3454

NEW ZEALAND GAZETTE, No. 139

29 OCTOBER 2004

45

Within this minimum zone, the Electricity Commission should have a second zone that would
trigger a conservation campaign, on the basis that there is a significant probability that we are in
a worse than 1 in 60 dry year event.

Good processes

46

In developing and operating its security of supply policies, the Commission should:

• put in place good consultation processes
• ensure a high level of transparency and stability of policy settings
• avoid ad hoc and discriminatory interventions
• put in place and publish protocols to manage potential conflicts between its roles as a
  participant in the market as a contractor for reserve energy and as a regulator.

Reserve energy

47

The Government wants the Electricity Commission to contract for reserve energy (generation and
contracted demand response) to provide additional security of supply beyond the level achieved
by the ordinary market. This will be a primary mechanism for the Commission in endeavouring to
ensure security of supply in a 1 in 60 dry year. Any reserve energy procured to ensure security
of supply in a 1 in 60 dry year should also be available to help cope with other unexpected supply
contingencies, such as serious grid, plant or fuel supply disruptions.

48

The Government intends that the mechanism should operate as outlined below.

Quantity and type

49

The Commission’s portfolio of reserve energy should be limited so that it is capable of producing
no more than 1200 GWh of reserve energy over any given four month period. Transmission
constraints and other relevant factors need to be taken into account in assessing the effective
contribution of reserve energy to ensuring security of supply.

50

The reason for a firm maximum quantity is to ensure market participants have certainty as to the
maximum role of the Electricity Commission in providing for reserve energy, and to minimise the
risk of reserve energy affecting incentives for market participants to construct new capacity, enter
into hedge and other contracts, and invest in demand-side management.

51

In contracting for reserve energy, the Electricity Commission should, as best it can, maximise
static and dynamic efficiency. It should also take into account the additional flexibility provided by
short term contracts.

52

Generation plant that is contracted as reserve energy should primarily comprise plant with low
fixed costs and high operating costs, including plant that would otherwise have been mothballed
or retired, rather than baseload plant.

53

In deciding whether to contract with existing plant, the Commission should take into account:

• the benefits of lower cost to the reserve energy scheme; and
• the potential detriments to security of supply and competition in the ‘ordinary’ market before
  replacement generation is commissioned.

54

Contracted demand response should form part of the Commission’s portfolio of reserve energy,
provided this is practicable, and the Commission is confident that the reduction in demand is
additional to normal demand-side responses to higher prices.

55

The Commission should develop and publish its processes for procuring reserve energy including
its processes for assessing competing offers of reserve energy.