Extended Reserve Selection Methodology Workshop 2 Default values and proposed payment mechanism 1

Workshop focus areas 2 Workshop 1 Workshop 2 Workshop 3 Default terms & conditions Example procurement schedule Data requirements Payment mechanism Default values

Session outline 1.Code and Authority intention for payments 2.Proposed payment mechanism and design choices 3.The default values 4.Impact of having a payment scheme 5.Interactive group session: seeking your feedback 3

The Code: our starting point The Code states that beneficiaries are distributors and pay if payments are made to extended reserve providers The selection methodology will state whether or not extended reserve providers get paid, and if they do, how the payments will be calculated. 4

Code intention for payments The Authority provides three “desirable outcomes” from introducing payments for extended reserve: a.“To incentivise the provision of ‘enhanced’ AUFLS services b.To incentivise Direct Connect consumers to submit realistic values of lost loads (VOLLs) for the selection process, and c.To equitably spread the burden of AUFLS provision across all consumers.” [Discussion on Extended Reserves Payment Mechanism, p.2] 5

Proposed payment mechanism Proposed payment calculation: Amount owing to an extended reserve (ER) provider = Sum of relevant costs applied to selected demand units Key terms: -standard monthly payment once in service -short-term outages do not affect payments -capital costs spread, termination payment if removed early -Code (8.67A, 8.68 and Part 14) payments/costs to be netted and invoiced monthly via the clearing manager. [Draft SM, clauses (pp 7-9) and schedule 3 (pp16-17)] 6

Payment design choices Choices include: -An up-front payment for capital costs, or spread them? -Split out df/dt relay cost? -Different relay costs for direct connects compared to lines companies? -Cost-recovery or cost-plus for ‘enhanced’? -Any additional costs? -Split or merge the costs? -Introduce a payment regime at all? 7

Two uses for the default values Two uses for Schedule 3 values: Used in the selection process (Potentially) to pay extended reserve providers. The values will still be used in the selection process even if there are no payments 8

Three compensation types 1.Payments to compensate customers for having their load interrupted 2.Payments for the provision of AUFLS assets 3.Payments for the provision of enhanced services 9

Expected interruption cost Payment to compensate potential for load interruption. Interruption payment = ▪ Demand unit load per block x ▪ expected hours of interruption per year (SM, Schedule 3, Part 2) x ▪ expected interruption cost (SM, Schedule 3, Part 3) 10

Inherited values 11 Relay Payment itemOpex/ Capex Proposed Cost ($) Capex * CRF = ($/yr) Relay administration costOpex500 Relay flexible service costOpex500 Relay reconfiguring costCapex1, Relay testing costCapex4, Base relay capital costCapex10, Additional df/dt relay costCapex Relay fast response costCapex400100

How to derive the values? Values quoted were utilised by the ERTWG The values will be confirmed before formal consultation We will use generic values (based on an assessed average cost), rather than to request the different actual costs incurred by each party, because: ▪ Generic values are used in the selection process ▪ Obtaining each party’s actual costs would raise administrative burden. 12

Being a clearing participant Must be a clearing participant (10 currently are, 12 are not) Extended reserve amounts added to existing invoices Invoices paid on 20th or market defaults = Code breach (Part 14) Prudential security (Code Part 14A) – up to 60 days, even if amounts are small -e.g. cash with security deed, or bank guarantee, or letter of credit Setting up – normal bank-level due diligence. 13

Impact of introducing payments Example 1 (Payment model) In the Payment Model example the following can be easily manipulated (figures in boxes): ▪ Inherited default relay costs ▪ Number of relays ▪ % of relay payment items ▪ Quantity of provision (32% is average) ▪ Block sizes ▪ Note VOLL cannot be manipulated by demand unit 14

Model example 1: Company X Payment TypeModel Parameter$/mth Annual average offtake13.12 MW Number of relays12 Relays reconfigured80% (10 x $/relay/mth)200 Relays tested100% (12 x $/relay/mth)1,000 New relays20% (2.4 x $/relay/mth)500 Df/dt10% (1.2 x 8.33 $/relay/mth)10 Admin100% (12 x $/relay/mth)500 Fast response20% (2.4 x 8.33 $/relay/mth)20 Flexible20% (2.4 x $/relay/mth)100 Interruption32% x x Ave Voll x Block%1,028 Monthly payment 3,358 15

Model example 1: Company X PaymentCalc$/yr Yearly payment40,656 Allocation (Code 8.67A)0.005 of $5,078,22425,000 Net (payee) 15, PaymentCalc$/yr Net (payer) -660 Fewer relays (5 relays instead of 12, all factors the same):

Model example 1: Company X 17 PaymentCalc$/yr No. of relays12 Net (Payee) 28, new relays (100% fast response): PaymentCalc$/yr No. of relays2 Net (Payee) 13,600 2 new relays (100% fast response):

Example 1 – insights It’s a net sum game – sum all beneficiaries pay = sum all ER providers are paid ▪ Beneficiaries pay based solely on relative load size ▪ ER providers are paid based on load size x VOLL, and sum of relay costs Example shows providers who have mostly existing relays are net payers. 18

Example 1 – insights continued Providers get paid more if: ▪ selected for more than the average 32% load ▪ they have more relays than average in proportion to offtake (smaller demand units) ▪ they install more new relays and more advanced relays ▪ the average VOLL of their selected units is higher than the total average VOLL (not shown in the example) 19

Example 2 – AUFLS cost and revenue example Example in Authority paper Commerce Commission’s likely treatment of lines company costs and revenue: -ComCom will “consider the Authority’s policy intent” when determining which costs are regulated -Proposed: all ER costs/revenue passed to consumers (regulated) except for installation of enhanced services (kept as incentive) -ComCom treatment would stand whether payments are introduced or not. [Discussion on Extended Reserves Payment Mechanism, Appendix A, p.7] 20

Example 2 – impact on lines companies Actual costs are incurred by lines companies. -With payments, lines companies are compensated at the generic default values and pass through the net cost or benefit to consumers -No payments, lines companies pass actual costs to consumers -Lines companies keep payments for enhanced services Little difference in financial impact. 21

Example – impact on direct connects Actual costs are incurred by direct connects. -With payments, direct connect ER providers compensated and direct connects not selected would have to pay -Without payments, direct connect ER providers receive no compensation and all those not providing ER would not pay. -May be more difficult for direct connects to pass costs to their customers. Desired outcomes are achieved BUT transaction costs are higher. 22

Group activities 23

Group activity 1 A: Does the current list of cost types cover the likely operational and capital cost types? B: What additional cost types should be considered and why? 24

Group activity 2 A: Are the inherited cost figures in the ball park? B: Where can we find relevant relay cost information? C: Separate costs for lines companies and direct connects? D: Should installation of enhanced services be based on a cost plus approach? E: Sufficient incentive to provide enhanced services? F: Any other points? 25

Group activity 3 A: Has the ERM missed anything in our consideration of a payment mechanism? B: What is the likely financial impact of these extended reserve costs / revenues on your business? C: Are you more likely to install enhanced services if there is a payment mechanism? 26

Group activity 4 A: Overall do you support a payment mechanism? -Why/why not? 27

Thank you Phone: Project webpage: are/business-overview/nzx-energy/consultations- submissions/extended-reservehttp:// are/business-overview/nzx-energy/consultations- submissions/extended-reserve 28