Electricity Price Review: Hikohiko Te Uira

Transcription

1 23 Octber 2018 Miriam R Dean CNZM QC Chair Expert Advisry Panel Electricity Price Review Wellingtn By energymarkets@mbie.gvt.nz Dear Miriam, Electricity Price Review: Hikhik Te Uira We welcme the pprtunity t submit n the Electricity Price Review s First Reprt dated 30 August We als appreciate the recent pprtunities t engage directly with the Review Panel and secretariat. The Review Panel is examining New Zealand s electricity sectr at a critical time. The Gvernment has cmmitted t ambitius 2050 climate change gals. The pathway t 2050 will invlve the electrificatin f transprt and industry, and a ptential dubling f electricity demand. At the same time, issues f energy affrdability and hardship are a pressing pririty fr the Gvernment, and the sectr. The Minister recrds in the First Reprt that nearly a third f all husehlds struggle t pay their pwer bills r spend a large part f their incme n pwer. This is cnfrnting and must change. Cmpetitin and regulatin must perate t imprve the lives f the mre vulnerable New Zealanders. The Gvernment pririties f a pathway t ur climate change gals, and addressing energy affrdability and hardship, are tightly linked and need t be cnsidered tgether. The pathway t 2050 requires significant changes in the sectr and the ecnmy at large, and establishing and maintaining a public cnsensus will be critical. As the First Reprt has highlighted, t maintain that cnsensus we need t ensure the sectr is wrking fr all New Zealanders. Electricity prices must be efficient, fair and affrdable t maintain plitical cnsensus n the pathway t 2050, and t ensure the transitin is just and supprts New Zealanders in greatest need. In this cntext, the electricity sectr will need t meet several imprtant challenges, including significant investment in new renewable generatin and assciated transmissin cnnectins, new transmissin investment, changes t the rles f distributin netwrks (t enable new technlgies and mre cmplex trading relatinships), and the increased imprtance f system reliability and security f supply. There is a gd degree f cnvergence n what needs t be dne, including the mdelling presented in the Prductivity Cmmissin s reprt n the transitin t a lw-emissins

2 ecnmy and Transpwer s recently published Te Mauri Hik Energy Futures analysis. Bth reprts envisage a ptential dubling f electricity demand by In this submissin, we: Prvide ur view n the high-level pririties fr achieving the Gvernment s 2050 climate change gals; and Outline where, in ur view, the Electricity Price Review can help t take the sectr frward, in particular: develping a gvernment plicy statement n electricity sectr regulatin; addressing energy affrdability and ensuring a just transitin; ensuring sufficient investment in new renewable generatin capacity; cnslidating ecnmic regulatin with the Cmmerce Cmmissin t imprve alignment acrss regulatry cntrls; and identifying the capabilities that distributin netwrks will need n the pathway t Attachment 1 prvides ur respnses t the Panel s specific cnsultatin questins. Pririties fr achieving 2050 climate change bjectives The Gvernment s bjectives bth the pathway t the 2050 climate change gals and addressing energy affrdability and hardship necessarily infrm ur plicy and regulatry pririties. At a high level, thse pririties seem t Transpwer t be: Climate change plicy settings: certainty and cnsistency in climate change plicy and institutins will be imprtant fr anchring the transitin acrss the ecnmy. Transpwer supprts the plitical fcus n lng run cnsensus and a pathway t lng term gals. Investment and pricing: meeting the 2050 bjectives will require significant investment in generatin, transmissin, and new technlgy in distributin. There is a lt t d. Regulatry settings will need t supprt the investment implied by the pathway t Changes we can see being required are discussed further belw. These include: charging regulatrs with ensuring all f their decisins are cnsistent with the pathway t the 2050 bjectives; mving all ecnmic regulatin f netwrks t the Cmmerce Cmmissin t ensure alignment f the varius regulatry cntrls; simplifying netwrk pricing, bth transmissin and distributin; and shifting the fcus when testing transmissin and generatin investment frm incremental t a mre system view f where the pipeline f renewable generatin investments will be lcated. Delivery f investment: the pathway t 2050 implies regular, significant infrastructure prjects, particularly in generatin and transmissin. There is a need t assess whether this scale f infrastructure can be delivered n time, having regard t Resurce Management Act 1 Te Mauri Hik reprted a dubling f electricity demand, the Prductivity Cmmissin reprted mre than 1.5 times.

3 (RMA) apprvals, land access issues, capacity and skills in the cnstructin sectr, and s n. If sufficient new renewable generatin cannt be cnsented and built in a timely manner this will put New Zealand s energy future at risk. Enabling sectr participants: in additin t ding a lt mre investment, the electricity sectr will have t adapt t changing rles. The mass rll ut f new technlgies, such as electric vehicles, batteries and slar, will change the rle that cnsumers play and the use they make f the distributin netwrks: generating, string and selling energy as well as cnsuming it. There will be knck n effects acrss the pwer system. Mass adptin f these technlgies is nt far away. Befre that happens, we need t clarify what will be required frm distributrs by way f technlgy, investment, pricing, services and peratin, and hw that will be dne natinally. A sectr-wide crdinated apprach is needed. Enabling innvatin: A framewrk will als be needed t facilitate the access t cnsumptin data that will stimulate new services and new prviders in the market, and enable the transmissin System Operatr and distributin businesses t perfrm their rles. We will als need t have minimum market and safety standards and assurance fr the new activities being undertaken by cnsumers, while cntinuing t manage system and cybersecurity risks and enhanced privacy expectatins fr participants. Market settings: regulatry and market settings must facilitate the develpment f platfrms and services that enable new technlgy and enhanced cnsumer participatin in the pwer system. The framewrk fr netwrk peratrs must evlve t prvide visibility and enable them t manage increasingly cmplex and multi-directinal pwer flws acrss the supply chain frm generatin t cnsumptin and vice versa. Other industries: there are clear implicatins fr transprt, manufacturing and husing in particular. We d nt have the sectr expertise t identify the pririties in these sectrs. We simply nte, as did the Prductivity Cmmissin in its reprt, that the pathway t the 2050 bjectives is an integrated package, and prgress in ne sectr is dependent n prgress in ther sectrs. Public cnsensus: as the Electricity Price Review has highlighted, we need t be aware f hw these changes will impact n peple. Climate change plicy implies a much higher carbn price. Increased investment in generatin, transmissin and distributin will be reflected int prices. Plicies will be needed t address fairness cncerns in a way that supprts the transitin t the 2050 climate change bjectives. The Review Panel expresses sme ptimism that falling csts f new technlgy will dampen any price effects, and while that wuld be welcme it is nt knwn r guaranteed. Regulatry changes shuld be tested fr their expected impact n vulnerable grups f New Zealanders. Where this impact is difficult t assess, incremental change shuld be preferred. Our view is that fairness cncerns are likely t be best addressed thrugh scial transfers t avid market distrtins and unexpected cnsequences.

