Lack of competition pushed up prices when Meridian spilled water, Electricity Authority says

Tuesday, 22 December 2020

There are lots of components in a typical power bill.

Power retailers say the Electricity Authority’s ruling that a lack of competitive pressure pushed electricity prices higher than they should have been for almost a month last year is a sign that the market is broken.

The authority has been investigating a claim from Haast Energy Trading, Ecotricity, Electric Kiwi, Flick Electric, Oji Fibre, Pulse Energy Alliance and Vocus, received on December 12 last year, that there had been an “undesirable trading situation'.

It earlier issued a preliminary decision stating that Meridian Energy pushed up power prices in December 2019 by spilling water from its South Island dams that could have been used to generate power and lower wholesale electricity prices.

Energy retailers that do not generate their own power rely on the wholesale market to purchase electricity for their customers. Some on-sell it with pricing that is linked to the wholesale price, while others offer fixed prices no matter what the underlying charge to them.

* Starting point for Meridian sanction should be $38m, Haast Energy says

* Electricity Authority announces extra step in Meridian investigation

An undesirable trading situation (UTS) is a situation outside the normal operation of the electricity market that threatens, or may threaten, confidence in, or the integrity of, the wholesale market and which cannot be addressed by other provisions of the Electricity Authority’s code.

Water that could have been used to generate electricity was spilled from dams.

The authority confirmed on Tuesday that there was a UTS between December 3 and December 27 last year.

It will consult early next year on proposals to correct the situation.

”What we found in the wholesale market during the UTS period were far from normal outcomes given the conditions at the time,” said Electricity Authority chief executive James Stevenson-Wallace.

“The operation of the market during the UTS period was very unusual. We experienced an extreme weather event in the South Island with severe rainfall and lake levels over and above the maximum. Generators were faced with record-level inflows, resource and operational constraints. At the same time North Island generation was aiming to conserve fuel ahead of an impending gas and HVDC outage.

“We’ve called this a confluence of factors - a group of factors that when combined were unusual and unpredictable. What we didn’t see is a normal market response - lower electricity spot prices driven by lower offers from those generators spilling excess water.

“There was a lack of competitive pressure which meant prices remained relatively high despite an abundant supply of water and no increased demand during the period. Water was wasted when it could have been used to generate power.

“The magnitude and duration of the event was such that confidence in the market may have been threatened. That’s the UTS test and that’s what we found.”

The authority had already begun looking into the market before the UTS claim was received.

It said, while it was reasonable to expect high prices when there was a scarcity of supply, that was not the case on this occasion.

Electric Kiwi chief executive Luke Blincoe said the decision had pointed to the concentration of market power and lack of competition in generation in the South Island. The UTS process would focus on the price aspect, he said, but there was a need to break up that market dominance.

The authority has indicated the price impact was at least $70 million and it is considered likely that any redress could involve a penalty to recoup some of that excess.

Retailers like Blincoe’s were totally dependent on the wholesale market, he said, and needed to be able to trust it was functioning appropriately.

He said there was also a carbon impact – the excess carbon emitted as thermal generation took over where hydro power could have been generated was equivalent to up to 50,000 Toyota Corollas on the road, he said.

“By unnecessarily spilling from its dams, the gentailers made $70 million to $180m of excess profits. That money comes at the expense of the smaller retailers, it comes at the expense of Kiwis who will have to pay higher power bills, and it comes at the expense of the planet. It's reckless and dangerous and is all about money before anything else.

“It's the first time since 2011 that a UTS has been found to occur. Gentailers that are responsible for generation and selling the power can't just get away with unfair practices and market manipulation.

“This is another example of the failed market model, hot on the heels of the failure of Energy Club, it's time for the Government to review the market structure.'

Flick Energy said it was a landmark outcome that pointed to major flaws in the market.

“It is a relief to see the watchdog is on track to holding Meridian to account. They should have been generating electricity when water was plentiful. Instead we reckon they've been using their part-government owned assets to lift wholesale prices and maximise their profits.

“The electricity market is fundamentally flawed, because it allows gentailers – those who generate and sell power – to manipulate the market in the first place. The EA needs to focus on making sure long-term structural change, ideally vertical separation of gentailers so they can’t increase wholesale prices and use market power to stifle competition.”

In a statement, Meridian said it was disappointed that the authority had ruled the event was a UTS. Its chief executive, Neal Barclay, said it would take time to review the detail of the decision.