The New Zealand electricity market (NZEM) is a decentralised electricity market regulated by the Electricity Industry Participation Code administered by the Electricity Authority (EA). The authority was established in November 2010 to replace the Electricity Commission.
Overview
Until 1987, New Zealand had a centrally run system of providers of generation, transmission, distribution, and retailing. Reform has since led to the separation of the monopoly elements from the contestable elements to create competitive markets in energy retailing and generation. Regulation has also been imposed on the natural monopolies of transmission and distribution.
Currently the market is split into the following areas:
Regulation, administration, generation, market clearing, transmission, distribution, metering and retail.
The wholesale market for electricity operates under the Electricity Industry Participation Code (EIPC), and is overseen by the market regulator, the Electricity Authority. Trade takes place at more than 200 pricing nodes across New Zealand. Generators can make offers to supply electricity at grid injection points, while retailers and some major industrial users make bids to withdraw "offtake" electricity at grid exit points. The market uses a locational marginal pricing auction which takes generators' offers and retailers' bids, and computes final prices and quantities at each node. These auctions are held every half-hour for a total of 48 trading periods each day.
In addition to the core wholesale spot market there are two associated markets. A hedge market for CFD financial contracts is operated by the ASX Australian Stock Exchange, and an FTR market for Financial Transmission Rights is operated by Energy Market Services, a business unit of Transpower. These markets are linked to wholesale market prices at select locations, allowing market participants to manage their basis risk.
The Electricity Authority contracts out the services required to run the electricity market. The Reconciliation Manager who reconciles all metered quantities, the Pricing Manager who determines the final prices at each node and Clearing and Settlement Manager who pays generators for their generation at the market clearing price and invoices all retailers for their offtake, are all contracted to New Zealand Exchange (NZX), who acquired the previous service provider M-co in June 2009.
The owner of the national transmission grid is Transpower, a state-owned enterprise. Transpower is also the System Operator, responsible for ensuring real time electricity supply security and quality. Transpower is the market scheduler, predicting demand to help generators make offers, as well as the dispatcher, in charge of matching demand and supply in real time.
Distribution of electricity from the grid exit points to the end consumers' premises is the responsibility of about 30 distributors, also known as lines companies, who have monopoly control of the lines services on their networks. Ownership of distributors is through trust-owned companies, such as Auckland Energy Consumer Trust, and public companies. Some major industrial users are directly connected to the grid, such as New Zealand Steel and the Tiwai Point Aluminium Smelter.
There are five major generators: Contact Energy, Genesis Energy, Mercury Energy, Meridian Energy and TrustPower. These five together produce about 95% of New Zealand's electricity. Meridian Energy, Genesis Energy and Mercury Energy are 51% majority owned by the New Zealand government, Contact and Trustpower are 100% publicly traded companies. An important feature of the New Zealand market is that all the major generators also own retailing arms. The companies are thus commonly known as "gentailers" (generator–retailers.)
Retailers purchase electricity from the wholesale market, and on-sell it to consumers. Competition for retail customers varies across the country but since 1999, when full retail competition was introduced, customers have switched at a rate between 9% and 14% per annum. Consumer NZ, with support from the Ministry of Consumer Affairs, provides a website called Powerswitch that enables consumers to compare electricity and gas prices from different retailers and to switch suppliers.
MBIE published a useful chronology of reforms up to 2015.
Wholesale spot market
Electricity is traded at a wholesale level in a spot market. The market operation is managed by several service providers under agreements with the Electricity Authority. The physical operation of the market is managed by Transpower in its role as system operator.