Submitted on September 7, 2021

Thursday of last week, 2nd September, marked the 25th anniversary of Energy Link Ltd. This post is a reflection on company and personal history, against a backdrop of an industry in transition. Over the last 25 years, it’s fair to say that some things have changed, but then some things have not. 

 

 

Energy Link commenced trading on 2nd September 1996, just less than a month before the electricity spot market opened, which happened at midnight on 1st October 1996. 

 

That might seem like a happy coincidence, but Energy Link was set up to help market participants operate on the spot market, and to manage the new risks associated with buying and selling power at spot prices.  I was one of the three original shareholders, along with Central Electric and MainPower. Central Electric’s CEO of the day, Alex Adams, called me up earlier in 1996 to see if I was interested in setting up a new entity to help them, and to find other clients who also needed help, but lacked the scale to have all the resource in-house.  It sounded like an interesting challenge. 

 

In my previous role, I had some involvement in the development of the spot market, and was also deeply involved in developing a simulation model of the new market, so I guess I stood out as being someone who had the knowledge and skill required to set up and run this new entity. 

 

Alex and MainPower’s Managing Director, Allan Berge, were very supportive of the concept, so in May of 1996 I left my old job and set about preparing to launch Energy Link.  At the time, we didn’t know it would be called Energy Link, and during a series of meetings during the middle part of 1996 we agonised over a name.  We came up with all sorts of weird and wonderful words but nothing stuck.  Then one night, at the Pacific Park Motor Lodge in Dunedin as I recall, Energy Link was suggested.  The obvious question was immediately forthcoming - link what, exactly?  We still don’t know the answer to that! 

 

But the name stuck, partly because it wasn’t already in use, but mainly because we couldn’t think of anything better.  It stuck, and not only that, it survived 25 years. Actually, we discovered not soon after launching the company that the name had already been used by a lines company, so we quickly entered into an agreement with the other party to secure the unencumbered use of the name. 

 

We secured office space in Consultancy House in what is now Dunedin’s Warehouse Precinct, hired two young, keen analysts to help with the mahi, and bought several computers along with software.   

 

Initially we set Energy Link up to serve its power company shareholders, and we had the honour of submitting the first bids into the market on behalf of Central Electric. 

 

The aim was to get one or two more power companies of similar size on board as shareholders, and to focus on helping the company’s shareholders navigate the complexities of the spot and hedge markets.  But in the first few months, no other shareholders materialised, which left us with the prospect of a substantial loss over the seven months of trading in our first financial year.  Our initial two major shareholders were happy with how things were going, and would no doubt have continued to support the company in the short term. But like every businessperson I’ve had to make lots of tough decisions along the way, and the options were to either increase the fees for our service to our two corporate shareholders or lose money.   

 

However, I had this nagging doubt about taking the easy way out:  the company would end up being vulnerable to losing either one of its two big customers.  I took a deep breath and opted not to increase fees, and instead I went looking for work from new clients, and this is one of the best decisions I have ever made in business.   

 

I found the extra work, in ample amount as it turned out, and from that day forward our client base has continued to diversify so that now we have clients all over NZ, in Australia, Singapore, and as far away as Europe and the US.  Those first seven months saw us break even, and by the end of our first full financial year, FY98, we had five staff. Turnover had increased so quickly that had competitions like Deloitte Fast 50 been around back then, I reckon we’d have been in with a chance of winning something. 

 

At this point, quite a few of our clients, including both Central Electric and MainPower, were Electricity Supply Authorities (ESAs), which were lines companies that also served the retail energy customers connected to their networks.  The ESAs purchased electricity from the spot market, some of them through three big buying groups that were set up in the early years of the market – Pacific Energy, Energy Brokers and Powerbuy.  Some ESAs also had their own generation.  The ESAs hedged net spot risks with the Electricity Corporation of NZ (ECNZ) and Contact Energy, which was carved out of ECNZ in February 1996.  For those not working through the buying groups, we were in demand for forecasts and hedging services, in particular. 

