Power price spikes hurt many businesses, damage confidence

Media statement Monday, April 4th, 2011

Power price spikes hurt many businesses, damage investor confidence

Many businesses buying power at spot prices have been caught out over the past two week-ends as power prices spiked as high as $19,000 Mwh, the Employers & Manufacturers Association says.

"One smaller business reported to us that Saturday, March 26th cost them an unforeseen extra $7000 for electricity," said Alasdair Thompson, EMA's chief executive.

"Another reported it cost them an unbudgeted $180,000.

"Several power retailers have reported the spot price peaks cost them tens of millions; $25 million alone for Mighty River Power.

"So business wants to know who made all the money - at least $50 million in all - out of this?

"We might expect prices to rise by perhaps 65%, or even 3 or 4 times in such an event, but never by 200 times!

"The question to be answered is, did Genesis use its market power at the time of the outage when other generators power supply was constrained, to manipulate a massive price increase?

"Second, can we expect this to become the norm when issues like this occur in the future, and will all generators in future follow Genesis' lead?

"If so, then what will the cost of hedging for all businesses buying power on the spot market rise to?

"Business needs answers to these questions from the Electricity Authority; it will be a real test for it.

"But we don't even know if the Authority has any power to retrospectively do anything about this.

"So it's a political issue until such anomalies are resolved, though it won't help those so massively stung by the enormous prices they retrospectively found they had incurred.

"The government itself should therefore take retrospective action, which though something business never likes, may well be warranted on this occasion.

"It must be noted that Transpower signaled the constraint in the upper North Island due to their planned grid outage, and Genesis found itself in a temporary monopoly position - the question to ask of it is, did Genesis abuse its near monopoly position or did it just act in a commercial manner because it could take advantage of the situation?

"If so the fault lies with how the Wholesale Electricity Market works and buyers' failure to recognise the possibility of prices 200 times greater than usual.

"Genesis issued a statement after last week's event noting they had offered price hedges to cover the potential trading risk in the Wholesale Electricity Market as late as the day before the constraint. Not our fault was the message from Genesis.

"Other winners from the outages may well have been very big electricity consumers which had hedging in place. Some may well have even made a lot of money, along with Genesis.

"Indicative spot prices on Friday prior to the first event were that they would likely rise to around $165 Mwh, not $19,000. Those firms unhedged against the known outage at that level may not have been overly concerned, but I would be surprised if they didn't at least enquire about the Genesis hedges on offer.

"Many businesses buying power at spot prices would not have realised the potential risk.

"But I am surprised the power companies constrained by the outage did not take hedging for it if the pricing and extent of the hedges on offer was historically reasonable.

"However the spot price users of electricity will not readily believe any finding by the Electricity Authority that suggests there was no market failure, or that's how the market is supposed to work in a planned outage of this nature."

ENDS

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