Electricity Security of Supply Policy Review

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Electricity Security of Supply Policy Review Powered By Docstoc
					11 April 2007

Anton Murashev
Castalia Ltd
PO Box 10225

By Email

Dear Anton
Thank you for the opportunity to provide a submission on the Security of Supply Policy Review.
TrustPower agrees with the main conclusions of the review paper that, given the existing situation,
the least intrusive and most flexible arrangement is essentially a continuation of the status quo. We
also agree that there is some scope for improvements to the existing system.
In particular, we support the concepts:
       That the security of supply standard could be more clearly specified and that the
        implications of crossing certain thresholds within the various measures used to quantify
        supply security could be better explained
       That a defined energy margin would be more readily understood by stakeholders
       That a “watch dog approach” is relatively unobtrusive, whilst allowing for further action at a
        later stage, should it be required
       That any centrally procured security reserve energy must be obtained in a transparent
        manner through a clear process
Specific comments to the key questions within the report are detailed below.

Yours sincerely

Mike Dunstall
                                               TrustPower Submission

                            Electricity Security of Supply Policy Review

                                       Responses to Specific Questions

          Box 3.3: How much additional risk of shortages is created by possible patterns of
          generator/retailer contract positions?
We believe there is a possibility that some generator/retailers may choose to cover their own
exposure positions very conservatively, thereby limiting the opportunity for some customers to obtain
what they may consider adequate cover. Excessive conservatism has an associated opportunity cost
for the potential provider of cover, but this in itself in no guarantee that it will not occur.
Contracting for specific cover for the more extreme scenarios has been relatively rare and is difficult
to price, for both the provider and the purchaser. We agree that the market has demonstrated some
difficulty dealing with these types of scenarios when they are reduced to specific instances and short

          Box 4.1: What marginal costs should be attributed to energy savings at various
The suggested levels appear quite conservative, and we believe they are probably more than
adequate to quantify the impact, at least for the first tranche of un-served energy. We suspect that
the cost and inconvenience to many customers may be at a lower level than used here, as
demonstrated by the voluntary savings obtained in the past. However, we support the suggested
values as a conservative starting point, and once a reliable methodology is in place these could be
easily be changed. Confirming a sound methodology is a much higher priority than choosing the
absolute values.

          Box 4.3: What range of assumptions might be relevant for the cost of reserve energy
          or demand reductions in dry periods?

          What are your views on our conclusion that the expected level of un-served energy
          each year should be between 0.025 percent and 0.1 percent of total annual demand?

          What are your views on the process of translating this optimal level of USE to an
          equivalent range for the probability of demand restraints in the region of 1-in-11 to 1-

          What are your views on the inferred optimal energy margin of between 12 percent
          and 17 percent?
Diesel plant provides a reasonable base case given the practical options available. It also provides a
useful benchmark to the possible pricing of contracts for curtailment of load.
The less conservative scenarios for un-served energy appear at the high end of what we expect the
general public would consider acceptable, whether or not supported by economic theory. There is a
certain “peace of mind” premium that we expect many are prepared to pay (knowingly or otherwise).
Encompassed within this we consider there is further tangible (although difficult to quantify) value
associated with security of supply, associated with things such as the reputation issues and
perception issues identified later in the discussion document.
Although the economic values of these parameters are difficult to define they provide further reasons
to take a relatively more conservative approach. The mid-range values therefore appear a lot more
acceptable, particularly if we must transition from what appears to be an overly conservative position
(the current regime).

Electricity Security of Supply Policy Review                           Submission by TrustPower Limited
The methodology suggested has considerable conceptual appeal over the “1 in 60” standard now
applied. In particular, the methodology is conceptually more clearly defined and easy to understand.
However, the practical implementation may be fraught with some of the same difficulties and
ambiguities surrounding the present methods, primarily due to the relatively small data set of hydro
inflow scenarios.

          Box 4.5: Do you agree with an economic approach to defining the optimal level of
          security of supply?
Yes. We support the proposal to use an economic approach, with the proviso that some of the
impacts on business credibility, investor confidence and public acceptability have value that is
important (but not as easy) to incorporate, along with the base concepts outlined in the discussion
Political risks, and the economic costs associated with responses to them, are important
considerations. The costs of these risks also represent real costs to the economy and should be
included in an economic argument. For example, if the economic optimum at first appeared to
require provision for a “1 in 10” scenario the public (and therefore political) unacceptability may result
in expensive interventions when a disruption to supply occurred, with a much greater total cost.

          Box 5.1: Do you agree with the use of a simple annual percentage energy margin as
          the operational standard of security of supply?
Yes. The system needs to be simple in concept, and has to appear superficially simple (even if it is
more complex in detail), so that it can be useful to all stakeholders including consumers, market
participants, regulators, market commentators, and political representatives. The percentage energy
margin meets this requirement well.

          Box 6.1: Do you agree that there is evidence of some market failure, but insufficient
          evidence to be able to assess the likely frequency or magnitude of market failure?
We do not agree that market failure has been demonstrated, however, we do agree with the
suggestion that it may have occurred. Furthermore, we support the notion that the market has some
difficulty in dealing with low probability events and that difficulties experienced in attempts to write
contract around such events reflect this.

          Box 6.2: Do you agree that, given the uncertainty about market failure, the best
          policy going forward is to adopt a watch dog approach? This would mean the
          Commission standing by to intervene if it becomes obvious that the market will not be
          in a position to meet the optimal reserve energy margin within the lead time of
          commissioning an open cycle gas turbine capacity, but being ready to switch to more
          comprehensive intervention options if the frequency and magnitude of market failure
          is greater than expected?
Yes. A watchdog approach is appropriate with the possibility that more comprehensive intervention
could be provided at some later stage should this prove necessary.

          Box 7.1: Do you agree that the current levy arrangements should remain in place?
Yes, but mainly because we agree that there is no other obvious practical solution. We understand
the perceived unfairness in this approach from the perspective of adequately contracted parties and
those with their own alternative generation. However, given the lack of obvious alternatives, as the
Commission acts on behalf of consumers generally it is reasonable to levy consumers equally.

       Box 8.1: Do you agree with the proposed separation of scope between the Regime
and the Policy? Are there better alternative definitions of scope that could be adopted?
We support the concept that the EC should have the flexibility to implement the regime as best suits
the circumstances of the time. Of the governing agencies, the EC is in the best position to determine
the most suitable course of action. Clarity and certainty around the range of potential outcomes is

Electricity Security of Supply Policy Review                            Submission by TrustPower Limited
        Box 9.1: Do you agree that the procurement process should be pre-announced, and
that a clear trigger for procurement be established in terms of the reserve energy margin?
Yes - a clear trigger is important to provide the market the greatest likelihood of meeting the required
security standards without the need for intervention.
If intervention is ultimately required the greatest possible forewarning will allow more extensive
participation in providing potential solutions. As such, a clear procurement process is essential ahead
of time.

        Box 9.2: Do you agree that no further compulsory requirements should be imposed
for the provision of information to the Commission?
The current voluntary information provision appears to be working quite adequately and a compulsory
system would unnecessarily increase complexity.

Electricity Security of Supply Policy Review                          Submission by TrustPower Limited