 

Ah, but then came the reforms of 1998 and the Electricity Industry Reform Act, which required ownership separation of lines and energy.  More-or-less at the same time the government of the day prepared to split ECNZ into three state-owned enterprises, what are now Genesis Energy, Mercury NZ and Meridian Energy.  In the second half of 1998 a massive sell-off began as almost all the ESAs sold off their retail businesses to focus on remaining in the lines business.  By the time the three new SOEs launched on 1st April 1999, the ESAs no longer needed our services, and we lost the major portion of our revenue, facing losses again. 

 

But we never lost faith. We got out there and talked to the new SOEs, and anyone else who would listen, and we built the company up again, thankfully without any redundancies.  Although the mix of market participants went through a major change, those that were left still faced the technical complexities of the spot and hedge markets, and the constantly pressing need to assess, mitigate and manage the risks they faced every day in the electricity market; that didn’t change. 

 

Sadly, the need for the three buying groups died with ownership separation, and they disappeared, leaving Energy Link, the “minnow” and the odd one out, to carry on. 

 

In our first year of operation, we used the market simulation model that I’d had a hand in developing in my previous rolein the years prior to the market opening.  But in the intervening period, the market design was finalised, then implemented, and I realised that we needed software that could model certain aspects of the market more accurately and allow us to answer more questions about the future.  I set about developing a prototype in Excel which included water values for the large hydro systems and a crude nodal dispatch.  This new model was then used to produce scenario with mean hydro inflows for 10 years for both Benmore and Haywards nodes, and went on to become the basis for the first long-term Price Path we issued mid-1997. 

 

But I needed a programmer who could take my prototype and turn it into a full-fledged, fast and flexible simulation model in the Microsoft C+ programming language.  So, in the second half of 1997 Matt Woods joined our team, and hes been on the team now for almost as long as me.  I don’t recall if he told me at the time, but I later discovered that Matt, who has a degree in Maths, is also the son of a Professor of Mathematics at Canterbury University.  So not only did we have a “gun programmer” join the team, he came with all the mathematical skills to take the concepts behind the prototype, and to develop and enhance them:  and so was born the EMarket model, which we still use today (six major versions later). 

 

I don’t remember exactly when, but sometime in the 2000s I worked out that EMarket had simulated in excess of two million market-years.  Today, we issue a Price Path every quarter and these currently require 20,025 individual market-years to be modelled, plus additional scenarios run every quarter.  So, since that humble one-scenario Price Path in 1997, our forecasting productivity has increased by a factor of over 25,000. 

 

Many companies that independently develop an electricity market model, will set about licencing it to market participants in their own country, then they modify it to work in other countries, and then proceed to sell in those markets.  Electricity markets tend to have many market-specific features, so a problem with this approach is that you end up with models that work sort of OK in most markets, but that aren’t brilliant in any particular market.  To produce credible results, electricity market models also need a lot of good data as inputs, well-honed technical modelling skills in their operators, and lots of high-quality local market intelligence with which to form scenarios and construct credible forecasts. 

 

Although we did licence EMarket to a client in Singapore for a while in the 2000s, and had a brief play with the market in the UK, we’ve focussed on creating a model that works really well in NZ.  We have a few EMarket users outside of Energy Link, but for the most part our skilled team has built a modelling infrastructure that we think is second to none in NZ and, using this, we can produce high-quality quarterly Price Paths and monthly price forecasts at a cost that no one else can rival on small volumes, or in-house.  We can also turn complex modelling assignments around in double-quick time. 

 

Now this does keep us very focussed on the NZ market, but we believe this is how we can best help NZ in the energy transition required to achieve a truly low carbon economy and hence in playing our part to help slow and eventually halt climate change and global warming. 

 

Given our experience and our capabilities, we have the honour and the privilege of providing advice and information to some of the biggest names in NZ electricity, in some cases working on transactions, or in relation to projects, that have price tags in the hundreds of millions of dollarsand billions of dollars in some cases. 

