Hopes for powerpricing investigation

AUCKLAND: An investigation of power pricing during December’s South Island floods may help resolve longstanding issues in the wholesale electricity market, Meridian Energy says.

The Electricity Authority believes wholesale charges that month may have been $80 million higher than they needed to be because of the way Meridian priced its output while spilling water from its South Island dams.

Central to the regulator’s action is whether generators are free to manage their pricing to avoid parts of the national grid becoming constrained. When that happens, the price they get for their output typically collapses, while the cost of energy needed to supply their customers on the other side of the constraint rises.

Guy Waipara, Meridian’s general manager of generation and natural resources, said the issue had been ‘‘bubbling away’’ in different forms since a similar investigation in 2011.

Industry standards for trading conduct have been introduced but remain unclear and the company was warned in 2016 over a similar pricing incident.

Mr Waipara said the trading standards were ‘‘a bit ambiguous now and that’s not good for anyone’’.

But the authority’s contention generators should be managing risks around constraints using other tools also needed to be tested, he said. Would that reduce competition in parts of the country prone to constraints, or would customers end up paying more to cover the cost of ‘‘insurance’’ contracts generators would have to take up instead?

‘‘It’s not a simple good or bad, black or white question,’’ Mr Waipara said.

‘‘It’s more about what’s the likely outcome and what is likely to be the longterm impact on consumers.’’

The authority this week made a preliminary ruling that Meridian’s actions in December constituted an undesirable trading situation. Power prices hadn’t fallen as much as expected given the abundance of water in the South Island dams of Meridian, Contact Energy and Genesis Energy.

If that decision is confirmed, the authority can order corrective action, including resetting prices for early December. A separate trading conduct investigation is also under way.

Most homes and businesses are on fixedprice power contracts so were not affected by the claimed overcharging. But retailers without their own generation which buy on the spot market, and bigger industrial users, may have been overcharged.

The Major Electricity Users’ Group was not among the parties that complained to the authority. But chairman John Harbord said members had been concerned about pricing in the wholesale market in recent years and the group had initiated its own studies to try to establish whether generators had been extracting excessive profits.

‘‘Greater transparency and understanding are essential if major users are to have confidence in the market,’’ he said.

When the market was established almost 24 years ago, most power suppliers had their own generation. Ever since the industry has grappled for ways to reduce the natural advantage generation ownership gives some retailers over newer independent players such as Flick Electric.

Flick chief executive Steve O’Connor said the market had fundamentally changed.

As independent retailers had gained a bigger share of the retail market, the generators had been ‘‘incentivised to sell as high as they can’’ to boost earnings from their wholesale businesses.

For many years, wholesale power sold for $70 to $80 a megawatthour. On a rolling 12month basis, firms such as

Flick had been paying almost $150/MWh, leaving no margins on recent retail sales.

‘‘We’re not really dealing with a oneoff event,’’ he said. The December undesirable trading situation was a ‘‘really obvious symptom and we’ve got to get to the root cause’’.

The Electricity Authority believes if Meridian had charged less for its power, it would have generated 41 gigawatthours more electricity in December than it did. As a result, prices would have been lower, highercost North Island thermal plants would have run less and more water would have been left in the Waikato hydro scheme to help secure supplies during major transmission work earlier this year.

Mr Waipara said the flooding was the worst the company had had to manage and staff and public safety were always its first priority.

During the event, South Island inflows had been equivalent to about 2900GWh of generation — 1200GWh of which actually became electricity, while 1700GWh was spilled, he said.

Of that, the authority believed Meridian had spilled 41GWh of water unnecessarily in December, and about 20GWh of that during the undesirable trading situation period from December 3 to 18.

‘‘It’s less than 1% of the water we had coming in over this period,’’ Mr Waipara said.

The authority is receiving submissions on its preliminary ruling until August 11. — BusinessDesk