1. Building confidence and resilience
Restructuring New Zealand’s electricity market
Building confidence and resilience
Asia Pacific Energy Regulatory Forum, Seoul
28-29 September 2016
Presented by Hon Roger Sowry and Susan Paterson, Board Members, Electricity Authority

2. Initial approach in New Zealand lacked a focus on confidence
The wholesale market was launched in 1996
Two large generators dominated supply. Monopoly retailers served consumers in each regional distribution network.
Reforms implemented in 1999 led to vertically integrated generator / retailers that dominated their individual regions
Residential consumers could choose between retailers from 1999 but switching times were very slow (~200 days in 2003) and error-ridden
A very basic hedge market was in place and there were highly volatile prudential requirements for market participants
Confidence was undermined by recurring concerns about security of supply
Initial approach in NZ lacked a focus on building confidence in the market

3. Increasing prices for consumers
Progressive unbundling of cross-subsidies led to ongoing price-rises for residential consumers
All retailers adjust prices on 1 April each year to reflect regulated distribution company price increases – not seen by consumers as competitive
Chart shows values in real terms (2015 $)
Upshot : hard to convince the general population that the market is working for them
Source : Ministry of Business, Innovation, and Employment

4. Focus since 2010 on market initiatives to build confidence
A centralised switching process was introduced in Switching targets were revised in 2010 to encourage faster switching
In 2010 it was recognised that two large retailers were using the maximum allowable period for a switch as a target. The targets were amended to switch 50% within 5 business days and 100% within 10 business days. The industry complied and the average switching period dropped to 3-4 business days.
Jan 2015 – Switch save protection scheme implementation encouraged retailers to reduce switching period, many switches now completed within 1 business day.
Source : Electricity Authority

5. Focus since 2010 on market initiatives to build confidence
An advertising campaign (WhatsMyNumber) was run from 2010 to tell consumers they can switch quickly and easily and save money
Switches per month
Source : Electricity Authority

6. Focus since 2010 on market initiatives to build confidence
The wholesale market prudential regime was reformed and a retailer- default scheme introduced
Initiatives were introduced to facilitate the development and growth of a futures electricity market
In the year ended June 2016 the volume of ASX futures contracts traded equated to approximately 17 TWh (41%) of the 41 TWh of electricity consumed in New Zealand over the same period.
Source : Electricity Authority

7. Focus since 2010 on market initiatives to build confidence
In 2011 the Government required physical and virtual asset swaps between three of the major generator / retailers
FTRs were introduced in 2013 to help break down regional silos
An optional ‘saves’ regime was introduced to deal with retailers using the centralised switching process for an inside advantage

8. Outcomes show an increasingly competitive retail market
Market structure has improved greatly since 1999 (measured by HHI)
2004
2010
2016
Source : Electricity Authority

9. Outcomes show an increasingly competitive retail market
Competitive conduct had intensified since 2010
Likelihood of switching household services
Chart shows 2015 survey results – compares the likelihood for switching electricity retailers vs other industries
Advertising expenditure by retailers increased by 65% between the years-ended Sept 2013 and Sept 2015 (it dropped in 2014 so the 2014 – 2015 increase was 138% YoY)
Source : Electricity Authority

10. Outcomes show an increasingly competitive retail market
Residential retail prices have fallen in nominal and real terms since 2015
Chart shows values in real terms (2015 $)
Source : Ministry of Business, Innovation, and Employment

11. Outcomes show an increasingly competitive retail market
Voluntary and competitive roll-out of smart meters
Smart meters now account for 70% of all meters. Expected to reach 85% by end of 2018
Seeing considerable innovation by new entrants and incumbents
Bundling electricity with other services such as telecoms
Partnership with GreyPower advocacy group
Prepay schemes such as Glo-Bug becoming more popular with an increased range of payment options
Spot price retail products introduced for residential consumers
Energy management services
One retailer offering a ‘free hour of power’ for its customers
‘Smooth pay’ options offered to spread payments more equally over the year
Upshot: much wider acceptance among political parties in the last year that the electricity market is competitive and most mainstream business journalists also appear to have that view now

12. What now?
Prospect of “bulk supply” model giving way to “dispersed supply” model with PV, batteries, EVs, smart appliances and smart apps for managing energy use
The decentralised competitive market provides good foundations for the forthcoming transformation, but confidence in the market could easily erode if there are unnecessary market and regulatory barriers
The Authority has embarked on a programme of work to review all of its market rules and operational and compliance processes, to identify and remove inefficient barriers to new technology and new business models
includes replacing the current Wholesale Advisory Group (WAG) and the Retail Advisory Group (RAG) with a new Innovation and Participation Advisory Group (IPAG) and Market Development Advisory Group (MDAG)

13. Concluding thoughts
It is risky to simply open up the electricity market and hope it flourishes on its own accord. Need to work hard to build confidence in the market
Critical areas to work on in our experience are:
barriers to entry;
barriers to expansion; and
barriers to consumer switching and participation in the market.