4 Electricity Price Review can take the sectr frward The Electricity Price Review is cnsidering several f the pririties described abve. In this sectin, we utline sme key areas where, in ur view, the Electricity Price Review can help the sectr t mve frward. Develping a gvernment plicy statement n electricity sectr regulatin The Electricity Price Review raised the rle f a gvernment plicy statement (GPS) in clarifying the next stage f the transmissin pricing methdlgy (TPM) review. 2 We agree that a GPS culd be useful in reslving the current impasse that exists between plicy makers, sectr regulatrs and industry participants. A GPS culd als have ptential wider benefits in prviding verall cherence fr all sectr participants, including regulatrs. We have given sme thught t hw a GPS culd be develped. Appendix 1 cntains ur draft thinking n the structure / scpe f a GPS n electricity sectr regulatin, and is intended as a starting pint fr further discussin. The draft GPS addresses the lng-term visin fr the sectr, the areas f lng-term pririty fr the gvernment cnsistent with that visin, and specific pririties relevant t the near term. This structure is intended t help alignment in the sectr, establish priritisatin f prjects and regulatry effrts, and a cmmn understanding f desirable utcmes. It is pssible that a GPS wuld benefit frm sme primary legislative fcus that culd direct regulatrs rather than guide, as has been the case with previus electricity sectr reviews, and pricing and access issues in the telecmmunicatins sectr. Energy affrdability and ensuring a just transitin The Review has highlighted the scale f energy hardship in New Zealand. We agree that sectr participants, regulatrs and the Gvernment must wrk tgether t imprve the relative psitin f thse New Zealanders in greatest need. There is n silver bullet, but in ur view t the general apprach culd be: ensuring material regulatry changes are tested fr their expected impact n vulnerable grups f New Zealanders and vulnerable regins; where this is difficult t assess, incremental change shuld be preferred; identifying where welfare plicies, rather than changes t therwise efficient market regulatin, can be used t supprt thse at risk f energy hardship (as transfers are less distrtinary); and cntinue t drive fr energy efficiency fr vulnerable cnsumers as these cnsumers use twice as much electricity t get prer results because f damp, leaky hmes with little insulatin and inefficient appliances. 2 First Reprt, p 50.

5 Ensuring sufficient investment in new renewable generatin capacity The Review Panel rightly identifies as a key challenge the need t build a lt f new generatin. It suggests that, prvided strng incentives t invest in generatin are maintained, current market and industry arrangements can meet the prjected level f demand. 3 We are less cnfident that existing arrangements will be sufficient t meet future demand fr new generatin. Our Te Mauri Hik mdelling suggests that, in rder t meet prjected future demand, ver 60TWh f new generatin will be needed by This will require a significant uplift in the rate f new generatin investment. There are sme imprtant barriers t investment that will need t be addressed. Amendments t the RMA framewrk will be needed t facilitate investment in new generatin assets. In ur view change is als required t the investment framewrk t allw practive transmissin netwrk investment where apprpriate, including t vercme first mver disadvantage and pen up new areas t generatin investment. In this future f dubling electricity demand, and the sectr wrking hard t deliver the flw f renewable generatin prjects needed, security f supply will als be a majr challenge. If we are t achieve renewable-nly generatin, Transpwer s Te Mauri Hik mdelling indicates a 12 TWh shrtfall in a dry year by 2050, fr which there is currently n slutin. At a minimum this makes it even mre imprtant t be cnfident that regulatry settings facilitate sufficient investment in new renewable generatin. And it is a reminder that the pathway t 2050 must be advanced in a way that maintains public supprt fr the chices being made and anticipates and addresses impacts n vulnerable New Zealanders. Cnslidating ecnmic regulatin with the Cmmerce Cmmissin We see merit in a ratinalisatin f regulatry functins between the Cmmerce Cmmissin and Electricity Authrity specifically the Cmmerce Cmmissin taking respnsibility fr ecnmic regulatin f netwrks (including ttal revenue and pricing), and the Electricity Authrity remaining respnsible fr market making regulatin. At present, the regulatry framewrk fr the sectr, and the respective rles f the regulatrs, is unclear and cnfusing t investrs and cnsumers. In ur view, while reallcatin wuld create a new regulatry bundary between transmissin pricing and whlesale market arrangements, it wuld prvide a clearer delineatin f rles than the status qu. It wuld als clear up the areas f ambiguity identified by the Review Panel. The regulatr charged with ecnmic regulatin f netwrks (the Cmmerce Cmmissin) wuld address issues f access t distributin netwrks, and the scpe f the regulated service. There are c-rdinatin and cherence benefits in having ne institutin respnsible fr ecnmic regulatin f netwrks. Having multiple regulatrs inevitably invlves at a minimum additinal csts and delays as the varius institutins and prcesses need t be c-rdinated. Mre seriusly, it can result in mixed r cnfused signals t investrs and cnsumers when the institutins, as they will d, frm different views. We have seen this play ut in the Electricity Price Review, where tw regulatrs have prvided cmpeting submissins t the Review Panel n matters f netwrk 3 First Reprt, p 34.

