PROJECTS

Electricity Market Security of Supply, New Zealand

The problem

New Zealand’s Electricity Commission was concerned about security of supply. More than 50 percent of New Zealand’s electricity comes from hydropower plants. In a dry year, output from these plants is reduced, meaning the country can run short of electricity, as had happened in 2003. The Commission had procured an expensive peaking-plant as reserve power source. However, there were concerns that the plant distorted signals in New Zealand market-driven system, deterring private investment—particularly because the plant was dispatched whenever the spot-power price exceeded NZ$200 per MWh. Moreover, it was still not clear what the optimal level of security of supply was, or how best to achieve it.

How we helped

Castalia estimated the optimal security of supply level for New Zealand by comparing the value of lost load to the cost of reducing expected unserved energy, at the margin. The economically optimal level of security was found to be equivalent to unserved energy of 0.05% in a year. We translated this into an operational security standard as a percent of reserve energy available in each three-month period. After reviewing international experience with security of supply mechanisms we developed four options for New Zealand. Drawing on consultation with stakeholders, international experience and analysis of probable market effects, we recommended improvements to the existing system, and continued monitoring to see if problems emerged, rather than radical change. We also advised on recovery of the costs of the security of supply regime from the beneficiaries.

Impact

The Electricity Commission accepted our recommendation to retain the existing system with improvements and increased monitoring. This system has continued work well to provide optimal security of electricity supply for New Zealand.