3456 NEW ZEALAND GAZETTE, No. 139 29 OCTOBER 2004

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The review should consider whether it is appropriate to relax the tight ring-fencing policy after
considering any reduction in dynamic efficiency that this might create. The review should also
recommend whether alternative levy arrangements would produce a fairer and more efficient
outcome. In particular, it should investigate whether to allow for some element of self-provision
of security of supply with an associated exemption from the levy, and if so whether the extent of
any self-provision should be audited by a body independent of the Commission.

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The review should provide an opportunity for public consultation, and should make
recommendations to the Commission by 31 December 2006. The Commission should consider
the report and make recommendations to the Minister of Energy by 31 March 2007.

Security of supply co-ordination

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A key requirement for the secure operation of the New Zealand system is that hydro lakes are
managed optimally to use as much water as possible while avoiding the risk of running out of
storage, and that thermal plants have adequate fuel and operate in a timely manner to
complement hydro generation and preserve lake levels when required. Risks of inadequate
security of supply co-ordination will need to be monitored by the Electricity Commission.

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Introduction of the reserve energy scheme may also impact on security of supply co-ordination.
A risk is that (for example) hydro generators may observe the reserve energy and decide to run
their lakes lower than they otherwise would have, or thermal generators might decide to procure
less fuel.

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The Commission should seek to minimise these risks by compiling and publishing high quality
information, including on hydro lake levels, thermal fuel availability, scheduled plant and
transmission outages and minimum hydro zones.

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The Commission is also expected to be active in monitoring developments, using the powers
available to it, and, if necessary, making recommendations to the Minister on any further powers
it believes to be necessary to ensure the market operates efficiently. This may involve:

• undertaking ‘co-ordination tenders’ to incentivise (via payments) a combination of hydro
storage and thermal fuel that is sufficient to achieve the security of supply standard over a
short term timeframe (e.g. one year)
• using the proposed additional powers in the Electricity Act 1992 to recommend regulations
or rules, which should be applied in a non-discriminatory manner, to:
o set minimum requirements on generators to hold or provide for reserve fuels (including
water)
o set requirements on generators to offer by tender a minimum volume of contracts that
enable the price risks associated with the spot market to be managed, including
requirements relating to the terms and conditions of those contracts (excluding prices
and reserve prices). This would incentivise generators, if those contracts were taken
up, to hold sufficient capacity and fuel to meet those contracts or to cross-insure with
other generators for that purpose
o set requirements on retailers and other direct buyers of electricity from the wholesale
market to maintain minimum levels of hedge and contract cover with generators and/or
minimum levels of demand-side management programmes and contracted demand
response.

Conservation campaigns during security of supply situations

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Although the Government wants the Commission to manage the electricity sector to minimise the
risk of supply shortages, it recognises that there will be infrequent circumstances where there is a
material risk of shortages (for example in a worse than 1 in 60 dry year). In this event, the
Government expects the Commission to activate a conservation campaign in a timely manner,
since conservation is significantly less damaging to the economy and less disruptive to
consumers and public welfare than actual blackouts.

Use of ripple control of hot water heating during security of supply situations

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The Commission is expected to ensure contingency arrangements are put in place for the use of
ripple control of hot water heating for use as appropriate if conservation campaigns are required,