6 regulatin. This sends a very pr signal abut the level f regulatry cherence and stability in New Zealand. The Cmmerce Cmmissin is New Zealand s primary ecnmic regulatr f netwrks. It has the lead rle in regulating netwrks in the electricity, gas, airprt and telecmmunicatins sectrs. In that rle it invests in understanding the ecnmics f the netwrk in each sectr, the interests f cnsumers and investrs, and the cmmercial and plicy challenges facing the netwrk n bth a static shrt-term and dynamic lng-term view. It has the expertise and experience t manage netwrk pricing in the electricity sectr. Reallcatin wuld then allw the Electricity Authrity t fcus n its imprtant rle in market facilitatin, including pririty areas identified by the Review Panel such as hedge markets and retail cmpetitin. Distributin netwrk capabilities t supprt pathway t 2050 The pathway t 2050 will require distributin businesses t deliver mre by way f new technlgy, investment, services and peratins, which will create new demands n gvernance, expertise and balance sheets. The Review Panel has started an imprtant cnversatin arund the future capabilities f distributrs. Distributrs prbably face the greatest changes t their rle, and necessary capabilities, in the pwer system. This cnversatin will need t cntinue we suggest the Cmmerce Cmmissin culd be charged with cnsulting n the future state f the distributin business mdel, and mnitring prgress in the sectr. Cnclusin Thank yu again fr yur wrk in preparing the Panel s first reprt. We wuld be happy t prvide further infrmatin r discuss any f these matters with yu. Yurs sincerely, Alisn Andrew Chief Executive

7 ATTACHMENT 1 SUBMISSION FORM Part three: Cnsumers and prices Cnsumer interests 1 What are yur views n the assessment f cnsumers pririties? 2 What are yur views n whether cnsumers have an effective vice in the electricity sectr? 3 What are yur views n whether cnsumers trust the electricity sectr t lk after their interests? This is a fair assessment. Understanding the range f cnsumer perspectives will becme increasingly imprtant. It will be particularly imprtant t understand the impact f changes in the electricity sectr n mre vulnerable cnsumer grups. There have been recent imprvements in cnsumer engagement, but mre can be dne t ensure cnsumers have an effective vice in the electricity sectr. Transpwer recently established a Cnsumer Advisry Panel 4 t better understand the needs, issues and pprtunities fr New Zealanders as the cuntry cnsiders the implicatins f mving t a lw carbn ecnmy. The Cnsumer Advisry Panel will bring tgether a brad and diverse grup f peple wh represent all sectrs f sciety, including thse n lwer incmes. 5 A number f distributin businesses have als recently develped cnsumer engagement strategies, cnsumer panels and mre rbust cnsumer cnsultatin prcesses. The Review Panel has highlighted the scale f energy hardship in New Zealand. We supprt effrts t prvide further assistance and supprt t vulnerable cnsumers and lw-incme husehlds, which may include as the Review Panel suggests extending Cnsumer NZ s advcacy and supprt rle. It is gd t see that levels f trust in New Zealand retailers cmpare favurably frm an internatinal perspective. But we agree the sectr cannt becme cmplacent. Relatinships between cnsumers, retailers, distributrs and generatrs will evlve quickly, and trust culd be easily erded. Imprving cnsumer engagement will help t maintain cnsumer trust in the electricity sectr thrugh this perid f change Panel members represent Cmmunity Netwrks Ateara, Rural Wmen NZ, Cnsumer NZ, Greypwer, Generatin Zer, iwi, Business NZ and Ecnmic Develpment NZ.

8 Prices 4 What are yur views n the assessment f the make-up f recent price changes? We agree with the assessment f the transmissin cmpnent f recent electricity price changes. We als agree with the analysis f transmissin charges in Appendix B f the Panel s reprt. In particular, it is imprtant t nte that Transpwer recvers transmissin charges frm distributrs based n their metered fftake frm the grid. Distributrs then determine the allcatin f transmissin csts amng their residential, cmmercial and industrial cnsumers. Figure 35 in the Panel s Reprt shws transmissin charges t residential cnsumers by regin, which reflect distributrs allcatin decisins. 6 The figure belw prvides a cmparative view f ttal transmissin csts by distributr. 5 What are yur views n the assessment f hw electricity prices cmpare internatinally? 6 What are yur views n the utlk fr electricity prices? The Review Panel ntes that New Zealand s verall electricity csts are belw the OECD average. It is imprtant that the sectr cntinues t deliver glbally cmpetitive prices in rder t supprt the Gvernment s bjectives arund bth affrdability and climate change. The Review Panel suggests that the increase in electricity demand will nt necessarily lead t majr price rises. We agree that New Zealand s abundant renewable resurces and the falling cst f new technlgies are likely t lwer generatin csts if new generatin can be develped (see Q14). But there is significant uncertainty in hw whlesale prices will respnd t lwer generatin csts. Prices will need t remain high enugh t encurage investment. If new supply is nt deplyed quickly enugh, electricity prices culd increase and becme mre vlatile. High prices culd slw electrificatin. Temprarily higher prices might als encurage husehlds and businesses t bypass transmissin and distributin netwrks, which culd lift netwrk prices (transmissin and distributin), 6 Fr clarity we nte: (i) ur analysis frm QSDEP data implies that natinally transmissin csts increased 110%, frm 1.80c/kWh t 3.79c/kWh between February 2008 and February 2018, yet Transpwer s HVAC revenue increased by 65% ver that perid, and (ii) the Electricity Authrity s nte t the Review Panel cited New Plymuth as having experienced an increase in grid charges f 166% ver the ten years frm 2007 t 2017, whereas transmissin charges t New Plymuth lad (c/kwh basis) increased by 57%.