 

Twenty-five years in the one industry, let alone in the same company, is a long time.  Leaping out of bed every morning is not quite how I would describe it, but as I finish breakfast in the kitchen, then leave for the office, arriving about three seconds later (I’m talking lockdown here, not the real office!), I often reflect on what keeps me going?  I still get that feeling of excitement thinking about the interesting work that I know I have ahead me, be it finishing a Price Path, perhaps finalising the slides for an upcoming seminar or workshop, or pondering a question of energy strategy or market design that we’re currently working on. 

 

Then there’s the knowledge that regardless of what I have planned for the day, the phone might go, or an email might arrive, asking that familiar question – how are you placed to have a chat about such and such a piece of work we need done?  New challenges and opportunities seem to present at a greater rate than ever. 

 

But this would all be completely irrelevant if it weren’t for one key factor:  the people I work with and the people who are our clients, suppliers, partners and collaborators.  Electricity is an essential service, and despite the negative publicity that the industry sometimes attracts (some deserved and some not, I might say)the industry people we interact with are almost universally dedicated to providing a highly reliable electricity supply, at a reasonable price. 

 

Our team is extremely talented and dedicated and my colleagues possess an amazing energy when it comes to getting results, generally on time and often delivering more than promised.  I’ve mentioned Matt Woods already, but we have a total of four team members of sixteen years or more with Energy LinkMark Nelson is our Senior Consultant and responsible for modelling and forecasting, which remain core activities.  Josh Smith is our Software Engineer, who also manages our IT resources and oversees quality assurance activities.  Paul Chapman heads up our corporate and retail team, undertaking procurement, hedging and contract managements for NZ’s largest and most sophisticated electricity consumers, and for smaller independent retailers. 

 

By 2005, both Central Electric and MainPower were no longer shareholders, and in 2019 senior staff were offered the opportunity to take shareholdings in the company, resulting in Matt, Mark and Josh taking up the offer and joining our Board as Directors. 

 

I currently present our wholesale market training courses including an Introduction to the Electricity Market, Nodal Pricing, and Hedging Electricity.  In the Hedging course I briefly mention separation of hedge trading duties from financial and settlement duties, and I always find it ironic when I tell the class that this protects against theft and fraud; the people that we deal with day-to-day have an amazing degree of integrity.  I can honestly say that in 25 years at Energy Link, and in the 10 years I spent in energy management prior to that, I’ve never met anyone amongst our industry clients that I had any doubts about on this point. 

 

Which all makes me very proud to work in, and for, the wider electricity industry. 

 

Thinking back about highlights of the last 25 years, the events and experiences that spring first to mind are those involving interactions with people in the industry.  Like the time I was invited to present our market intro course to the Board and senior management team (SMT) of a large gentailer, who shall remain nameless.  There were a few new Board and SMT members, and it was felt they would benefit from an introduction to the industry they were joining.  The intro course includes a spot trading game played on tablets, and so the group was split into teams of two members each, as the five teams competed to see who would make the most profit by the end of the day.  About three rounds into the game, I have a vivid memory of the team consisting of the CEO and Chair of the Board mercilessly ribbing the other teams about their lagging performance.  All in good fun, of course. 

 

I’ve presented these courses so many times now that several times a year I will meet someone, generally considerably younger than me, who cheerily greets me by name; but I cannot place them.  Usually, they attended a course some years ago, and they’ve remembered me, but I get so caught up in presenting the course that the names and faces often don’t remain in memory.  My apologies to all of you, and I am trying hard to remember more names and faces in future. 

 

Talking about people attending courses, it constantly impresses me just how bright and motivated the new people coming into the industry are.  The electricity industry isn’t for everyone – it has its own set of peculiarities and challenges.  But for those who enjoy the mix of “physics and finance”, as I like to put it, and buys into the challenge of keeping the lights on at low cost, it provides many and varied opportunities to thrive and to grow on a personal and professional level. 

 

When I first got into the energy industry in 1983, and even in 1996 when Energy Link was established, the awareness of climate change was in its early stages, and there wasn’t any sense of urgency.  The Kyoto protocol was signed in December 1997 but only came into force in February 2005, so in the early days of the market there weren’t any formal policy mechanisms to incentivise a change in the mix of renewable and non-renewable generation. 

