Electricity market isn't perfect 'but few markets are', says power regulator

Wednesday, 12 October 2022

The electricity regulator has concluded the power market isn’t perfect but fundamental changes aren’t currently justified.

The Electricity Authority has concluded fundamental changes to the electricity market are not justified, despite warning that competition problems in the industry could worsen.

It also said uncertainties around several government policies were delaying investment in new electricity generation.

The authority found last year that there was evidence of electricity generators exercising market power and described investment in new generation as “thin”.

It suggested in a new report on Wednesday that the market power of the big four generators, Meridian, Mercury, Genesis and Contact Energy could increase as the market moved towards 100% renewables, and observed there was “a long lag” between higher electricity prices and new investment.

But it said it was encouraged by an acceleration in the pipeline of proposed investment in new renewable generation, including solar farms being discussed by overseas developers, and said high wholesale power prices could mostly be explained.

Electricity Authority chairwoman Nicki Crauford and then chief executive James Stevenson-Wallace give evidence to a select committee on February 10.

* Big businesses blast Electricity Authority over market 'dysfunction'

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“Structural change is not currently justified by the available evidence and may risk unintended consequences,” it concluded.

A Stuff reader poll that has so far received about 42,000 responses indicated that only about 11% thought the country had got the structure of the electricity market approximately right.

That poll was running before and after Genesis, Meridian and Mercury reported that their combined profits had more than doubled to $1.35 billion in the year to the end of June.

But the authority said it did not expect competition in the wholesale electricity market to be perfect.

“Few markets are,” it said.

More and faster investment in new generation and a focus on “monitoring and enforcement” was currently the best strategy to promote competition in the wholesale electricity market, it said.

Energy Minister Megan Woods says the Government is taking steps to “help the electricity system evolve”.

Uncertainty around the Government’s aspiration of achieving 100% renewable electricity by 2030, its Gas Transition Plan, its NZ Battery project which could see a huge pumped hydro facility built at Lake Onslow, and its Energy Strategy caused delays in investment, it said.

Energy Minister Megan Woods would not comment directly on whether she agreed with the authority’s conclusion that structural reforms weren’t needed, or on its assessment that uncertainty around several government polices was delaying investment.

She would also not comment on whether the Electricity Authority was setting itself a high enough bar as a regulator.

Instead, Woods said the authority’s findings would take some time to consider, but that the Government was taking several steps to “help the electricity system evolve”.

Aside from the NZ Battery project, those included establishing a regulatory regime for offshore windfarms, investing in upgrades to the national grid, and trialling community energy projects, she said.

John Harbord, chairperson of the Major Electricity Users Group, said it was “cautiously pleased” to see what appeared to be a more explicit acknowledgement from the authority that market power was a problem in the industry.

It also agreed with the authority’s assessment that encouraging new entrants and new investment in power generation would fundamentally help.

But he questioned whether the regulator was doing enough to address the issues it had identified.

“The EA’s approach to the issue of market power is to increase their market monitoring function and they don't seem to be suggesting doing much else.”

Monitoring electricity trading was not going to reveal or get to the heart of addressing entrenched long-term market power, Harbord said.

“They've got to answer the question of what's the driver of the dysfunction we're seeing in the market, before they solve it.”

The Resource Management Act should be reformed to make it easier to get new power plants approved, Harbord said.

But he agreed generators should also face “use it or lose it” rules that prevented them for land-banking by sitting on resources consents for the likes of wind farms and paying retainers to landowners for long periods that prevented others from developing consented sites that they were not advancing.