Electricity Authority's 'UTS' fix won't restore confidence, Electric Kiwi warns

Thursday, 11 March 2021

Meridian Energy says it expects its final cost to fix ‘undesirable trading situation’ to be about $2m.

An Electricity Authority proposal on fixing an “undesirable trading situation” that inflated wholesale electricity prices is disappointing and won’t restore independent retailers’ “extremely low” confidence in the market, Electric Kiwi chief executive Luke Blincoe says.

Independent retailers complained in December 2019 that Meridian and Contact spilled water from their South Island dams in December 2019 that they should have used to generate power.

The Electricity Authority estimated Meridian would need to pay $11.3 million and Contact just under $5m to reset spot market prices under its proposed fix, which it announced on Thursday.

But the regulator noted that estimate did not take into account the impact of various financial instruments used by market participants, including hedging contracts.

Meridian CEO Neal Barclay comments on the 'UTS' finding against it.

* Day of reckoning for Meridian on Tuesday as Electricity Authority readies ruling

* Starting point for Meridian sanction should be $38m, Haast Energy says

Meridian Energy forecast it would end up paying “closer to $2 million” in the final recalculation.

Meridian and Contact could face penalties under a separate trading standards investigation over the same incident that the authority still has underway.

The Electricity Authority has proposed unravelling the impact of the UTS by requiring generators cap the payments for power generated from nine South Island generating stations on the Clutha and Waitaki rivers between December 3 and 27 in 2019 at $13.70 a megawatt-hour, and repay the excess.

Blincoe said Electric Kiwi was pretty surprised and disappointed by the cap, which he said was double that the authority had previously signalled, and that cap should be applied across the whole market with those responsible for the UTS compensating other generators.

Electric Kiwi was one of the seven independent retailers that brought the complaint to the authority about the UTS in 2019.

Another, Haast Energy, had told the authority the “starting point” for any sanction on Meridian should be $38m.

Contact spokeswoman Leah Chamberlin-Gunn said it would be making a submission on the authority’s proposal.

”There is a long way to go in terms of the process and it is a very complex area,” she said.

“We were surprised at the claim when it emerged in December 2019 and we have always disagreed with the allegations.”

Contact didn’t spill water without good reason and “throughout the period in question, we acted responsibly in challenging circumstances”, she said.

Meridian chief executive Neal Barclay told Parliament’s Transport and Infrastructure select committee last month that it would not need to fork out more than $2m to rectify the UTS.

Committee chairman Greg O’Connor subsequently told Stuff that Barclay’s assessment was “a brave statement to make if it is not true”.

The authority’s proposed fix comes at a tense time in the sector, with wholesale electricity prices soaring.

Wholesale prices averaged more than 30 cents a kilowatt-hour across the country in the fortnight to March 2, according to national grid operator Transpower.

John Harbord, chairman of the country's Major Electricity Users Group, warned “unprecedented” wholesale prices could drive some small electricity retailers and energy users “out of business”.

The survival of some commercial power users was “on the line right now”, he said.

The Electricity Authority showed the impact of the fix it was proposing would leave the Tiwai Point aluminium smelter $10m better off and NZ Steel recording a $2.3m gain, again not counting any hedging arrangements which the authority has not so far attempted to calculate.

Flick, Electric Kiwi and some other independent retailers would be entitled to spot market refunds in the hundreds of thousands of dollars, its data indicated.

Electricity Authority chief executive James Stevenson-Wallace said its proposed actions were intended to “restore confidence as soon as possible” to the market.

'There is no perfect solution – some of the consequences of the UTS cannot be undone. For example, we can’t un-spill water,” he said.

Flick Electric chief executive Steve O’Connor said that to “truly restore faith in the wholesale market”, the authority would need to consider reforming the market so that all power companies “bought from the same electricity market and on the same terms”.

“December 2019 was just one example of when prices should have been low and they weren’t and there’s nothing in place to stop a repeat or actions underway to change the market incentives that motivated this to happen, he said.

Flick had to ask if current high wholesale prices were another example of market failure, he said.

“While it’s not dam spilling this time, the ultimate reason we have high wholesale prices is not fully explained by current market conditions.”