Words by Richard Rennie.
Electricity users throughout New Zealand, including irrigation users have been grappling with ever rising electricity costs for the past five years, a fact confirmed by the recent Electricity Authority market monitoring review of the wholesale electricity market.
In late October the Electricity Authority released papers outlining the main conclusions it had drawn from its review of the wholesale electricity market. The review was prompted by the surge in prices since the unplanned outage of the Pohokura gas facility three years ago.
After the Pohokura gas outage prices rose and have on average been above $100MWh since, with the average spot price for 2019 at $127/MWh, the highest annual average since 2008 when the market was hit by severe hydro shortages over winter. In contrast the average spot price between then and Pohokura in 2018 was only $67/MWh.
The Authority noted that prices over the review period have to a certain extent reflected underlying supply and demand conditions, a sign of a competitive market. The economy has been growing strongly over this time, hydro lakes have been lower than average, gas outages have occurred and all fuel costs including the carbon component have been moving upwards.
Most recently, the lift in electricity prices has accompanied an ever-growing inventory of cost pressures upon producers, exacerbating the effects of Covid’s impact on freight price rises and labour cost movement.
Calculations by investment company Forsyth Barr are that the energy component for commercial contracts has surged from $82/MWh in 2018 to $99/MWh in 2021, a rise of 6.2% a year, over double the annual inflation rate.
But there is also a portion of unexplained cost rises the Authority has identified post-Pohokura. One example was in 2019 when low lake levels only existed for 4% of the year, yet the average yearly price remained stubbornly high above $100MWh.
For anyone buying electricity in commercial quantities, including Canterbury irrigators, interest will be high in whatever recommendations come from the Authority’s review on competition and pricing.
The Authority has noted the New Zealand supply market is dominated by a few large generators, requiring Meridian in particular to meet demand over 90% of the time. While prices have increased since Pohokura, it also acknowledges the higher price offers may reflect some uncertainty over on-going gas supplies, including disruption risk.
It also noted some prices offered by electricity generators did not reflect underlying supply and demand conditions.
The review also determined there was some evidence of an incentive, and ability, for generators to structure offers to the market in such a way they could keep prices high.
Perhaps unsurprisingly to many in the industry, the review also determined NZ Aluminium Smelter which consumers 13% of the country’s electricity was also offered a low power price to encourage it to stay longer in New Zealand.
Estimates are this amounts to about $200 a year more per householder on their annual power bill.
Overall, the Authority has raised concerns the smelter is subsidised by generators to the tune of $500 million year, with its demand putting greater pressure upon thermal generation, in turn pushing up consumers’ power prices, particularly in dry years.
John Harbord, chair of the Major Electricity Users Group (MEUG) said the review is critical, with confidence in the wholesale market’s ability to deliver good outcomes for users at stake.
He said in the last three years some MEUG members have experienced rapid and sustained increases in wholesale electricity prices, which have given rise to significant adverse effects on productivity, investment decisions and hiring intentions.
“We will spend the coming period to identify any potential areas of common ground, including issues we believe could improve outcomes for consumers.
“An issue we will be considering is whether the scope of the review was too narrow, and whether that has affected the recommended areas to focus on to improve the market.”
The MEUG has earlier pointed to market complexities at play that are giving rise to levels of profitability that significantly outperform the Commerce Commission’s criteria for ‘persistent excess profit’.
“This raises some complex questions relating to largely unexplained pricing events, which we believe the regulator needs to work through and answer with the sector, households, SME’s and major electricity users,” he said.
The Authority has noted its investigation into wholesale pricing is not focussing solely upon any one company, and that it applies to every large gen-tailer in New Zealand. This includes comparing relevant businesses to determine if there is a market issue needing to be addressed.
The MEUG has also called for a market that more closely reflects the fundamentals of supply and demand, and for work to determine in investment in supply is adequate to meet future demand increases. More scrutiny of the market to ensure greater consumer confidence in fair prices was also sought.
The MEUG has gone so far to claim one gen-tailer had outperformed the level of profit making seen by the Commerce Commission in the retail fuel and supermarket sectors, both subject to Commission scrutiny recently.
MEUG has pointed out that unlike the retail fuel market with its price volatility, the hydro generator had experienced no volatility in the past seven years, with increased profits being largely constant year on year since 2014.
However, the MEUG’s claims have also been countered by a Forsyth Barr report that concluded electricity generators have only averaged a 1.6% return on their assets over the past 15 years, below the average annual inflation rate for the same period of 1.9%.
Electricity users are hoping the Authority’s review will shed some light on two very diversionary views about pricing levels.
The Forsyth Barr report attributes much of the price increases that have happened to an increase in carbon costs, which have almost tripled in only three years, and higher fuel costs for coal and gas.
Some possible outcomes of the Authority’s review could include reducing market concentration through forced generation asset sales, wholesale electricity price caps, and the introduction of a capacity market.
History suggests it is unlikely generator-retailors would be separated, with a 2019 Electricity Price Review rejecting this move with the benefits of integration outweighing the costs.
The review board also found it would stall or delay the amount of generation investment needed to decarbonise New Zealand’s economy.
The Authority has released two documents on its review that are open for consultation until early December.