Review Identifies Risk To Retail Electricity Competition

A review of risk management options for electricity retailers by the Electricity Authority Te Mana Hiko has found that while there are a range and combination of solutions available to retailers, there is a potential risk to retail competition that the authority cannot ignore.

"Our review was set up to look at whether the availability and pricing of risk management contracts was creating a barrier to retail competition. It found that retailers have been able to secure substantial hedge cover through over-the-counter (OTC) contracts offered by gentailers, and prices for most of these contracts are likely to be competitive," says Chief Executive Sarah Gillies.

"However, we could not reach the same finding for super-peak hedge contracts which provide morning and evening price cover, when residential demand is highest and wholesale electricity prices can get very high.

"Risk management helps enable competition in the retail electricity market, especially for those retailers focused on domestic consumers and small business customers.

"The market for this type of hedge contract is neither deep nor liquid, with some gentailers not offering hedges when requested. While alternatives are emerging, that will take time. To support retail competition, we need to increase the liquidity of this type of contract and increase price transparency.

"While some of the evidence is not conclusive, and scarcity is a factor in the availability of these contracts, we believe there is a risk that some level of gentailer market power could be in play. We are not going to ignore that potential risk.

"Retail competition brings benefits to consumers and small businesses through more choice and access to affordable electricity. The Authority is working to increase retail competition and is responding to this risk. At the same time, we are ensuring that we don’t stifle the long-term development of new risk management options, and the broader evolution of the sector.

"Risk management helps to insure retailers and major industrial users against wholesale electricity price volatility. There is no one solution and retailers use a portfolio of complementary options to manage risk. But for the next few years at least, the hedge contracts offered by the four big gentailers will continue to play an important role," said Gillies.

The Electricity Authority and Commerce Commission’s Energy Competition Task Force will pick up on the review’s analysis as it develops actions focused on enabling new generators and independent retailers to enter, and better compete, in the market.

The review requested a substantial amount of information from gentailers and non-integrated retailers and carried out extensive analysis and modelling of that data and other data, to inform the preliminary findings in the report. Throughout the review the Authority has tested the analysis and findings with Commerce Commission staff.

Feedback on the preliminary Authority’s risk management review findings is sought by 18 December 2024.

Other report released

The Authority has also published today a report showing that the internal transfer pricing and retail gross margins disclosure regime has limited, if any, benefit in providing the necessary assurances about the competitive operation of the electricity market in relation to gentailer retail pricing or increased participant trust and confidence.

The Authority will reconsider the role of internal transfer prices and the disclosure regime, directly after it finalises its findings from the risk management review.

Additional background:

In December 2023, the Authority commenced the risk management review to assess whether the availability of OTC contracts, in the context of other risk management options, is creating a barrier to entry or expansion in the retail electricity market, and therefore harming competition.

The Authority decided to undertake this review against the backdrop of increasing wholesale spot market volatility and increasing investment in intermittent generation, both of which will increase demand for efficient risk management options. The review takes account of concerns raised by some non-integrated retailers about the availability and pricing of OTC contracts.

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. The additional objective of the Authority is to protect the interests of domestic consumers and small business consumers in relation to the supply of electricity to those consumers.

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