9 creating the risk f a cycle whereby high prices cause bypass, which causes higher prices and s n. 7 The upsht is that the effect f increasing demand n electricity prices is nt knwn r guaranteed. Pricing plicies and signals will need t encurage renewable electricity supply grwth, and manage the effect f any price increases n cnsumer behaviur, including the impact n vulnerable cnsumers and lw-incme husehlds. Affrdability 7 What are yur views n the assessment f the size f the affrdability prblem? 8 What are yur views f the assessment f the causes f the affrdability prblem? 9 What are yur views f the assessment f the utlk fr the affrdability prblem? As nted abve, the issues f energy affrdability and hardship are a pressing pririty fr the Gvernment, and the sectr. We agree with the Panel s assessment f the size f the affrdability prblem. The scale f energy hardship in New Zealand is cnfrnting and must change. While we have nt had time t fully digest the findings f the Retailing Billing Analysis, released shrtly befre submissins were due, it appears t prvide cmpelling evidence abut the price disadvantages cnsumers in sciallydeprived grups face. This analysis will help the Electricity Price Review determine the size f the affrdability prblem and the apprpriate plicy respnse. Further t ur respnse t Q7, we nte that the Retail Billing Analysis the Review Panel has released als prvides further detail n the causes f the affrdability prblem. We agree that sectr participants, regulatrs and the Gvernment must wrk tgether t imprve energy affrdability in New Zealand. We als generally agree with the Review Panel s assessment f the utlk fr the affrdability prblem. As nted abve, while there is n silver bullet, in ur view a general apprach culd be: ensuring material regulatry changes are tested fr their expected impact n vulnerable grups f New Zealanders and vulnerable regins; where this is difficult t assess, incremental change shuld be preferred; identifying where welfare plicies, rather than changes t therwise efficient market regulatin, can be used t supprt thse at risk f energy hardship (as transfers are less distrtinary). We pick up n these general prpsitins belw, including in ur cmments relating t transmissin pricing and a pssible gvernment plicy statement. Summary f feedback n Part three 10 Energy affrdability is a key issue fr the sectr and we must d mre t supprt vulnerable cnsumer grups. We als need t supprt increased cnsumer engagement t ensure cnsumer vices are heard and t help maintain trust in the sectr. The effect f increasing demand n electricity prices is uncertain. Pricing plicies and signals will need t encurage renewable electricity supply grwth, and manage the effect f any price increases n cnsumer behaviur, including the impact n vulnerable cnsumers and lw-incme husehlds. 7 Refer Te Mauri Hik, pp

10 Slutins t issues and cncerns raised in Part three 11 We have suggested, as a general apprach t addressing energy affrdability: ensuring material regulatry changes are tested fr their expected impact n vulnerable grups f New Zealanders and vulnerable regins; where this is difficult t assess, incremental change shuld be preferred; identifying where welfare plicies, rather than changes t therwise efficient market regulatin, can be used t supprt thse at risk f energy hardship (as transfers are less distrtinary). We supprt effrts t prvide further assistance and supprt t vulnerable cnsumers and lw-incme husehlds, which may include as the Panel suggests extending Cnsumer NZ s advcacy and supprt rle. Part Fur: Industry Generatin 12 What are yur views n the assessment f generatin sectr perfrmance? 13 What are yur views f the assessment f barriers t cmpetitin in the generatin sectr? 14 What are yur views n whether current arrangements will ensure sufficient new generatin t meet demand? N specific cmment. The Review Panel s assessment arguably understates the barriers t generatin cmpetitin. While the situatin is imprving, the generatin market remains highly cncentrated. The Panel ntes that the five biggest generatrs cntinue t accunt fr arund 90 per cent f electricity prductin capacity. A 2009 Cmmerce Cmmissin investigatin cncluded the fur main generatrs (Cntact, Genesis, Mercury, and Meridian) had substantial market pwer. 8 While the 2010 refrms (virtual and physical asset swaps) have imprved cmpetitin, the market share f the fur main generatrs has nt shifted materially. The Electricity Authrity als fund evidence f market pwer when it investigated the spt market trading cnduct f the large generatrs, and its independent Market Develpment Advisry Grup is cnsidering whether changes are required t the high standard f trading cnduct rules. 9 We discuss the depth f the cntract market in the Vertical Integratin sectin belw. The Review Panel rightly identifies as a key challenge the ptential need t build a lt f new generatin. It suggests that, prvided strng incentives t invest in generatin are maintained, current market and industry arrangements can meet the prjected level f demand. 10 As nted in ur cver letter, we are less cnfident that existing arrangements will be sufficient t meet future demand. Our mdelling suggests that, in rder t meet prjected future demand, ver 60TWh f 8 Hn Gerry Brwnlee, Minister f Energy and Resurces, Media Release, Reprt raises serius and legitimate cncerns, 22 May 2009, First Reprt, p 34.

