Investment Key To Promote Competition In The Wholesale Electricity Market - Authority

The Electricity Authority is proposing a number of measures to aid investment in renewable generation and to constrain the exercise of market power to promote competition in the wholesale electricity market.

The paper Promoting competition in the wholesale electricity market in the transition toward 100% renewable electricity released today stresses the critical role the entry or expansion by competitors in the renewable electricity generation market plays in encouraging competition and keeping a check on the exercise of market power.

"We believe the best way to promote a competitive market at the moment is to facilitate more and faster investment in new generation assisted by our enhanced monitoring of the market and compliance with the Electricity Industry Participation Code," says Andrew Doube, General Manager of Market Policy at the Electricity Authority.

"The entry or threat of entry by competitors is one of the most powerful forces to mitigate the exercise of market power and we are seeing a surge in investment interest from independent developers keen on pursuing new generation projects. We want to get the settings right to ensure as many of these projects see the light of day."

The paper is the next step to the observations made in the Authority’s 2021’s review into the structure, conduct and performance of the wholesale electricity market which observed that elevated prices over the review period did not always match underlying supply and demand conditions and there was some evidence that generators may have exercised market power.

It also follows on from the Authority identifying the potential for very large electricity contracts to have an adverse impact on other electricity consumers of as much as $850 million a year. In August, we made an urgent Code amendment to prohibit Materially Large Contracts unless certain conditions are met, requiring disclosure of such contracts, and providing a voluntary clearance process.

"After considering submissions on these observations the Authority has not changed its initial views and this consultation paper puts forward a number of proposals for itself and other Government entities to undertake to promote competition for the long-term benefit of consumers.

"The Authority commissioned an investment survey which highlights the amount of new generation projects that are being actively pursued. The timely conversion of intended investment into actual investment is vital to encourage competition and help meet the country’s renewable electricity goals.

"With around 400-500 MW of new supply or demand response needed every year until 2050 it is key that any impediments hindering potential investment are addressed which is why certain proposals are focused on speeding up development.

"In addition to investment in new generation, the Authority believes rigorous monitoring of trading conduct is vital to constrain the exercise of market power and the recent increase to the maximum penalty for breaches of the Code to $2 million will help encourage compliance.

"We believe that fundamental structural change is not currently justified by available evidence and may run the risk of unintended consequences, including the potential to stymie the investment pipeline," said Mr Doube.

The papers released today also include a post-implementation review of the new trading conduct provisions that took effect in June last year. The review, covering a 13-month period, found prices are tending to reflect underlying conditions and economic costs more closely than previously.

"The post implementation review shows that the provisions which require generators to ensure that their offers reflect the offers that would be made in a competitive market, are having the intended impact on generator behaviour," said Mr Doube.

The paper Promoting competition in the wholesale electricity market in the transition toward 100% renewable electricity sets out the rationale behind the proposals and explains how to submit feedback. The Authority welcomes input on the review and consultation closes at 5pm, Wednesday 30 November 2022.

Links:

Issues Paper: Promoting competition in the wholesale electricity market in the transition toward 100% renewable electricity

Information paper: The Authority’s response to submissions on the 2021 market monitoring review of structure conduct and performance in the wholesale electricity market

Information paper: Post implementation review of the trading conduct provisions

Information paper: Generation Investment Survey 2022, Concept Consulting report for the Electricity Authority

Factsheet: Review of competition in the wholesale electricity market

Timeline: Wholesale market competition review and other actions

Background

The Authority launched a review into competition in the wholesale electricity market in March 2021 after sustained high electricity prices since Spring 2018 following the Pohokura gas field outage.

The Authority’s review released in October 2021 also observed that generators had incentives to conduct inefficient price discrimination which may adversely affect consumers - with the potential to impact on consumers as illustrated by the Tiwai contracts between Meridian, Contact and New Zealand Aluminium Smelters.

The Authority made an urgent Code amendment in August 2022 to address this specific issue by prohibiting Materially Large Contracts unless certain conditions are met, requiring disclosure of such contracts, and providing a voluntary clearance process. The Authority is currently consulting on a proposed permanent Code amendment to replace the urgent Code amendment before it expires.

Notes:

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

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