Key improvements in electricity market in 2012

Key improvements in electricity market in 2012

17 April 2013

There were three key developments in the electricity market in 2012 – increased competition in the retail market, increased activity on the ASX futures market and improved hydro management by the sector in response to the 2012 dry winter.

The Electricity Authority has published ‘Electricity market performance – A review of 2012’, which looks at these and other developments.

Evidence of increased retail competition includes measures of market concentration and switching. The review shows the overall level of competition in the retail market is one of reducing regional market concentration, with some new independent retailer entry and growth slowly reducing the market shares of the main retailers.

The main measure of market concentration the Authority uses is the Herfindahl-Hirschman Index (HHI), which continued its long-term trend downwards in 2012. The HHI is the sum of squares of market shares in a particular market. It has a maximum of 10,000. The retail market HHI is about 3,500.

Nationally, switching levels stayed strong in 2012, with 18% of customers switching retailers. This was down slightly on record levels of 19.5% in 2011, but still very high, indicating customers are exerting pressure on retailers by voting with their feet.

The ASX futures market had an excellent year in 2012 according to Electricity Authority Chief Executive Carl Hansen. “Futures were traded heavily in the lead up to the winter once the hydrological situation became clear. This indicates participants are using the ASX to manage their risk, which is exactly the outcome intended,” he says. This increased use was reflected in record Uncovered Open Interest (UOI)—which is a measure of total hedge cover supplied from the ASX market to the sector—and record trading volumes.

The 2012 year had the driest first six months ever recorded. The market responded in ways that are very encouraging says Mr Hansen. Generators invested in new equipment to increase the amount of reserves offered in the South Island, and acquired the offer rights for interruptible load from the aluminium smelter at Tiwai Point. This increase in reserves is needed in a dry year to support southward flow through the HVDC. The review outlines how this resulted in earlier flow south than in the previous dry year 2008, which had the effect of conserving water in the South Island.

Mr Hansen says this evidence indicating that hydro storage was managed far more conservatively than it was in 2008 is an encouraging sign that the changes resulting from the 2009 Ministerial review have had a positive effect. Hedge and spot prices reflected the hydrological situation, which meant that the market received useful price signals of the near-term supply risks arising from the low hydro inflows.

However, prices for the longer-dated futures remained almost unchanged from November 2011 until the middle of the year, showing that hydro events in any one year are not expected to affect supply and demand conditions in future years.

“The hydro management in 2012 augurs well for future hydro management,” Mr Hansen says. “Also, in future years, the risk of supply shortages should be greatly reduced now that Meridian has access to an additional five metres in Lake Pukaki when official conservation campaigns are undertaken.”

In other developments, the year also saw the introduction of new schedules in the wholesale market aimed at creating signals about the value of reducing load. These changes to demand-side bidding and forecasting affected final prices in the electricity market in 2012.

And the roll-out of smart meters continued at pace during 2012, and is likely to drive considerable innovation in retail products and price offerings over the next few years.

Electricity market performance – A review of 2012

ENDS

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