11 new generatin will be needed by This will require a significant uplift in the rate f new generatin investment. There are sme imprtant barriers t investment that will need t be addressed. Amendments t the RMA framewrk will be needed t facilitate investment in new generatin assets and assciated transmissin cnnectins. In particular, we supprt the Prductivity Cmmissin s recmmendatins t priritise: revising bth the Natinal Plicy Statement n Renewable Electricity Generatin (NPSREG) and the Natinal Plicy Statement n Electricity Transmissin (NPSET), t ensure that lcal authrities give sufficient weight t the rle that renewable generatin, assciated transmissin cnnectins and netwrk upgrades will play in the transitin t a lw-emissins ecnmy; and develping a new Natinal Envirnmental Standard fr Renewable Electricity Generatin t increase the speed, and lwer the cst and uncertainty fr btaining and renewing resurce cnsents. Other changes that culd be cnsidered include adding climate change as a cnsideratin under s 6 f the RMA (which culd be dne as a part f the Zer Carbn Bill). Changes are als required t the Natinal Envirnmental Standards fr Electricity Transmissin Activities (NESETA) t enable mre efficient and effective cnsenting f maintenance and upgrade wrk n existing transmissin assets. There is ptential t use a streamlined natinal directin prcess under sectin 46A f the RMA t issue verarching Energy Natinal Directin that achieves all f the fllwing: strengthens the NPSREG t allw a mre balanced debate at the cnsenting stage; strengthens the NPSET and NESETA; and prvides a new NES fr Renewable Energy fr bth large-scale and smaller scale generatin. In ur view there shuld als be a fcus n ensuring the investment framewrk allws practive transmissin netwrk investment where apprpriate. This wuld include vercming the first mver disadvantage under the current pricing methdlgy whereby the initial cnnectin custmer pays fr the full cst f a transmissin extensin, even where there is a wider benefit in pening up a new area t further generatin investment. In this future f dubling electricity demand, and the sectr wrking hard t deliver the flw f renewable generatin prjects needed, security f supply will als be a majr challenge. If we are t achieve renewable-nly generatin, Transpwer s Te Mauri Hik mdelling indicates a 12 TWh shrtfall in a dry year by 2050, fr which there is currently n definitely viable and affrdable slutin. At a minimum this makes it even mre imprtant t be cnfident that regulatry settings facilitate sufficient investment in new renewable generatin. Finally, we believe the current energy-nly market prvides a strng fundatin fr the future. Hwever, we als questin whether ther cmplementary and evlutinary market mechanisms designed t prvide timely investment signals and efficient management f energy

12 resurces may be needed t deliver a lw-emissins future fr New Zealand. We cnsider the industry shuld enter int a discussin n the evlutin f energy market design t ensure it will be fit fr purpse t manage a just transitin t a highly renewable, very lw-emissins and affrdable system. Retailing 15 What are yur views n the assessment f retail sectr perfrmance? 16 What are yur views n the assessment f barriers t cmpetitin in retailing? This is a fair assessment. As nted abve in Q7 and Q8, the Retailing Billing Analysis appears t prvide cmpelling evidence n the price disadvantages that vulnerable cnsumers are facing. It reinfrces the need fr the sectr t fcus n fairness and addressing energy hardship. We agree with the Review Panel s assessment. The retail market remains highly cncentrated and we have nt seen the rate f change bserved in ther sectrs where cmpetitin has been intrduced, such as bradcasting and telecmmunicatins. In additin t the barriers identified in the Review Panel s reprt, new technlgy will be increasingly imprtant t the way cmpetitin develps. Data and infrmatin will becme critical enabler fr new technlgy. We need t ensure that access t data des nt becme an impediment t cmpetitin r cnsumer chice. This will require that cnsumers retain cntrl ver their wn data. Vertical integratin 17 What are yur views n the assessment f vertical integratin and the cntract market? 18 What are yur views n the assessment f generatrs and retailers prfits? We agree with the Review Panel s assessment, including the imprtance f a well-functining and liquid cntract market t the successful peratin f cmpetitin in the dwnstream retail market. Third parties shuld be able t negtiate fr cmpetitively priced hedges n equal terms t parties in cmmn wnership (pen access). Vluntary ASX market making has enabled a material imprvement in the ability fr entrants (retail and generatin) t manage risk. But true liquidity (and therefre cmpetitin) requires traded vlumes t increase by many multiples. We agree that imprving the depth and resilience f the cntract market is a high pririty and supprt the Review Panel in cnsidering hw this can be achieved. N specific cmment. Transmissin 19 What are yur views n the prcess, timing and fairness aspects f the transmissin pricing methdlgy? We agree that the TPM prcess has been slw and cstly. We als agree with the Review Panel that a gvernment plicy statement (GPS) culd be useful in clarifying the next stage f the TPM review. A GPS culd als have ptential wider benefits in prviding verall cherence fr all sectr participants, including regulatrs. As nted abve, we have given sme thught t hw a gvernment plicy statement culd be develped see Appendix 1. The draft GPS addresses the lng-term visin fr the sectr, the areas f lng-term

