I am delighted to be addressing you as Energy Minister as I understand just how vital this portfolio – including your part in it – is to our New Zealand way of life.
Electricity is fundamental to our well being and necessary to our economic success. As trustees of distribution companies you are the stewards of this important sector.
For many decades the electricity industry was largely stable and secure with little change.
Supply followed forecast demand in a predictable manner, and planning for the future largely required simply adding new wires and poles as required.
Today all that is changing, largely due to new emerging technologies, ranging from solar PV and battery storage to intelligent IT systems that help manage networks more effectively.
Responding to change and uncertainty requires nimble and astute management.
The government has a role to provide appropriate governance and regulatory arrangements that give you the necessary flexibility to deliver the infrastructure and services needed for tomorrow’s energy users.
But we also expect you to step up and rise to the challenges the future brings.
In my recent trip to the United States, I saw some of the emerging disruptive technology, and the impact this is having on the energy sector.
The rate of technological change which is evolving at pace will have big implications for the electricity sector, especially distribution companies.
The combination of software with rapidly improving batteries and solar technology will see consumers better manage their own electricity utilisation, allow for alternative generation through community-based micro-grids, and allow consumers to potentially trade in energy – for example, selling to each other or back to the grid. Storage is seen as the new frontier.
Changes like these will have a significant impact on the utilization of trust-owned assets in the future, and this is something I am sure you are all thinking about now.
It is anticipated that many of the future innovations in energy supply and demand management may come from non-traditional market participants, such as software companies – with potential disruption and fundamental changes in the way generators, distributors, and retailers think about their business models.
For you, this increasing pace of change will challenge the traditional model of infrastructure planning and investment.
Trust ownership and governance
The model we have for trusts, and the electricity distribution sector more broadly, dates back to reforms initiated in the 1990s.
This model was introduced as an ownership vehicle, chosen by some communities in the early 1990s. It retained ownership of the local power network by the community, while also delivering the benefits of the stronger commercial focus that came with corporatisation (which was required under the Energy Companies Act 1992).
Overall, the model appears to have delivered value for consumers. However, it is valid to question whether these arrangements are still fit for purpose and whether consumers will continue to see value in the future.
My starting point is that your core business is electricity lines. You are there to ensure your communities receive efficient and reliable access to electricity infrastructure.
We’ve had some notable examples where distribution companies have invested in areas completely unrelated to the sector.
I am not privy to the economics of these specific investments and even if I was, that is not necessarily my concern as Energy Minister.
My point is that you should aim to stay focused on your core business in order to successfully adapt to technological change, meet the needs of consumers, and ensure that the value of your considerable assets is maintained.
The risks arising from disruption by rapidly changing technology are also very relevant to the consideration of future trust ownership and governance.
One question is whether the trust model is a constraint on getting the benefits of greater scale in distribution businesses. It is reasonable to assume the businesses with greater scale will be best placed to trial and test new smart technologies, and to attract the capital and skills necessary to succeed in an electricity system that is rapidly becoming more complex.
If you drop the ball and are unable to adapt to these challenges, and to meet the evolving needs of consumers, then the value of the community assets entrusted to you will erode.
There are a number of initiatives underway by a range of different parties, which may have some bearing on the future operations of trust owned companies.
For example, the Electricity Authority has work underway with its Distribution Pricing Project, and the Commerce Commission’s Input Methodology Review shows it is actively concerned with the effects of new technology on the sector.
This work by the regulators is intended to enable them to fine-tune their respective regulations to better manage the effects of new technology and ensure electricity consumers see the greatest benefits.
While these two regulators already communicate well and work together on matters of common interest, there is scope for greater coordination.
This is why MBIE has set up a Council of Energy Regulators to share information and identify emerging issues, if and when they arise, and to work collectively to resolve them.
MBIE also plans to develop and publish an energy regulatory system charter, to document how the different parts of the regulatory system work together, and to help identify any areas for improvement.
The issue of distribution company efficiency and governance was raised by the International Energy Agency in its 2017 In Depth Review of New Zealand energy policy.
This report recommended directing the Productivity Commission to review the electricity distribution sector to identify opportunities to improve the sector’s productivity, flexibility and capability in order to meet technological change, including examining the sector’s structure and governance.
