New Zealand may modify electricity market, says government

The New Zealand government said in March that it is considering making major changes to its electricity market, because a lack of rain and faltering investment in new generation projects is causing fears of power shortages to grow.

The country’s prime minister, Helen Clark, told reporters at a press conference in Wellington that the government was contemplating changes that could be significant for the structure of the market.

She gave no details of how the market might be changed, but said: “There is a need for more generation, but the [market] model is part of the problem in getting more generation.”

The government has set up a working group under finance minister Michael Cullen to look at how the market infrastructure could be changed.

Analysts have long criticised the structure of the New Zealand electricity sector for preventing the efficient transfer of high prices in the wholesale market to the retail market – a problem similar to the one that caused the power crisis in California in 2000–2001. Many wholesale power firms, which benefit from higher prices, are also active in the retail market and can afford not to pass on price signals.

Hydro dependence
New Zealand is largely dependent on hydroelectric power. The government says about 150 megawatts of extra generating capacity will need to be added each year to meet rising demand and ensure an adequate reserve capacity to protect against years when there is low rainfall.

The country faced its last serious power shortage in 2001, when a dry winter cut availability, caused spot prices to rise sharply and led the government to call for a voluntary 10% reduction in electricity use.

Prime minister Clark said: “We know from the 2001 experience that it is possible to manage through dry years, but for the long term it is not really satisfactory to have dry years throw New Zealand power security as much as they now appear to do.”