Authority Imposes Interim Restrictions On Very Large Electricity Contracts

Consumers of electricity will be protected from potentially paying more than they should due to the impact of very large electricity contracts on wholesale prices, under urgent changes announced today by the Electricity Authority.

The Authority has made an urgent amendment to the Electricity Industry Participation Code 2010 to prohibit generators from giving effect to a contract of net 150MW or more unless certain conditions are met.

The urgent Code amendment will be in place for nine months, while a proposed permanent amendment is consulted on.

"The Authority last year observed that there was the potential for electricity contracts of a certain size to have adverse impacts on other consumers," says Andrew Doube, General Manager of Market Policy at the Electricity Authority.

"The arrangements announced in January 2021 to extend operations by the New Zealand Aluminium Smelter (NZAS) at Tiwai was used to highlight the potential issue of inefficient price discrimination.

"The Authority estimated the impact of the contract could potentially lead to households paying up to $200 extra on their electricity bills each year. This is because the cut-price electricity deal negotiated to keep the smelter operating could have been less than the cost of producing the electricity, effectively maintaining demand and keeping prices high in the wholesale market. It was estimated that it enabled a wealth transfer from consumers not party to the contract to generators of as much as $850 million a year.

"While the Authority did not definitively determine that the Tiwai contract was inefficient it considered, after consultation on its Issues Paper, that a timely and targeted intervention was required. This is all the more urgent given the recent announcement that NZAS is seeking to negotiate a new deal with generators when its current contract expires at the end of 2024.

"The Authority’s focus is to protect the long-term interests of New Zealand electricity consumers. The urgent amendment to the Code will protect consumers from the potential of financial impacts from contracts of a size that can shift market prices, while a proposed permanent code amendment is consulted on," says Mr Doube.

The urgent Code amendment will prohibit generators from giving effect to very large contracts that relate to the physical consumption of electricity or combinations of contracts - of net 150MW or more - unless:

• the buyer is able to onsell any unused electricity;
• the net value of the contract is positive; or
• the Authority has provided clearance of the contract

The urgent Code amendment will require generators to disclose to the Authority within five days of signing any contracts (or combinations of contracts) over net 150MW that are linked to the physical consumption of electricity. Generators will need to provide supporting information explaining the rationale underpinning pricing, the implications of resale conditions and forecast impacts of the contract on each affected generator’s group level financial performance.

The urgent Code amendment will take effect the day after it is Gazetted.

While the current Tiwai contract is the only current arrangement in New Zealand to meet the net 150MW threshold, the Authority is aware of other potential contracts linked to the physical consumption of electricity that could shift market prices.

The urgent Code amendment is the latest in a suite of initiatives by the Authority to improve competition and fairness in the electricity market including implementing trading conduct rule reforms, introducing a commercial market-making scheme, new Transmission Pricing Methodology guidelines and work to introduce real-time pricing to the market.

The potential issue of inefficient price discrimination was observed during the Authority’s review into competition in the wholesale electricity market. The next phase of that ongoing review is due to be released later this year.

The consultation paper on the proposed permanent Code amendment can be found on the Authority’s website. Submissions close at 5pm on 29 September 2022.

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