Fonterra calls on Electricity Authority to toughen up regulatory action

Tuesday, 4 May 2021

Fonterra is expected to need more electricity as it seeks to replace coal boilers and cut carbon emissions but says the current structure of the power market is not fit for purpose with ‘market power’ driving up prices.

Fonterra has joined independent electricity retailers in calling for the Electricity Authority to take stronger action to correct an ‘undesirable trading situation’ in the electricity market.

New Zealand’s biggest company told the Electricity Authority in a submission that it needed to restore confidence in the market.

The electricity market was “complex and opaque” and its current structure was no longer fit for purpose, Fonterra also said.

The dairy giant uses about 1160 gigawatt-hours of electricity each year.

That is expected to increase in the coming decades as it replaces coal boilers at its factories with electric ones and other alternatives in a bid to cut its carbon emissions.

But Fonterra portfolio manager Bruce Turner said an ‘undesirable trading situation’ (UTS) in 2019 provided “considerable evidence of market power being used” to drive up electricity prices.

The Electricity Price Review described the structural separation of gentailers as unnecessary, and for now the Government is sticking by that advice.

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The Electricity Authority determined last year, in response to a complaint from several electricity retailers, that a combination of factors pushed spot market electricity prices above the level they should have been in December 2019, creating the UTS.

Authority chief executive James Stevenson-Wallace told Stuff in March that “front and centre” of those factors was Meridian Energy withholding hydro generation from its Waitaki hydro scheme to prevent wholesale prices in the South Island reducing.

The authority proposed resetting spot market prices by a nominal total of $80 million in a draft decision on “actions to correct” the UTS in March.

But it said it could not “unspill water” and Stevenson-Wallace has declined to provide an assurance that generators would not benefit financially from undesirable behaviour under its proposed fix, or that power users would be fully compensated.

Meridian Energy says spot market prices should be reset at a higher price than the authority has proposed based on the authority’s own analysis.

Meridian has said the proposed reset would cost it about $2m.

Turner told the authority that in Fonterra’s view, the market behaviour uncovered by the UTS “was an example of the extreme end of a not uncommon practice”.

Buyers of electricity in the wholesale market “as well as downstream consumers” would be left in “a net negative position” despite the authority’s proposed fix, he said.

Fonterra said the authority’s corrective action should attempt to compensate for some of the downstream impacts of the UTS.

It noted those impacts had included extra carbon emissions from fossil-fuelled power plants.

“This UTS resolution comes at a critical point in time for the EA,” Turner told the authority.

“New Zealand’s zero carbon goals will see significant electrification as consumers change to electrical technologies in order to reduce emissions profiles.

“The EA must take this opportunity to restore confidence in the market and seek to ensure that the supply side is unable to earn systematic economic rent.”

Independent electricity retailers also criticised the Electricity Authority’s proposed fix in their submissions.

Electric Kiwi and Haast Energy said in a submission that the remedy should “ensure no market participant that was a party to or contributed to the UTS benefits financially from it”.

But Meridian submitted that the authority was proposing to reset spot prices at too a low price; $13.70 a megawatt-hour when Meridian said the figure should be $19.98 according to the authority’s own analysis.

In a possible further complication, the ASX warned that retrospectively resetting spot prices was likely to have “significant and lasting undesirable impacts” on the market for hedging electricity.

Such contracts are frequently traded on the ASX.

The ASX would prefer to see an “off-market mechanism” used to address the UTS, its general manager of commodities, Bradley Campbell, said.

“Given the complex interplay between spot prices, ancillary markets, and hedge contracts, a change to spot electricity prices may not achieve the authority’s objective of correcting the impact of the UTS,” he told the authority.

The Electricity Authority has signalled it will finalise its “actions to correct” in August but has said they will then take several months to implement.

The regulator cleared Meridian and Contact Energy of breaching its trading conduct rules in April, following a separate investigation of the conduct involved in the UTS, indicating it had not had time to fully consult on and fix deficiencies in its trading conduct rules which it identified four year ago.

The authority described its market conduct rules as lacking clarity and said they were hard to apply.