Electricity review: dam buster or damp squib?

Friday, 22 October 2021

The Detail looks at our electricity market; why some say the current structure needs to go; and why there are big profits to be made in power (first published in October, 2021).

ANALYSIS: It would be a bombshell of dam-buster proportions for investors in the country’s biggest power company.

But Meridian should find out this week whether there is any chance of it having to hand over one of more of its giant hydro power stations to a rival.

The Electricity Authority is due to publish the results of a review into the wholesale electricity market and spot market prices on Wednesday.

The review kicked off in a low-key manner earlier this year but has snowballed in significance amid high wholesale prices and growing concerns the power market is not working out for customers.

* Big firms put knife into power market saying Meridian made $3.5b excess profit

* Electricity Authority's defence of power market prompts backlash

The Benmore dam changed the course of the Ahuriri and Waitaki rivers.

No-one expects the authority to completely up-end the electricity market – if that happens it will be a government far less enamoured with the current market structure than the authority that does it.

The authority is certain to say high wholesale prices have been largely due to gas shortages and concerns over a drought-year causing hydro generators to conserve their lake levels.

But the open question is whether it concludes the exercise of market power has also been a factor.

If it does, there is a reasonable chance it may require Meridian – the country’s largest generator – to divest either its Manapouri hydro scheme or more of its six remaining power plants on the Waitaki River.

Speculation that could happen has been circulating for while and increased in July, when the authority took the unusual step of proactively releasing a confidential briefing it had provided Energy Minister Megan Woods on its review.

The briefing confirmed the authority was looking at whether the size of power companies might be hindering competition and whether generators were earning profits that would not be possible in a competitive market.

One explanation for the authority releasing the briefing is that it may have been designed to prevent any power company investors claiming they did not have fair warning forced divestments were a possibility – given the speculation at the time.

Multiple industry sources have said Meridian is genuinely nervous about the authority getting out the trimmers, and broker Forsyth Barr views it as a possibility.

But a forced sale would still come as a shock to shareholders in the $12 billion company, none of whom asked any questions about that risk at Meridian’s annual general meeting earlier this month.

Luke Blincoe, chief executive of independent retailer Electric Kiwi, isn’t expecting fireworks.

He would like the authority to take some hydro plants off Meridian, Genesis and Mercury and pool them into a new ‘Kiwi hydro’ company, but says he doesn’t expect the authority to “be that bold”.

“Definitely, Meridian’s got significant market power in the South Island.”

But Blincoe said he hadn’t got the impression from meetings with the authority that they were considering any significant structural change.

Genesis Energy chief executive Marc England has been promoting the idea of a ‘capacity market’ which would insure power buyers for periods of tight supply, as an add-on to the existing market.

“I'd love to be proven wrong, but I've got very little confidence. The most likely outcome based on history is ‘nothing meaningful’ and some more tinkering with the rules.”

Meridian said it wouldn’t be commenting on speculation.

A forced divestment by Meridian and perhaps other power firms would certainly be the most dramatic of the three most-discussed options for the review.

Another possible upshot may be new rules requiring the big generators to supply power to independent retailers at the same price and on the same conditions that they supply their own retail businesses.

The goal would be to breathe some fresh life into moribund retail competition, which has been battered by unpredictable wholesale prices and sagging confidence among independent retailers in the authority as a regulator.

But Blincoe questions how much difference anything short of structurally separating the gentailers into separate generation and retail businesses would make.

“Internal transfer pricing is just so open to interpretation it's a can of worms, and would take forever to unpick.”

A third possibility is that the authority recommends the creation of a “capacity market”, favoured by Genesis Energy, that would in effect insure independent retailers and major power users against future wholesale price spikes.

Spot market prices for electricity have ranged between the equally bizarre figures of 1 cent and $300,000 per megawatt-hour this year.

Under a capacity market, generators – possibly including Genesis – would be paid to keep extra generation on hand for periods of low supply, resulting in wholesale prices that were less subject to extremes, though not necessarily cheaper overall.

Electricity expert Bryan Leyland says a capacity market could address the fact that power companies are not currently rewarded for the important job of “keeping the lights on”, and could be designed to restore incentives to lines companies to manage demand by controlling hot water systems in times of shortage.

He describes it as “a good sticking plaster” for the existing market, even though he would like to see that more deeply reformed.

“Virtually every market that started off like us has found it necessary to bring in a capacity market.

“All of them have got problems – it is not an easy thing to sort out – but basically it is a good idea if properly implemented.”

John Harbord, chief executive of the Major Electricity User Group (MEUG) says downsizing Meridian, a capacity market, and a more arm’s-length relationship between gentailers and their retail arms would all be worth considering.

The MEUG represents the interests of major power users including Fonterra, Rio Tinto and NZ Steel.

But Harbord is less certain any of those outcomes would deliver what power users ultimately want.

That, in his view, is cheaper power prices that are more reflective of the cost of supply, and certainty that investments in new renewable generation will keep up with demand and with the retirement of fossil-fuelled and other ageing plants.

So whatever action – or inaction – the Electricity Authority unveils on Wednesday, it is unlikely to be the final word on electricity reform.