In late July, Natural Gas Corporation (NGC), the stock exchange listed owner of New Zealand utility OnEnergy, announced that it had quit the country’s retail electricity market, selling its 290 000 North Island customers to state-owned Genesis Power. The move came as no surprise, and highlighted the current problems in New Zealand’s electricity market.
Not unlike other power markets around the world, New Zealand has witnessed soaring wholesale prices in its spot market. From a typical average price of NZ$40/MWh ($17.6/MWh), prices have risen to an average of around NZ$200/MWh throughout July, with peaks of NZ$700/MWh.
The underlying cause of the rise in prices is an unusually dry winter which has lead to low hydropower storage levels. Hydro-power supplies around 60 per cent of New Zealand’s power needs and at the beginning of August, total national hydro storage was just 58 per cent of normal levels for that time of year.
The shortage of power has caused the government to introduce a power saving campaign and has also led to debate in parliament over reform of the country’s electricity industry. Industrial consumers exposed to wholesale spot prices have been hit hard, as have retailers such as NGC’s OnEnergy.
NGC is 66 per cent owned by Australian Gas Light (AGL), a company which entered the New Zealand electricity market during the industry reform process in the late 1990s. AGL announced that its full-year net profit after one-off items has plunged 74.4 per cent to A$115.4m (NZ$141.07m) from A$450m a year earlier, while NGC reported a net loss NZ$302m. NGC also disclosed recently that it had lost more than NZ$1.4m a day for two straight months due to its exposure to the wholesale electricity market in New Zealand.
NGC warned the market of forecast losses in June. In early July it sold its 116 000 Christchurch customer base to state-owned generator Meridian Energy, while AGL provided NZ$170m of emergency funds to enable it to continue purchasing wholesale power. NGC cut its losses and exited the market in late July with the deal with Genesis.
While OnEnergy is the retailer to have been most affected by the rise in wholesale prices, others have also felt the effects. TrustPower and new entrant, Todd Energy’s Freshstart, both announced that they would not take on any new customers until late 2001 as they would not be able to supply them with power. Meridian Energy has also closed its doors to new customers.
But while retailers have suffered from exposure to spot prices, the power price hikes are likely to benefit generators – particularly those with thermal capacity. Contact Energy has stated that it is running its generation harder than it usually would, and analysts expect the utility to bring in several million more dollars in revenues this year due to the high wholesale prices. The generator has around 30 per cent of its generation uncommitted to hedge contracts.
State generators, meanwhile, have been criticized for profiteering. Genesis Power denied the accusation, saying that its full output was committed to fixed price contracts, while Meridian said that it has had to reduce its generation due to low hydro levels and so would not be making any ‘windfall profits’.
Nevertheless, the high spot prices caused those worst affected by the power shortage – NGC and Trustpower – to claim that market abuse was taking place and that the New Zealand Electricity Market (NZEM) was insufficiently competitive. Todd Energy also complained publicly about the behaviour of large generators.
The complaints prompted an investigation by the NZEM Market Surveillance Committee (MSC). The MSC undertook a month-long inquiry, examining the market’s management of risks in the context of current prices and the demand-side and pricing issues.
Spot prices in New Zealand’s wholesale electricity market have given some industry participants cause for concern
The MSC said in July that it found no evidence of abuse of market power in NZEM. It said in a statement: “Ultimately, each market participant’s individual perceptions of particular risks and opportunities are what matters in NZEM. A market participant that complies with NZEM’s guidelines and principles is entitled to compete in NZEM as it chooses.”
New Zealand’s market is fully open and essentially ‘self-regulating’. Competition exists in generation and retail, and distribution line businesses are fully separated from retail and generation. In the wholesale market, spot prices are set half hourly, two hours in advance in NZEM, which is operated by M-co, and generators and retailers can hedge against spot prices through bilateral contracts.
But the self-regulation may not last long. Last year, the government initiated an inquiry into the electricity market following complaints from consumers about electricity prices and billing accuracy. The inquiry assessed the extent to which the regulatory regime for electricity transmission, distribution, wholesaling and retailing ensures an efficient, reliable and environmentally sustainable power industry.
The outcome was a proposed Electricity Industry bill which would create a new ‘governance board’, overseen by an independent board, to replace the three existing governance bodies. The bill will also give the government the power to regulate certain activities and also provide backstop regulatory power should it be required.
Parliament has been debating the proposed legislation in light of the electricity ‘crisis’. There is no doubt that the government is under pressure to bring the current situation under control, especially as next winter has also been forecast to be dry. In addition, there is concern among consumer groups that the consolidation currently taking place among generators and retailers has already reduced the level of competition in the market, and industrial consumers do not want to see a return of the high prices that have affected their productivity. The result could be a higher level of re-regulation than had been anticipated.