28 May 2015

Review of Secondary Networks

TENCO EBS (http://tenco-ebs.co.nz) commissioned Andrew Shelley Economic Consulting Ltd (ASEC) to prepare a report in response to the Retail Advisory Group’s Issues and Options Paper on Secondary Networks.

Networks for conveying electricity to consumers are categorised by their level of connection to the transmission network. Those that are directly connected to the transmission network are local distribution networks (“Local Networks”). Secondary networks are indirectly connected to the transmission network by way of another electricity network.

Secondary networks typically service consumers in a specific multi-tenant location such as multi-tenanted office blocks, residential apartment buildings, retirement villages, shopping centres, airports, industrial/commercial parks, residential subdivisions, and permanent camping sites. Secondary networks may be:
  • Customer Networks, which is typically represented by a single Installation Control Point (ICP) in the registry, and individual consumers on that network do not have an ICP but are billed for their electricity consumption by the network owner;
  • Embedded Networks, where each consumer has an ICP and can obtain retail services from retailers that operate on that Embedded Network (which in theory requires a use-of-system agreement (UoSA) to be negotiated); and
  • Network Extensions, where the network operates as an extension of the Local Network, and each consumer has an ICP and obtains retail services from retailers that operate on the Local Network.

The Retail Advisory Group has identified that certain competition, reliability, and efficiency issues may arise with secondary networks. The issues identified include:
  • Consumers on Customer Networks do not have a choice of retailer;
  • Retailers claim that it is difficult to negotiate UoSAs with Embedded Networks;
  • Retailers claim that it is difficult to maintain relationships with Embedded Networks;
  • Interactions between retailers, distributors, and secondary networks could be improved, for example during the conversion of a secondary network from one type to another; and
  • Interactions between retailers, distributors, secondary networks and consumers could be improved to reduce costs of performing market functions and providing retail and network services.

Of particular note, ASEC analysis of registry data on ICPs shows that Embedded Networks have a Herfindahl-Hirschman Index (HHI) of 1,562, significantly lower than the estimate of >3,000 calculated by the Electricity Authority for the national residential retail market. Embedded Networks also have significantly lower Concentration Ratios. This data strongly suggests that there is not a problem with competition on Embedded Networks, but rather that Embedded Networks are the network environment with the highest level of competition.

A range of measures are proposed to reduce transaction costs and enhance the efficiency and competitiveness of retail competition on Secondary Networks. More Information: