Power bills start to climb as wholesale prices surge

Wednesday, 24 March 2021

Power bills have begun to rise as the ability of independent retailers to protect customers from soaring wholesale prices wears thin.

Nova Energy and “gentailer” Mercury have been among the first power companies to raise their prices.

Mercury said it had limited the average price rise in the energy component of its bills to about 2 per cent, but Nova has increased its average prices by about 6 per cent.

Nova spokeswoman Sia Aston said its price rise worked out at an average of about $2.50 a week.

The price rise was “really regrettable” but was being driven by wholesale price rises, she said.

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“That is certainly what has driven this shift. There is some significant movement there.”

A Mercury spokeswoman also blamed its smaller price rise on the wholesale market, describing that as “a challenge most retailers are facing at the moment” as well as on changes to operating costs and metering charges.

Gavin Male, the chief executive of price comparison website NZ Compare, said some small retailers had stopped trying to win new customers as it was not sustainable to supply them under current conditions.

“The trend is very much going to be prices increasing,” he said.

Energy Minister Megan Woods is closely monitoring the situation in the power market but expects the near-term impact to be on people and businesses directly exposed to the spot market.

A spokeswoman for Energy Minister Megan Woods said the Government was closely monitoring the situation, and Woods was getting regular briefings on it.

“We are aware that some consumers exposed to spot pricing could be paying higher than normal power prices this autumn and winter,” the spokeswoman said.

“This is because of stressed wholesale electricity pricing, in part driven by this year’s dry La Nina weather pattern and low hydro lake storage levels.”

Consumers with fixed-term retail contracts were not likely to be hit by the higher prices in the near or medium term, she said.

“However, some industrial users could be exposed to the current high spot market prices if they have not adequately hedged their position.”

Spot market prices have mostly been sitting at several times both their 2020 levels and current prices in Australia, since the start of the year.

They were sitting above 60 cents a kilowatt-hour across much of the country for long periods on Wednesday.

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That is about double the retail price paid by most consumers for power, which also needs to factor in retailers’ other costs and margins and lines charges.

Low lake levels and gas shortages have bitten at the end of a long period of relatively low investment in new generation by major power firms.

Gentailers that generate more electricity than they retail can shield customers from price increases in the wholesale and derivates markets, and indeed benefit from them, by consuming their own power and selling off their excess generation on the wholesale market.

Retailers that sell more power than they generate – if any – can also protect themselves from movements in spot prices for a while, by in effect buying most of their power from generators in advance.

But increases in spot market prices can be expected to increase the cost of such hedging arrangements.

Male said he couldn’t see retailers having many options “other than to pass some of that cost on”.

John Harbord, who chairs the Major Electricity Users Group, warned earlier this month that high spot market prices and expected price rises through to September would flow through to hedge contracts and could drive some large and small companies – and smaller power retailers – out of business.

Contact Energy chief executive Mike Fuge likened the issue in New Zealand to the housing market, where the obvious answer was to “build more houses”.

About 2.5 terawatt-hours of new generation had just been brought on-stream or would come online in the next two years, he said.

“So the market is responding both to the signal from Government and the signals from the market itself.”

He said an “over-investment” in solar and wind generation had been partly responsible for bringing wholesale electricity prices in Australia down to about 4c/kWh.

Harbord said in his market update that some commercial power users might not be around to see lower spot prices in 2023 to 2025, as the survival of some businesses was “on the line right now”.