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Single buyer power market EPOC Workshop University of Auckland 5 September 2013 John Small

3 Outline Caveat Short-run operations Long-run capacity issues Competition effects

4 Caveat No inside knowledge of current plans

5 Ricardian rent Variable Cost Price ($/MWh) Quantity (MWh) Demand P* Q* Surplus revenue paid to lower cost generation plants

6 Operational issues Power purchase contracts with each plant Three part tariff Fixed cost component Running cost component Availability component Plants submit supply offers to S.O. Volume only, because price is known Merit order, constraint checking etc Economic dispatch similar to status quo

7 What about hydro? Ideally, use same opportunity cost approach as now Expected future spot prices = f(running payments, hydrology) Design choice: who runs these models? Should make choice based on information resources Centralised modelling inside NZPower, or Decentralised to power stations  Would need incentive payments / information rent

8 Capacity adequacy Few energy-only markets in the world Most have added capacity mechanisms, or are doing so Peaking plant difficult to justify in energy-only Need very big price spikes, which carry political risk In NZ, tendency to build base load Grid upgrades also help

9 Who picks the reserve margin? In NZ currently: no-one It is the outcome of (regulated) market processes Under single-buyer…..? Some options The single-buyer acting alone The single-buyer subject to GPS, like RBNZ’s policy targets agreement Any others? NB: reasonable chance of a higher reserve margin Which is more costly

10 Will investment be forthcoming? Yes

11 Competition & efficiency It is effectively vertical separation Regulated generation sector with tender-based competition for new plant contracts Single buyer would sell tranches of hedges to retailers Stand-alone retailers would be viable Retail competition would probably intensify quite a bit Possibly some risk pooling benefits?