Power companies accused of manipulation as minister prepares renewables push
Tuesday, 17 December 2019
ANALYSIS: The flaw at the heart of the electricity market has been exposed after independent electricity companies accused Contact Energy and Meridian Energy of manipulating the price of electricity and indirectly causing 6000 tons of carbon emissions.
'We have accused them of withholding water from hydro generation, which results in higher prices and extra carbon emissions,' Electric Kiwi chief executive Luke Blinco said, acting as spokesman for a group of seven retailers.
The group set out their allegations in a complaint to the Electricity Authority, accusing Contact and Meridian of intentionally spilling water from hydro plants leading to more generation at fossil-fuelled power plants, including Genesis' Huntly Power Station.
The retailers claim Contact and Meridian together earned $61 million in extra revenues as a result of the wastage, which they said began on November 10 and was still continuing.
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Meridian and Contact both denied the allegations, with Meridian spokeswoman Polly Atkins saying it didn't spill water unless it had to 'and only do so when required by environmental rules or to manage our dams safely during high inflow events'.
Contact generation officer James Kilty said it also only spilled water when it had to, for example to flush rivers of silt, and water had been flowing towards its two hydro plants on the Clutha river at a faster rate than it was physically able to put through its turbines.
It will be up to the Electricity Authority to investigate the formal complaint levelled by the independent retailers and decide if there is any truth in the accusations.
Energy Minister Megan Woods said: 'I think it's good that the EA is looking closely at this claim – it would be very concerning to me if 'gentailers' were looking to game the wholesale market by spilling when they don't need to.
'The EA is best equipped to look into this accusation and it's good they are taking it seriously.'
Contact and Meridian should be presumed innocent.
They may both be able to show the allegations are baseless and that there were sound reasons for them to spill water at power plants that include the Lake Manapouri and Clyde power stations.
In February, the authority knocked back a separate market manipulation complaint from Flick, Pulse, Electric Kiwi and Vocus, saying it hadn't found any evidence of anti-competitive behaviour in relation to an outage at the Pohokura gas field that also constrained electricity supply.
But the flaw in the electricity market is that regardless of whether or not Contact and Meridian have in fact been caught in the act of underutilising their hydro plants, it could in theory have been in their economic interests to do so and to keep the coal and gas turbines at the Huntly power station spinning.
In other words, the competitive electricity market designed by former National Party energy minister Max Bradford has an incentive to manipulate pricing and to avoid achieving 100 per cent renewable electricity generation baked in.
The perverse incentive partly stems from the fact that the big 'gentailers' – companies that both generate and retail electricity – supply most of the power they generate to their own retail customers, but at a price that is effectively controlled by competition from independent retailers.
Those independent retailers buy their electricity from the excess power that the gentailers sell to them on the wholesale market, so the incentive on gentailers is to keep the wholesale price high.
The easiest way to do that is to ensure that the very last megawatt of power needed to match supply and demand in the wholesale market is generated by the power source which has the highest marginal cost of production, which is generally gas generation.
So that could indeed incentivise them to hold back on hydro generation.
Gas plants are cheap to build but expensive to run; the opposite of hydro plants which are expensive to build and then cheap to run.
A market in which all New Zealand's power came from clean hydro would be a disaster for generators under the current market model.
They would find it hard to avoid bidding the spot price of electricity down through the floor, even to a price below that needed to fund the construction of future power plants.
But right now, we have the opposite problem with gentailers' massive 'producer surplus' evident in their bumper profits.
The seven independent retailers are shining a light on the flaws of the power market at a sensitive time for the Government and the industry.
Woods dangled the hope of lower power prices in front of consumers in October, when she unveiled the Government's response to its Electricity Price Review which comprised a series of tweaks rather than fundamental reforms to the Bradford market model.
But Genesis Energy, which is 51 per cent owned by the Crown, embarrassed the minister last month by announcing that its standard electricity prices would go up by an average of 5 per cent in January, prompting an extraordinary invitation from Woods to consumers to 'shop around'.
The independent retailers' claim that market manipulation by Contact and Meridian has resulted in 6000 tonnes of extra carbon emissions comes at even more awkward juncture.
Woods is expected to release details of the Government's plan to increase renewable energy any day.
But the Ministry of Business, Innovation and Employment reported on Thursday that the proportion of electricity generated from renewables sources fell by 4 percentage points, from 84.8 per cent to 80.8 per cent, during the three months to the end of September.
So Woods will be releasing her renewable electricity policy against the backdrop of an industry that has been moving in the wrong direction.