 

But with the start of the Kyoto protocol, government activity ramped up.  This eventually led to the implementation of the Emissions Trading Scheme (ETS) in July 2010, although it has to be said it was watered down to the point of being relatively ineffective in the wider, with subsidies for electricity generation and other energy users, which weren’t finally removed until 2019, and with the ability to use fraudulent ‘hot air’ carbon credits typically sourced from Eastern Europe. 

 

Nevertheless, I observed that as soon as the government of the day started talking about the possibility of a carbon tax or ETS, the industry changed its activity in respect of investigating and building new renewable generation instead of more fossil fuel-fired generation.  More gas-fired generation was built, but whereas in the 1990s there was relatively low interest in building windfarms, this changed so that the 2000s were actually a good decade for wind. 

 

As an independent observer, this proved to me beyond doubt that the transition to renewable energy would only happen if government and industry worked together to achieve this goal.   

 

What has changed significantly in the last 25 years is the sense of urgency around climate change.  We are a little bit isolated from it here in NZ, a bit like we are from the worst of the covid-19 pandemic, but many low-lying nations, and nations in the northern hemisphere or near the equator, are now seeing the impact of climate change even in its early stages. 

 

French diplomat and financier, Jean Monnet, said that people only accept change in necessity and see necessity only in crisis.”  I’ve said for a long time that global progress on climate change would be slow until key nations faced crises that could be attributed directly to climate change.  An example is when major cities in the US start to be inundated as the sea level rises, which is happening earlier than I’d anticipated, due to the impact of bigger and more common storm surges.   

 

Let’s face it, if we gave combating climate change the same priority as combating covid-19, change could happen very quickly. 

 

Given the right strategy, I believe that NZ could be the first country in the world to have truly 100% renewable electricity, and what an achievement that would be.  We probably do have the natural resources here, which the NZ Battery project is currently investigating, combined with technology already available locally or from offshore.   

 

There’s always that question of why we should be so proactive given that we are possibly the least- affected country in the world, at least in terms of the physical climate, and we are but a tiny contributor on a global scale.  But 100% renewable electricity would contribute positively to brand NZ if we want to keep selling our premium products to increasingly climate-conscious high-end consumers in distant markets.  As parents, with children now fully grown, even if rule-breaking was in their immediate personal best interest, we always led by the example of how adhering to rules was in the best interests of all of us, and in our own best interests in the long run.  Just like we’re all doing now with lockdown.  Does the same not apply to NZ in respect of climate change? 

 

We’ve also recently had our first grandchild.  We want our grandchildren to inherit a world in which they can savour and enjoy the Earth’s full range of beauty and natural resources for the long, long-term.  That makes for some very sobering reflection. 

 

Electricity is a premium energy source, which powers just about anything.  Add the possibility of green hydrogen, produced by electrolysis, then it literally could power everything; so we’re going to become much more reliant on electricity in the future. 

 

One day we will have low-cost nuclear fusion in NZ – you can quote me on that.  But in the meantime, the challenge for the industry and the government working together is to accelerate the transition to fully renewable electricity, while also keeping the price of electricity as low as possible.   

 

Why is price so important?  As we become ever more reliant on electricity in all areas of our lives, prices that are seen to be too high will lead to ever greater resentment and to political pressure for change.  But we’ve seen the impact on electricity in the past of big government involvement:  big government can lead to big mistakes (I won’t get started on this).  No market is perfect, and all markets are subject to some degree of regulation and oversight as a result, but markets do some things wonderfully well. 

 

The urgency around climate change has increased over the last 25 years.  But what hasn’t changed is the need to keep the lights on at (what is generally considered to be) a reasonable price; if anything, the pressure to keep the lights on at low cost has increased.  To balance climate and economics is a big challenge, one that needs the right balance between government involvement and the aggregate actions of the many participants in the wider electricity market. 

 

I was attracted to the electricity market by the fascinating interactions between people, physics and finance. Did I believe 25 years ago that the market would be more interesting than ever in 2021?  I had no idea… 

Downloads: