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High power prices red flag to regulator

28 October 2021

The Electricity Authority (EA) review and supporting issues paper, released this week, on competition in the wholesale market demonstrate an appetite for reform but uncertainty over exactly what the problem is.

The EA is seeking feedback on its analysis, including the indicators used, and the potential solutions it is offering. A factor in determining the size of its response will be its assessment of the extent to which the recently amended trading conduct rules will address the conduct concerns it has identified.

The consultation closes on 8 December 2021.

The EA smells a rat

The review covers the period January 2019 to June 2021 and investigates why spot prices over that time have been the highest yearly average since 2008.

Basically the EA thinks it smells a rat but it cannot see the rat or prove conclusively that it exists.

It says that underlying supply and demand conditions explain some of the price rises, but not the full extent of them, and that the “unexplained” quotient may reflect limitations in the data available to the EA “or it could be because prices are not being determined in a competitive environment”.

In support of this view they name “potential inefficiencies”, such as the contracts between Meridian, Contact and the New Zealand Aluminium Smelter. The EA says these constitute a $500m subsidy to Tiwai which could push up the electricity bill to New Zealand households by $200 a year.

It also notes that there may have been some periods where some generators have offered capacity at a price much higher than the spot price with the intention that such capacity not be dispatched. This, the EA considers, may indicate “economic withholding” – an exercise of market power.

Potential solutions/rat bait

While the EA’s immediate concerns stem from its views on the NZAS deal, it has proposed a range of possible options to address inefficient discriminatory pricing, some of which may have wide ranging impacts on the sector and unintended consequences for market participants.

These include:

  • giving the EA the ability to pre-approve large contracts (although not specified, this would apply to power purchase agreements, under which an off-taker contracts for all or a large part of supply from a particular power plant)
  • requiring public disclosure of all (or some) hedge contracts or requiring large hedges to be traded publicly
  • extending the trading conduct requirements to the hedge markets
  • introducing non-discriminatory pricing rules
  • introducing a hybrid of non-discriminatory pricing rules and pre-approval of contracts, and/or
  • prohibiting ‘use-it-or-lose-it’ clauses (these are common in power purchase agreements and enable one party to terminate an agreement if consumption falls below a certain threshold).

If proceeded with, these proposals would increase operational, regulatory and commercial burdens in an already heavily regulated industry, and may inappropriately extend the role of the EA to take in functions typically associated with commercial decision-making or management.

The proposal that the EA pre-approve power purchase agreements is a significant move which may prove counter-productive as it would introduce another hurdle, in addition to resource consenting, and overseas investment consent for offshore developers, which may delay or inhibit new generation projects.

All at a time when in order to meet the Government’s electrification and net carbon zero goals, huge amounts of new renewable generation are required.

What next?

The EA appears motivated to address the risk of inefficient price discrimination as soon as possible in order to protect against any perceived detriment to the long-term interests of consumers.

However it does not seem to be firm in either its analysis or its conclusions, instead highlighting the “complexity” of the issues in play and inviting detailed feedback on its report.

We suggest you begin digesting the content of these papers and developing your response now. Contact us to get started.

Our thanks to Kishan Gunatunga for preparing this publication. 

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