Electricity Authority’s Review Of Competition In The Wholesale Electricity Market Raises Questions

In March 2021 the Electricity Authority announced it would conduct a review into competition in the wholesale electricity market.

The period of the review covers the sustained elevated electricity prices since an unplanned outage at the Pohokura gas facility in Spring 2018 and the announcement in January 2021 of the arrangements to extend operation of the New Zealand Aluminium Smelter (NZAS) at Tiwai by four more years.

The review looked at the structure, conduct and performance of the wholesale electricity market from January 2019 until June 2021.

Today the Authority published:

- A detailed Review paper that sets out the methodology used for the review, as well as a set of observations about the competitiveness of the wholesale market; and

- An Issues paper that addresses an observation made in the Review paper around the electricity arrangements that extended operation of the NZAS smelter at Tiwai Point - just prior to the Authority launching its review.

"The Authority is concerned that all consumers might be paying too much for their electricity, because Meridian, supported by Contact, appears to have sold electricity to NZAS for $500m less than it cost to produce. The arrangement could be wasteful. The subsidy maintains demand and keeps prices high in the wholesale market. Households might be paying up to $200 more every year," said James Stevenson-Wallace, Chief Executive of the Electricity Authority.

"The Authority has been monitoring the impact of the smelter on the wholesale electricity market. We became concerned about the potential adverse impacts on consumers when, after the deal was signed, we became aware of the effective contract price."

The review notes that the price the smelter pays for electricity appears to be significantly lower (even adjusting for location) than the forward prices at the time the deals were being made. "Our analysis suggests all generators benefit from NZAS staying because it keeps prices high for all other consumers." says Mr Stevenson-Wallace.

"The Authority’s focus is to protect the long-term interests of New Zealand electricity consumers. The Issues paper seeks feedback on timely and practical steps it can take to ensure that future contracts between electricity generators and large consumers are efficient."

The Authority has not found anything unlawful with the arrangement, which was made under current electricity market and competition policy settings. The Authority is looking at the settings and arrangements that allowed the deal to be done.

The Issues paper focuses on the harm from inefficient price discrimination as potentially illustrated by the NZAS arrangements. The Issues paper is seeking feedback on a range of potential steps the Electricity Authority could take under its mandate and powers to ensure that similar future deals are efficiently priced, and consumers have confidence prices reflect supply and demand fundamentals. The Issues paper also notes that other measures - such as bespoke structural solutions - are also available to the government but outside the Authority’s remit. At this stage the Authority thinks these issues are unrelated to generators owning retail businesses.

Addressing the potential issues the NZAS arrangement raises is the first step in responding to the Review and we are consulting on all options. The wider review of wholesale market competition signals the continuation of the Authority’s focused programme of work on the wholesale market. The Authority welcomes input from all stakeholders on the review and their views on the actions that should stem from it.

The timing of this review is important as the Authority looks to establish whether current market settings will support an efficient transition to a low emissions economy.

The review will inform the Authority’s future work programme on the wholesale market, and we welcome input from all stakeholders on the review and their views on actions that should stem from it.

The papers can be read on the Authority’s website and you can email the Authority at reviewconsultation2021@ea.govt.nz with your feedback until 5pm Wednesday 8 December.

Notes:

- The Electricity Authority is an independent Crown Entity with a statutory objective to promote competition in, reliable supply by, and the efficient operation of, the electricity industry for the long-term benefit of consumers.

- The review - Market monitoring review of structure, conduct and performance in the wholesale electricity market - analyses data and indicators from multiple sources using the Structure/Conduct/Performance approach.

- The Structure/Conduct/Performance framework is an internationally accepted way of examining a sector’s competitiveness and provides the starting point for the Authority’s monitoring framework. The simple premise is that the structure of the market determines the conduct of its participants and thus market outcomes. The more competitive the structure, the more competitive the conduct of participants and the more efficient their performance.

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