13 pririty fr the gvernment cnsistent with that visin, and specific pririties relevant t the near term. In relatin t the TPM, the draft GPS sets ut expectatins n: the pririties and principles that shuld guide netwrk pricing; and timely cmpletin f the TPM refrm prcess. It suggests that the TPM shuld: Be simple, understandable and implementable: it is imprtant that the TPM can be understd by a wide range f sectr participants and can be implemented and perated with limited discretin; Include a peak usage price: A peak usage price prmtes greater utilizatin f existing assets by flattening demand and deterring peak demand grwth. The TPM already includes peak-usage charges, which in ur view d require sme finetuning. We are particularly mindful f the need t ensure the TPM fits with the refrms electricity distributrs are thinking abut making t their pricing, including the ptential shift t peak-usage pricing. Intrduce change incrementally: any majr change t the TPM will bring with it unintended and likely unfreseen cnsequences, the csts f which culd exceed the expected benefits. Cnversely, significant imprvements can be made t the current TPM thrugh incremental change. The 2014/15 TPM Operatinal Review highlights that changes d nt need t be majr t deliver significant psitive benefits, including lwer prices, fr cnsumers. 11 Scientia estimated that the change t the allcatr fr the HVDC charge has resulted in reductin in annual lad purchase csts at spt prices f $87m, as well as ther benefits, such as reductin in spt price vlatility (7% and 9% in the NI and SI respectively). The Electricity Authrity cnservatively put the benefits in the tens f millins, n an annualised basis. 12 Incremental change als allws fr impacts n mre vulnerable areas r grups f cnsumers t be adequately addressed ver time. Intrduce any change in a way that avids price shcks, and is sensitive t the ptential impact n vulnerable regins r grups f cnsumers Be aimed at securing wide-spread acceptance fr any change: including by reference t a clear and cmplete cst-benefit analysis. Wide-spread stakehlder acceptance is essential fr the changed TPM t be durable. Be fcused n the future: the TPM must reflect the pathway fr generatin and netwrk investment implied by New Zealand s climate change bjectives. 11 Scientia, Market impact assessment frm changes t HVDC cst allcatin, May

14 It is pssible that a GPS wuld benefit frm sme primary legislative fcus that culd direct regulatrs rather than guide, as has been the case with pricing and access issues in the telecmmunicatins sectr. We nte that sectin 42 f the Electricity Industry Act was updated fllwing the last electricity industry review t include pririties fr the Electricity Authrity s wrk prgramme. Finally, in relatin t the prpsal t defer TPM refrm, ur view is that we d need sme relatively technical adjustments t, in particular, cnnectin charges, and the sner we get n and d them the better. These changes will make a significant difference t the cst f wind generatin prjects in particular. Technical changes f this nature d nt require TPM Guideline changes but d need EA apprval. In ur view, these technical changes shuld be prgressed as sn as pssible. Distributin 20 What are yur views n the assessment f distributrs prfits? 21 What are yur views n the assessment f barriers t greater efficiency fr distributrs? 22 What are yur views n the assessment f the allcatin f distributin csts? 23 What are yur views n the assessment f challenges facing electricity distributin? N specific cmment. We agree with the assessment. Our detailed thughts are set ut belw in respnse t Q23. N specific cmment. The Review Panel has identified the challenges facing the distributin sectr, and the barriers t achieving greater efficiency. We agree that it is imprtant t fcus n the capabilities distributrs will need t adapt and take advantage f new technlgies. Sme f the key challenges, and ptential slutins, as we see them are: Regulatry versight All distributrs will need t respnd t majr changes in the industry. In ur view, the time has cme t cnsider subjecting all distributrs t price/quality regulatin t ensure all cnsumers benefit frm advances in new technlgy. Gvernance and scale The Review Panel ntes that many f New Zealand s distributin businesses are small rganisatins, and sme may be challenged by the specialist skills and financial requirements fr change. We agree that scale is a challenge. Slutins are emerging thrugh partnerships with technlgy prviders, and sme f the larger distributrs may find ways t prvide the technical and financial resurces required by smaller distributrs. Distributrs will need bards and management teams skilled t lead in an envirnment f technlgy change, increased investment risk, changing service fferings, and changing cnsumer demands. Distributrs will als need strnger balance sheets capable f supprting significant and mre risky capital investment prgrammes.

15 Pricing We agree that distributin pricing shuld mre accurately reflect csts. This will becme increasingly imprtant as the ecnmics f new technlgies imprve, including electric vehicles, slar PV and batteries. The Review Panel ntes the ptential fr EVs, under current price structures, t magnify demand in evening peak hurs and ptentially require significant additinal netwrk investment. There are als equity cncerns, with higher-incme husehlds able t reduce their distributin charges (e.g., thrugh slar PV) withut reducing the cst f their cnnectin t the distributr ptentially leaving lwerincme cnsumers t pick up the bill. As nted abve, we wuld als like t see a mre cnsistent apprach t netwrk pricing, bth acrss distributin and transmissin, and acrss netwrk industries. Any pricing changes in distributin netwrk usage will have direct flw n effects fr transmissin netwrk usage and peaks. But there are challenges and uncertainties that may impact n pricing refrm at the distributin level: Ptential price shcks and harmful impacts n cnsumers, including residential cnsumers, wh may cnsume high amunts f electricity during system peaks. 13 Uncertainty arund the TPM and whether it will cntinue t include peak-usage charges as transmissin charges are a cst input int distributin charges. 14 Uncertainty arund the utcme f the Electricity Authrity s review f distributin pricing principles. 15 The Electricity (Lw Fixed Charge Tariff Optin fr Dmestic Cnsumers) Regulatins 2004, which we understand frm bth distributrs and retailers are an impediment t the intrductin f mre innvative pricing arrangements. As nted abve in Q9, it will be imprtant t assess the impact f majr regulatry changes including t distributin pricing n mre vulnerable areas and cnsumer grups. Asset management and technical capability All distributrs will require asset management capability t rbustly plan fr significantly lnger time frames than current 10-year plans, in a much mre cmplex perating envirnment. This will require access t deep technical expertise. Plans will als need t be aligned acrss the system (we discuss the need fr mre active management f distributin netwrks belw). Pwer systems and service delivery We will need rbust and serviceable systems t enable distributed electricity resurces (DER) that can cnnect acrss New Zealand. In ur view, 13 ENA, DPWG update n pricing ptins analysis, September We have discussed the interrelatinship between distributin and pricing, and the need fr a jined up and cnsistent apprach, in varius fra including in submissin t ENA n distributin pricing. ( and t the Cmmerce Cmmissin n Auckland Airprt s pricing ( data/assets/pdf_file/0022/89032/transpwer-submissin-n-draft-reprt-fr-review-f- Auckland-Internatinal-Airprts-pricing-decisins-and-expected-perfrmance-July-2017-June May-2018.pdf). 15 Letter frm Graeme Peters (CEO, ENA) t Andrula Dmetakis (Acting CEO, Electricity Authrity), RE: Update n status f distributin pricing wrk streams., 16 July 2018, sectin 7.

