nodes for prices.

Block dispatchBlock dispatch allows generators to receive dispatch instructions for a group of stations to be dispatched as a block. This allows them to decide how to implement the instruction within the block to manage their hydro resources efficiently.

Clearing House and Settlement Manager (CHASM)The clearing and settlement system used by the Clearing Manager.

Constrained-on compensationAn amount paid to generators, if they are required by the System Operator to generate during a trading period when the final price is less than the generators offer price. The payment is calculated by the Clearing Manager and is payable by purchasers and the System Operator.

Demand-side initiativeAn initiative that encourages or assists electricity consumers to modify their usage in a way that reduces consumption in a specific time period or shifts consumption from one time period to another.

Direct consumerA consumer that purchases electricity from the wholesale (spot) market for its own consumption, or a consumer with a grid connection e.g. a large industrial user.

Dispatch objectiveThe system operator has the objective of ensuring that generation meets demand at least cost to purchasers.

Embedded generationGeneration that is connected to local or embedded networks rather than to the national grid.

Final priceFinal prices are calculated the day after physical dispatch and are normally published by 12pm that day. They are used for monthly settlement. Final prices are available at www.electricityinfo.co.nz.

FrequencyThe frequency of the NewZealand grid is normally maintained at 50 Hertz or 50 cycles per second.

Hedge contractA range of financial risk management products, or contracts for sale and purchase of electricity, that mitigate against some price risks in the spot price. The most common contracts are known as contracts for differences (CFDs). They set a price at which a buyer will purchase at a specific node for a set period. The buyer pays this price regardless of whether the market price is higher or lower than the contract price.

Installation control point (ICP)A point of connection on a local network or an embedded network that the distributor nominates as the point at which a retailer is deemed to supply electricity to a consumer.

Kilowatt hour (kWh)A kilowatt hour is a unit of electricity and is the basis of retail sales of electricity.

LossesAs electricity is transmitted through the national grid, a proportion of energy is lost as heat due to the resistance in the lines. The greater the distance the electricity is transmitted and the lower the voltage of the line, the higher the loss.

Megawatt hour (MWh)One megawatt hour is equal to 1,000 kilowatt hours. Megawatt hours are the metering standard unit for the wholesale market.

Must-run dispatch auctionThe must-run dispatch auction allows a generator to bid for the right to offer generation at zero price to ensure it is dispatched. The auction typically runs during periods of low demand (e.g. Christmas Day) when generators need to run their plant to fulfil contractural obligations, comply with legal obligations, or for cost reasons.

NodeA point on the national grid where electricity enters or exits the grid (a grid injection point or a grid exit point).

ParticipantsParticipants, as defined under the Code, include the following groups:

electricity retailers

electricity distributors

electricity generators

line owners

electricity consumers connected directly to the grid

people who purchase electricity from the Clearing Manager

service providers

metering equipment owners

ancillary service agents

payee generators and the System Operator in relation to payment for ancillary service administrative costs.

Profiling/profilesProfiling allows retailers to estimate how much electricity any consumer will use in each half-hour by providing a typical consumption shape.

Supervisory Control and Data Acquisition (SCADA)The systems used by the System Operator and local networks to collect and display information on how the system is operating on a moment-by-moment basis.

about the industry28

Other informationMore specialised information for industry planners and investors is available in the biennial Statement of Opportunities (SOO) most recently released by the Electricity Commission in September 2010, and the Authoritys Centralised Dataset, which provides metering, pricing, hydrology and network configuration data.

The Generation Expansion Model (GEM) and vectorised Scheduling, Pricing and Dispatch model (vSPD) developed by the Commission are also available from the Authority.

The SOO presents detailed forecasts of electricity demand and supply through to the year 2040, modelled on five prospective scenarios.

The Centralised Dataset is a compilation of half-hourly meter data covering: HVDC flows; active and reactive power by GXP; and generation by GIP, along with pricing data, including bids and offers, reserves and final prices. It also provides weekly hydro-inflow and daily lake-level data, as well as transmission network information, such as load-flow models, line diagrams, asset outages, generation assets and GXP characteristics.

GEM is a model of the NewZealand generation sector. It projects the construction of new generation over coming decades and simulates outcomes in terms of dispatch, costs and emissions. It can be used to assist decisions regarding investments in transmission, or to assess implications of factors such as technology change, carbon pricing, or developments in market policy.

vSPD replicates the Scheduling, Pricing and Dispatch software used by the industry, and is used to monitor wholesale market operation, investigate performance and analyse the potential impact of proposed changes.

WebsitesBesides the Authoritys website www.ea.govt.nz, the following sites provide further information on the NewZealand electricity sector:

Ministry of Consumer Affairs www.consumeraffairs.govt.nz

Ministry of Economic Development www.med.govt.nz

Powerswitch (Consumer NZ) www.consumer.org.nz/powerswitch

Rightlight (EECA) www.rightlight.govt.nz

Statistics NewZealand www.stats.govt.nz

Transpower www.transpower.co.nz

Contact Information

Electricity Authority Te Mana Hiko

Level 7 ASB Bank Tower 2 Hunter Street PO Box 10041

Wellington 6143 New Zealand

www.ea.govt.nz

TEL + 64 4 460 8860FAX + 64 4 460 8879

Published November 2010.