What's gone wrong with New Zealand's electricity market?

Friday, 2 November 2018

There have been outages at Pohokura gas field.

New Zealand's electricity industry is reeling as it adjusts to 'unprecedented market conditions' – but retailers cannot agree on who is to blame.

Spot prices have soared over the past month. The average wholesale price for most of October was $300 per MWh, spiking at more than $500. That's compared to the previous highest October monthly average wholesale price of $102 per MWh.

In September, the highest price recorded was $165 per MWh.

That's caused pain for customers who are on spot-price-based plans such as Flick's. It has also put pressure on smaller retailers who offer fixed prices to their customers, but do not have enough protection in place to cover themselves for sharp rises in what they have to pay.

There are lots of components in a typical power bill.

* Spot pricing 'like not insuring your car', retailer says as it puts brakes on switches

* Power generators 'made $5.4 billion in excess profits'**

There are industry rumours that three small competitors may have to withdraw from the market within the next month.

If the situation continued, it could lead to higher prices for all customers - except the country's biggest smelter at Tiwai, which gets a discounted rate for the 13 per cent of the market it takes. The extra power it negotiated in a deal with Meridian this year will be provided at a rate of $55.5 per MWh.

WHY?

Some reasons for the increase are agreed on.

Hydrolakes are low because of a lack of rainfall. Nationwide, they are at about 75 per cent of normal for this time of year.

There have also been outages at Pohokura gas field. Kupe, another gas field, is due for inspection next month and this will reduce gas output there. Huntly Power Station's unit five is also on a certification shutdown.

Thermal generators are only running at 40 per cent of potential capacity.

That has left generators competing for smaller amounts of fuel with which to create electricity.

Most customers aren't yet affected, but those on variable-price deals have been hit hard.

ALLEGATIONS FLY

Some retailers allege there is something more sinister going on.

Al Yates, of Ecotricity, said retailers were 'under the gun' from generator firms rigging the wholesale market. 'Gentailers [firms with generation and retail arms] are not competing on the same footing as independent retailers, nor independent generators.'

Big brands were selling into the forward market at a higher rate than their own retail brands would get, he said.

This forward market is where electricity retailers agree to buy future supply at a certain price, giving them certainty of future costs.

'The big retailers are rigging the market to stop smaller players competing and getting bigger prices to the public.'

Power companies have a number of fuel sources they can turn to, to keep the electricity flowing.

Flick said the current pricing situation did not reflect the cost of supply, and wholesale prices were at a level that did not correlate with the cost of generating or supplying electricity.

'It is opportunism driven by a lack of competition. We are elevating this issue with the regulators on behalf of our customers and all New Zealanders who deserve a properly functioning market that enables product innovation and consumer choice.'

It said pricing this October could work out to be around same or worse than the worst month of the 2008 'dry winter', during which there was fear of blackouts and the government ran conservation campaigns to try to reduce supply concerns.

'We aren't seeing this level of campaign or public information available now which indicates that the security of supply issue is simply not comparable and does therefore not warrant the prices we are seeing.'

Flick said forward-pricing was factoring in risk long after the current situation was meant to have been resolved.

'Buying hedges becomes extremely expensive for independent retailers, without raising their prices. With a profit model supported by generation, the gentailers are able to either absorb this cost, or use it as a reason to put up their own prices during annual reviews. This is within the rules of the industry. But, again, it indicates that retail competition is not a level playing field and points towards poor consumer outcomes.'

Electric Kiwi chief executive Luke Blincoe said it constrained growth. In normal conditions, his firm would buy more hedged supplies to take on more customers but as it was, it had to stick to the forecast growth track it had assumed when it locked in its forward pricing.

Stephen Poletti, senior economics lecturer at University of Auckland, conducted a study of the market over seven years and found the gentailers were consistently exercising market power. He said he would not be surprised if they were gaming the system.

'In a current situation where there's a squeeze on gas and lakes are bit a lower, these are the perfect conditions for them to exercise market power. I would expect it.'

NOTHING TO SEE HERE

But Marc England, chief executive at gentailer Genesis Energy, said while there was 'something unusual' going on, there was no gaming of the system. 'There's no big versus small plot here.'

He said, while it was not uncommon for lakes to dry out, it was a problem when combined with the gas outages. 'It creates a very stressed wholesale market. We will get through but it will require careful management of fuel resources.'

When hydro supplies were low, other retailers would come to Genesis looking for electricity. Some were on long-term contracts while others had short-term deals. 'That's all happening behind the scenes and is an example of the market working in a fuel-challenged environment.'

Big industrial users of gas such as Methanex had been encouraged to use less, so that more could go into electricity generation, he said. The spot price of gas was reaching heights of more than five times the norm.

Coal was used as a back-up to water and gas.

Genesis would normally have a stockpile of 250,000 to 300,000 tonnes or enough to get through a three-month drought.

It is about to start bringing in coal from Indonesia but England said that was contentious, expensive and had supply chain risks.

'We have to pay to import millions of dollars' worth of coal and if there is a big storm and the lakes fill up no one will want it for generation. That's a risk to us, a high cost to us so we've been asking retailers to manage their positions carefully and talk to us if they need to.'

He said coal would be imported through to the end of January. 'It's tough but it won't last forever… by early next year the market should settle down a bit.'

REGULATOR MONITORING

Poletti said the Electricity Authority should be more concerned about the market power in the spot market than it seemed to be. 'They seem a bit blase.'

A spokeswoman for the Electricity Authority said it was reviewing the situation and asking questions of the industry.

'Some of the things we look at daily include the spot market offers, thermal generation patterns, outages, behaviour in the hedge market and hydro inflows. At this point we have not detected evidence of suspicious behaviour.'

She said the electricity market was resilient and would manage through the current situation.

'Businesses will enter and exit the market, as for any sector. If a business stops trading, it's easy for customers to switch and there should be no disruption for them.'

She said the level of wholesale prices was not unprecedented but was unusual for this time of year. 'Prices around current levels are more common during winter months in unusually dry years.'

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