Thank you for the invitation to be here today. I’m told the theme of your conference is “Delivering Sustainable Infrastructure.”

That’s a particularly relevant theme given the importance this Government is placing on the delivery of important infrastructure.

The various elements of our energy infrastructure – everything from the national grid, electricity lines, and generation plants – are essential for a prosperous society.

Today I’d like to talk about some of the current challenges facing the electricity industry, and what the Government is doing about meeting those challenges.

I’ll talk about transmission, the Ministerial Review of the Electricity Industry, investment in generation, and a very exciting new initiative we announced yesterday: the Warm up New Zealand: Heat Smart home insulation scheme.

I’m very happy to take questions at the end of my address.

Transmission

Let me start with transmission, an area I know many of you will be interested in.

A secure supply of electricity is one of the foundations for a growing economy. When businesses shut down because of power failures, we all lose out.

The Government is very concerned by the

under-investment in the national grid over the last few years.

The result of that under-investment has been power outages like we saw earlier this year in Auckland, and rising retail prices because of an inability for generators to send electricity freely around the country.

The retirement of Pole 1 at the end of 2007 has placed considerable pressure on the system, and all around the grid there are constraints which indicate upgrades are well overdue.

It's important that these problems are fixed as quickly as possible.

Transpower has a $3.8 billion programme of investment planned for the next ten years, and the Government is keen to see that work progressed.

Earlier in the year we issued a new Government Policy Statement which raised the threshold above which national grid investment had to be approved by the Electricity Commission.

Previously, individual grid upgrade projects costing more than $1.5 million had to each be approved by the Electricity Commission.

The process often involved a lengthy duplication of engineering and systems planning, resulting in costly delays.

Furthermore, in the five years the Commission has operated, the cost difference between projects proposed and projects approved has only been $120 million.

I say only because that represents just 5.9% of the total cost of all approved projects.

And that doesn't take any account of the time and expense in the process.

For many projects there has been little or no variation between the application and approval cost figures.

The new Government Policy Statement raises the threshold for which Electricity Commission approval is required to $20 million.

We’re confident this will help assist Transpower in getting on with the job.

The figure of $20 million is well below what some in the industry recommended, such as $50 or even $100 million.

I think it strikes the right balance between timeliness of investment decision making, and making sure investments are prudent and reasonable.

Ministerial Review

In April this year I established a Technical Advisory Group to assist with a Ministerial Review of the Electricity Industry.

The Review is essentially looking at two areas where we think there is significant scope for improvement in the electricity sector in New Zealand.

First is the issue of electricity governance and regulation.

The Government considers the overlapping roles and duplication between the Electricity Commission, the Commerce Commission, and Transpower, should be disentangled.

Our 2008 election policy promised a regulatory and governance review, to reduce duplication, minimise the costs of regulation, and improve the investment environment.

The Ministerial Review gives effect to that policy.

There is broad consensus in the industry, I believe, that the current arrangements are not working. Change is required.

The critical question is: change to what?

The LECG report commissioned by Business NZ written by Kieran Murray, Graham Scott, and Toby Stevenson made a good start in answering that question.

The report says that there is currently a clear mismatch between an allocation of roles and responsibilities for effective problem solving, and the current allocation of regulatory functions in the electricity industry.

I agree with that analysis, and have referred this report with others to the Technical Advisory Group working with MED on the Ministerial Review.

The TAG group, as it’s become known, is chaired by Brent Layton, and its members are Toby Stevenson, Lew Evans, Stephen Franks, Miriam Dean QC and David Russell.

The Ministerial Review team will publish a discussion document in late July with some recommended reforms to the governance and regulation of the industry.

Your association will have a chance to submit on those recommendations and I encourage you take up that opportunity.

The government does not have any fixed ideas about what we want the electricity sector to look like, so all ideas will be considered.

But we do know that we need to improve on the arrangements we have presently.

The second issue the Ministerial Review will be examining is the structure, design and performance of the electricity market.

The timeframe for this work is a bit longer than that relating to governance, because its so complicated, and so important to get right.

The Review is taking a careful look at the Commerce Commission investigation into market power in the electricity sector, better known as the Wolak Report.

I suspect the reaction of most people to the news that electricity companies had “market power” was, “so tell us something we don’t know.”

The $4.3 billion of alleged overcharging of consumers by power companies in particular has attracted much public attention.

The precise methodology utilised by Professor Wolak is now coming under fairly sustained criticism from some in the industry.

Some of that criticism is fair.

However, I do agree with Professor Wolak’s basic conclusion - that there are serious systemic issues arising out of the current market structure, market design and market rules, which provide the generators with the ability and incentive to exercise market power at various times.

The Government is very concerned at the ever increasing price of electricity.

Retail electricity prices have risen by 72% over the last nine years.

We cannot continue along the path of electricity price increases at double the rate of inflation each year.

We anticipated that the Wolak Report would raise some issues that would need to be considered by experts, and so I’ve referred the Wolak Report to the Review team to consider carefully.

The team will also be considering other recent reports into the electricity market, such as the Electricity Commission’s market design review.

It’s important that we don’t respond to the Wolak report in an

ad-hoc way and make policy on the hoof.

The review team has been told to take its time to explore all of the issues arising from the report.

I’ve asked them to think creatively about solutions to the current problems in the electricity market.

Nothing is off the table. I am not pre-disposed to particular outcomes.

This is not a review that has been set-up with an outcome already in mind.

The Government wants electricity prices to be as competitive as possible, we want to spur innovation and better service, and for prices to flatten and fall more in line with the rate of inflation each year.

It’s abundantly evident that we don’t have that at the moment.

The discussion document published in July will outline the history of the market and its design, comment on current issues and work already done, and suggest some proposed changes.

You’ll be able to submit your own thoughts on those proposed changes.

Generation

A critical element for security of supply is new generation coming online to meet rising demand.

Although our power consumption fell by 5% last quarter, when the economy picks up again, so will demand for electricity.

There is little doubt in my mind that the convolutions of the RMA have in no small part deterred greater levels of investment in generation.

The RMA has slowed down new projects, made sure some never got off the drawing board, and even made it hard to keep existing power stations running.

The worst effect of the RMA has been the costs it has imposed on new projects - costs that just get passed on to consumers

I'm very pleased by the initial changes to the RMA that are currently before a select committee of Parliament.

That Bill will soon came back out of committee, and we’ll be progressing it quickly through the House

Insulation and Clean Heating

The final thing I’d like to talk about is the government’s home insulation and clean heating scheme which we launched yesterday.

In the Budget we allocated $323 million over four years for the Warm Up New Zealand: Heat Smart programme.

That is a lot of money, at a time when we know there is not a lot about.

Households of all income levels with homes built before 2000 will be able to access up to $1800 for insulation and a clean heating device such as a heat pump or a wood burner.

The Government is providing such a large amount of funding because we have such a large amount of inadequately insulated homes: around 900,000.

Our aim is to get 180,000 houses insulated by the end of year four of the programme.

There are three particular benefits from the programme I want to highlight:

First are the big health benefits from warm homes. When a house is not insulated properly, it is more difficult and costly to heat.

New Zealand homes are much colder than homes in other developed countries.

The World Health Organisation recommends a minimum indoor temperature of 18 degrees for healthy people and 20 degrees for sick people, the very young, or very old.

New Zealand’s average living room temperature is less than 16 degrees.

Cold houses mean more doctors’ visits, more admissions to hospitals, more days off school and work, and more of a burden for employers and families.

If 180,000 houses are insulated under the scheme, then Otago University health researchers estimate the programme will result in 33 percent fewer respiratory illnesses for people with pre-existing conditions.

The second benefit is in terms of job creation.

Over four years we expect to see 33 square kilometres of insulation laid under the floor and in the ceilings of New Zealand houses.

That’s about the size of 4000 rugby fields.

Fitting that much insulation is a massive undertaking, and will create jobs for hundreds of New Zealanders.

The third benefit is in terms of energy efficiency.

Insulation means households can use the same amount of electricity as they normally would to heat their home, but get much more benefit from it, because the heat is not escaping quickly.

And if they use a clean wood burner as well, the benefits are even greater.

Energy efficiency saves households money on their power bills, and helps the country as well, by reducing the demand for electricity and thus expensive new power stations.

So Warm Up New Zealand: Heat Smart is a win-win-win for everyone, and that’s why I’ve been proud to develop it over the last few months.

Conclusion

Let me just finish by saying that these are exciting times for the electricity sector in New Zealand.

I’m looking forward to the next couple of years as we make changes that improve the investment environment and competition, improve the affordability of electricity, and roll out a scheme that will see thousands of New Zealanders enjoy healthier, warmer homes.