16 distributin netwrks will need t perate as platfrm prviders and have DER enabled n their netwrk and accessible t New Zealanders. Critical services will need t be rbustly and transparently prcured. There will als need t be agreed standards fr criticality with transmissin. Data and IT Usage and generatin data will be critical t managing the netwrk. Distributrs will need t be able t prvide access t real-time data as a part f their system management, fault preventin and detectin. They will als need rbust cybersecurity practices. We agree with the Panel n the need fr mre active management f distributin netwrks. We have supprted the develpment f distributin system peratr (DSO) functins, independent f distributin netwrk wnership. 16 DSO functins will be imprtant t ensure cmpetitive access t netwrk infrastructure, crdinate mre cmplex energy flws, meet preferences fr security, quality and reliability, and ensure rewards and csts fr lad and generatin are allcated efficiently and fr the lng-term benefit f cnsumers. This cnversatin will need t cntinue we suggest the Cmmerce Cmmissin culd be charged with cnsulting n the future state f the distributin business mdel, and mnitring prgress in the sectr. Summary f feedback n Part fur 24 Ensuring sufficient investment in new generatin assets is a key challenge. There are sme imprtant barriers t investment that will need t be addressed. RMA refrms will be needed t remve barriers in the cnsenting prcess. Fcus is als required t allw practive investment in transmissin where apprpriate, including t vercme first-mver disadvantage and pen up new areas t generatin investment. We als need t cnsider evlutin f the current energymarket design t ensure it will be fit fr purpse t manage a just transitin t a highly renewable, very lw-emissins and affrdable system. The retail market remains highly cncentrated. We agree with the Panel s assessment f barriers t retail cmpetitin. We als agree with the Panel n the imprtance f imprving the depth and resilience f the cntract market t facilitate cmpetitin in retailing. In additin, access t data and infrmatin will becme a critical enabler fr retail cmpetitin. In relatin t transmissin pricing, we agree that a GPS culd help t clarify the next stage f the TPM review and imprve verall cherence in the sectr (discussed further in the next sectin). We need t have a clear understanding f the capabilities distributrs will need in ur future electricity system. We agree with the Panel s assessment and in Q23 abve ffer ur perspective n the key challenges and ptential slutins in the distributin sectr. Slutins t issues and cncerns raised in Part fur 25 We have develped a draft GPS at Appendix 1 as a starting pint fr further discussin. In relatin t the TPM, a GPS culd set expectatins n the pririties and principles that shuld guide netwrk pricing, and the timely cmpletin f the TPM review (see Q19 abve). The Review Panel shuld als cnsider whether a GPS wuld benefit frm sme primary legislative fcus that culd direct regulatrs rather than guide, as has been the case with previus electricity sectr reviews, and pricing and access issues in the telecmmunicatins sectr. 16 Refer Transpwer s submissin n the Prductivity Cmmissin s Lw-emissins ecnmy draft reprt, p 9.

17 Amendments t the RMA framewrk will be needed t facilitate investment in new generatin assets, including amendments t the NPSREG, NPSET and NESET, as well as develpment f a new NES fr renewable electricity generatin (refer Q14 abve). Changes will als be required t ensure the investment framewrk allws practive transmissin netwrk investment where apprpriate. The cnversatin n distributr capabilities will need t cntinue. We suggest the Cmmerce Cmmissin culd be charged with cnsulting n the future state f the distributin business mdel, and mnitring prgress in the sectr.

18 Part five: Technlgy and regulatin Technlgy 26 What are yur views n the assessment f the impact f technlgy n cnsumers and the electricity industry? We agree with the Panel s assessment f the impact f technlgy n cnsumers and the industry mre bradly. As ur Te Mauri Hik utlines we expect significant disruptin with EVs, electrificatin f prcess heat and distributed slar and batteries. T take advantage f new technlgies, we will need t ensure that: we have the technical standards and assurance in place t facilitate mass participatin; participants have access t the data and infrmatin they need t mre actively engage in the electricity system; and distributrs have the necessary capabilities t enable mre cmplex relatinships and flws thrugh their netwrks. 27 What are yu views n the assessment f the impact f technlgy n pricing mechanisms and the fairness f prices? 28 What are yur views n hw emerging technlgy will affect security f supply, resilience and prices? Our cmments n the impact f new technlgy n pricing are canvassed abve in Q23 (regarding distributin). Te Mauri Hik sets ut ur current thinking n hw emerging technlgy will affect the electricity system, including security f supply, resilience and prices. See als ur respnse t Q23 abve. Innvatin and technlgy can be an enabler and cmplement t the grid. Hwever, this will require a new paradigm arund data sharing and a fcus n standards. Regulatin 29 What are yur views n the assessment f the place f envirnmental sustainability and fairness in the regulatry system? Overall, we agree with the Panel s assessment f the place f envirnmental sustainability and fairness in the regulatry system. We agree with the Prductivity Cmmissin s recmmendatin against establishing specific emissins reductins bjectives in the electricity sectr, and in favur f an ecnmy-wide apprach. We als agree with the Cmmerce Cmmissin that cautin is required in cnsidering changes t a regulatr s purpse statement. 17 But it will be imprtant t ensure that the decisins f ne regulatr d nt run cunter t the bjectives f anther agency, including the Climate Change Cmmissin. The draft GPS at Appendix 1 wuld require electricity sectr regulatrs t have regard t the Gvernment s lng-term visin and pririties fr the sectr, which are driven by the 2050 climate change gals. This culd help t establish verall cherence fr all sectr participants, including regulatrs. 17 Cmmerce Cmmissin, memrandum, Respnse t May 2018 questins frm Expert Advisry Panel, 8 June 2018, paragraph 58.