While the Productivity Commission could provide valuable insight and recommendations in this area, it may be just as effective to better coordinate the ongoing work of the Commerce Commission, the Electricity Authority, MBIE and the Auditor General. MBIE will report to me on the advisability and usefulness of having the Productivity Commission review the distribution sector and the government will consider that advice.
My visit to the United States reinforced to me the potential of electric vehicles to New Zealand. I toured the Tesla factory in California and was impressed with their hi-tech approach.
Equally impressive is the fact that they manufacture their products in-house. The company reiterated its intention to build a bigger market in New Zealand.
EVs are seeing substantial growth in San Francisco – which is encouraged not just to reduce carbon-emissions but to improve urban air-quality and reduce noise. Again, the pace of change is astounding. Five years ago there were only four EV models available – now there are 40.
It was interesting to see how other countries incentivise uptake – in San Francisco they provide rebates, but also use similar measures to those we are introducing, such as access to special vehicle lanes.
With more than 80% of our electricity generation being renewable, electric vehicles are an excellent option for New Zealand.
I am encouraged by the role the electricity sector is taking to support the uptake of EVs. I believe energy trusts have a role to play here and I know some of your businesses have already taken some action.
Your distribution businesses stand to benefit from EVs, through greater utilisation of network assets, and your communities stand to benefit from improved air quality, as well as helping to reduce carbon emissions.
The impact of solar PV
Solar energy is still small in volume in New Zealand, but is expected to grow in importance as its costs continue to decline.
The Government’s view is that solar power is currently not the most economic and efficient option for New Zealand compared to other renewable alternatives that we have available.
It has a higher cost than hydro, wind and geothermal systems that are currently supplying the national grid, and it does not produce power at night.
Hence growth in solar power may displace cheaper renewable fuels and probably does not reduce the need for network investment (which is typically driven by winter night peaks).
However, we recognise that the world is changing. Solar costs are decreasing and new battery technology is becoming more widespread.
This could see solar generation become cost competitive with grid-based generation across the board within a decade, and batteries could help improve network utilisation.
In California I visited Siemens and Solar City which highlighted to me the emerging opportunities that could arise in New Zealand from more productive solar generation, improved integration of energy infrastructure, battery storage technology, and digital management systems.
It is important that you as trusts keep an eye on these developments as they have the potential to impact significantly on your businesses.
I am aware there is a concern about pricing structures for solar, with some arguing that existing tariffs – particularly volume-based tariffs – implicitly subsidise solar PV, because customers without solar PV will have to pay a bigger share of common network costs.
This issue seems to be broadly recognised across the industry, and you will be aware that several electricity distributors and retailers are developing plans to reform retail tariffs to make them more service-based and cost-reflective.
The Government supports this reform effort, which is enabled by the country’s significant and ongoing investment in smart metering. New Zealand has an abundance of cheap wind and geothermal generation able to be developed, and we want the power system to provide good incentives for the full range of resources – including demand response and batteries – that have the real potential to reduce costs and increase benefits overall.
Transmission Pricing Methodology
As I’m sure you are all aware, the Electricity Authority has been consulting on proposed revisions to Transmission Pricing Methodology (or TPM). The Authority’s recent work is the continuation of an attempt to resolve a problem that has vexed the industry for several decades.
Any change to the status quo, and even the status quo itself, can be contentious.
The delay announced on April 26 by the Electricity Authority to redo its cost benefit analysis is unfortunate, as delay prolongs the regulatory uncertainty for stakeholders. I also am aware that some parties see this further delay as a reason to cancel the process, or for me to intervene in some way.
Legally, my powers to intervene are limited, even if such action was desirable. However, I can and will ensure that the Authority keeps me and my officials fully informed of its intentions going forward and works closely with Transpower to ensure that if and when a new TPM is developed, that it is workable.
In closing, I would like to reiterate how important the distribution sector, and particularly trust owned companies, are to New Zealand – both in terms of powering our economy and contributing to the wellbeing of our people.
The Government looks to your sector to deliver innovative solutions that will allow consumers to benefit from new technologies.
We recognise that the future presents a number of challenges that may call into question existing business models and technologies.
I look forward to your sector’s solutions in response to these challenges.