Big businesses blast Electricity Authority over market 'dysfunction'

Tuesday, 18 January 2022

OceanaGold says government intervention is needed to “restructure the way electricity is priced” and better enable decarbonisation

NZ Steel, Fonterra and Winstone Pulp have criticised the Electricity Authority for failing to properly address the shortcomings of the electricity market in a review it published in October.

Electricity Authority chief executive James Stevenson-Wallace acknowledged at the time of its report that power firms could have an incentive to delay investment in new generation to maximise the return on their existing portfolios “as part of a rational commercial strategy”.

The review noted advice that generators might need to invest between $27 billion and $37b in renewable generation by 2050 to meet demand growth and the need to phase out fossil fuels, and said the “incentives” on existing power industry players might have impeded timely investment in renewables.

But an issues paper the EA published alongside the review focussed heavily on the way that a new contract between Meridian Energy and the Tiwai Point aluminium smelter might be distorting prices.

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NZ Steel energy manager Alan Eyes told the authority in a submission released on Tuesday that it was disappointed by the lack of “tangible insights and actions” arising from the review.

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“We acknowledge the analysis is complex, but if the designer and regulator of the market is not across the underlying dynamics who is?” he said.

“It does lead one to question – is the market and its structure and settings too complex or manageable?The current generator-retailer vertically integrated settings and/or model are likely not fit for purpose.”

Fonterra also told the authority the electricity market was delivering “sub-optimal outcomes” and that its own power costs had increased materially over the last three years.

It suggested the Electricity Authority had got its priorities wrong, saying its interest in the Tiwai smelter contract did not address “the more serious issues regarding pricing conditions in the wholesale market” which had predated that agreement by two years.

“Fonterra notes that there is insufficient new generation build underway, ahead of accelerating demand and the potential loss of fossil fuel thermal generation from the market,” it said.

Mining company OceanaGold – which employs nearly 1000 workers at its Macraes and Waihi mines – said it was aiming to be carbon-neutral by 2050.

But it said it needed wholesale electricity prices to be both more reasonable and more predictable to justify investments such as replacing diesel excavators with electric shovelling equipment.

“Within a week we see that pricing can move from one cent to $384.81 per megawatt-hour, making this significant input cost into our business model very difficult to price.

The Electricity Authority acknowledged generators could have an incentive to delay investments in renewables.

“It is very difficult to look to decarbonise, based on modelled operating cost savings, with this level of volatility.”

It told the authority “the most critical enabling factor” for decarbonisation was a well-functioning wholesale electricity market, and said government intervention was needed to “restructure the way electricity is priced”.

“The Electricity Authority’s analysis shows that the drivers of wholesale prices remain substantially unexplained and counter-intuitive,” it said.

Winstone Pulp managing director David Anderson was “overall very disappointed” with the review and options paper published by the authority, saying they lacked well-developed options that could address the root causes of the “current wholesale electricity market dysfunction”.

“There is no doubt that the market is letting all consumers down, is dysfunctional and needs fixing urgently,” he said, warning otherwise of irreversible economic damage.

Winstone operates a pulp mill at Karioi, near Ohakune, and processes more than 660,000 tonnes of logs and fibre each year, but Anderson said “wholesale prices at current and futures levels are unsustainable for our business”.

“We acknowledge the EA has a programme of market development and improvement that is resulting in incremental improvements within the current market framework, but we believe a more radical ‘off market solution’ is required,” he said.

The country’s largest power generator, Meridian Energy, also said it was surprised at the authority’s “primary focus on a single hedge transaction agreed between Meridian and the New Zealand Aluminium Smelter”.

But it said it supported the authority’s “overall conclusion” that evidence of the exercise of market power had not been found.

Energy Minister Megan Woods did not rule out making “structural changes” in October in the wake of the EA’s review, saying she had asked officials to investigate options.

Woods effectively reopened the 2019 Electricity Price Review by saying she wanted to see if some changes to the market that the ministerial review rejected might need to be implemented.

The options rejected by the review included splitting gentailers Meridian, Genesis and Mercury into separate generation and retail businesses.

“I welcome the consultation the EA has started, but I am not ruling out looking at what interventions might be required … including the possibility of structural change in the sector,” she said then.

Consultant Bryan Leyland suggested the Government could revive Labour’s 2014’s plan to switch to a “single buyer market” that could see a new authority identify when new power generation would be needed and then contract for it through a competitive bidding process.