19 30 What are yur views n the assessment f lw fixed charge tariff regulatins? 31 What are yur views n the assessment f gaps r verlaps between the regulatrs? The draft GPS als incrprates the Gvernment s bjectives arund ensuring a just transitin, and imprving the psitin f New Zealanders in greatest need. As the Panel ntes, the regulatry framewrk already implicitly incrprates aspects f fairness (e.g., limiting the ability f regulated businesses t make excessive prfits, sharing efficiency gains with cnsumers, cnsidering the durability f regulatin etc). But tackling energy hardship is clearly an issue the industry needs t fcus n. We discuss abve ur views n a general apprach t imprving energy affrdability (see Q9), which aligns with the Panel s assessment n: taking a jined-up apprach t regulatin; bsting cmpetitin and extending its benefits t vulnerable cnsumers; and t the extent prblems remain, using targeted measures t supprt thse in need. The cnsensus view appears t be that the lw fixed charge tariff regulatins have nt wrked as intended, and are generally inefficient and ineffective. The lw fixed charge tariff is an example f what can g wrng in using a market-based respnse t address an issue mre apprpriately dealt with thrugh welfare payments. As nted abve, we supprt targeted welfare plicies, like the winter energy payments, t supprt thse at risk f energy hardship. Overall, we agree with the Review Panel s assessment f the regulatins. As nted in the cver letter, we see merit in a ratinalisatin f regulatry functins, with the Cmmerce Cmmissin taking respnsibility fr ecnmic regulatin f netwrks (including ttal revenue and pricing), and the Electricity Authrity remaining respnsible fr market making regulatin. At present, the regulatry framewrk fr the sectr, and the respective rles f the regulatrs, is unclear and cnfusing t investrs and cnsumers. In additin t access t distributin netwrks, bundary issues have arisen n several ccasins, including in respect f: verlapping interests in emerging technlgies; 18 the effect f a revenue cap n distributrs incentives t adpt efficient distributin pricing structures; 19 the implicatins f netwrk pricing n the ability f regulated businesses t perate efficiently under incentive mechanisms established by the Cmmerce Cmmissin; 18 Refer Letter frm the Electricity Authrity (Carl Hansen) t the Cmmerce Cmmissin (Sue Begg), Implicatins f regulatry treatment f cash flws fr emerging technlgy, 1 June Refer Letter frm the Electricity Authrity (Carl Hansen, CEO) t the Cmmerce Cmmissin (Sue Begg, Deputy Chair), Pssible implicatins fr efficient distributin pricing f a decisin t change the frm f cntrl fr electricity distributin businesses, 30 May 2016.

20 the ability f regulated businesses t recver csts under Part 4 f the Cmmerce Act fr wrk they are directed t undertake by the Electricity Authrity (Transpwer was recently directed by the EA t evaluate whether distributed generatin was needed t satisfy the Grid Reliability Standards, withut prvisin fr funding under Part 4); prmting incentives fr distributin businesses t imprve efficiency; and 32 What are yur views n the assessment f whether the regulatry framewrk and regulatrs wrkplans enable new technlgies and business mdels t emerge? the treatment f lss and cnstraint excess. 20 In ur view, while reallcatin wuld create a new regulatry bundary between transmissin pricing and whlesale market arrangements, it wuld prvide a clearer delineatin f rles than the status qu. It wuld als clear up the areas f ambiguity identified by the Review Panel. The regulatr charged with ecnmic regulatin f netwrks (the Cmmerce Cmmissin) wuld address issues f access t distributin netwrks, and the scpe f the regulated service. There are c-rdinatin and cherence benefits in having ne institutin respnsible fr ecnmic regulatin f netwrks. Having multiple regulatrs inevitably invlves at a minimum additinal csts and delays as the varius institutins and prcesses need t be c-rdinated. Mre seriusly, it can result in mixed r cnfused signals t investrs and cnsumers when the institutins, as they will d, frm different views. We have seen this play ut in the Review, where tw regulatrs have prvided cmpeting submissins t the Review Panel n matters f netwrk regulatin. This sends a very pr signal abut the level f regulatry cherence and stability in New Zealand. The Cmmerce Cmmissin is New Zealand s primary ecnmic regulatr f netwrks. It has the lead rle in regulating netwrks in the electricity, gas, airprt and telecmmunicatins sectrs. In that rle it invests in understanding the ecnmics f the netwrk in each sectr, the interests f cnsumers and investrs, and the cmmercial and plicy challenges facing the netwrk n bth a static shrt-term and dynamic lng-term view. It has the expertise and experience t manage netwrk pricing in the electricity sectr. Reallcatin wuld then allw the Electricity Authrity t fcus n its rle in market facilitatin, including pririty areas identified by the Review Panel such as hedge markets and retail cmpetitin. We agree that the regulatry framewrk and regulatrs wrkplans will need t evlve t enable new technlgies and business mdels. A GPS culd help t align regulatry pririties arund these future challenges. The draft GPS at Appendix 1 includes specific pririties arund enabling innvatin and the adptin f new technlgy 20 Accrding t the Electricity Authrity bth the Cmmerce Cmmissin and Authrity have jurisdictin ver the treatment f LCE. This is smething that culd be reslved in a simple manner with minr adjustment t Part 4.