The government yesterday announced it intended establishing an Electricity Commission, which would contract power generators to provide reserve electricity that would only be released onto the market in dry years, such as 2003 has been.

The commission will be responsible for managing the electricity sector so that demand can be met without the need for national power conservation campaigns as is presently happening.

Energy Minister Pete Hodgson said withholding reserve generation from the market in normal years would allow the market to operate as usual. Reserves would only be released at a "high" price during dry years to ensure continued investment in new generation to meet normal growth in electricity demand.

Spot market volatility would be significantly reduced in dry years because prices above that of the reserve generation would be relatively rare.

Commissioners would be appointed within three months and the reserve generation was expected to be built up within about three years. Securing that generation capability was expected to cost electricity consumers under half a cent per unit as because reserve generation was expected to comprise new plant, with relatively low capital costs, plus heavily depreciated old plant, added Hodgson.

Major electricity player Contact Energy gave the policy initiatives a cautious tick, saying it welcomed the government moves to reduce uncertainty in the market.

"The announcements appear to strike a reasonable balance between the need to maintain a competitive electricity sector, while dealing with the particular circumstances New Zealand currently faces," said chief executive Steve Barrett.

It was good policy-makers had endorsed a preference for a competition-based system, in which prices were the key signal for action to both electricity investors and consumers based on competition, rather than central planning.

The Electricity Networks Association said the security package was a commonsense solution to maintaining consistent power supplies in the future.

However, it remained concerned that the announced measures might not be sufficient to overcome New Zealand's looming energy deficit as reserve generation capacity could only be a back-stop solution. The government should not under-estimate the on-going need for more primary sources of energy to meet expected growth in demand, said ENA chairman Warren Moyes.

"The lines industry welcomes the Government's acknowledgment that this industry has a role to play in meeting New Zealand's energy needs. Its approach is far more constructive than that of the regulation focus lines companies have had to contend with over the past year. We are now dealing with issues that really matter."

Lines companies would begin considering their new potential role as generators, given the increased ceiling (up to 25MW or 10% of a line company's load) for local generation allowed under the new structure, and the unrestricted right they were being given to build reserve generation.