Day of reckoning arrives for Meridian
The Electricity Authority will issue its final ruling tomorrow on whether Meridian and Contact Energy manipulated the electricity market and caused unnecessary carbon emissions last year.
Independent retailers who brought the complaint argue tough action is needed to restore confidence in the electricity market.
Seven electricity retailers including Flick Energy and ElectricKiwi complained Meridian and Contact spilled water from their South Island dams late last year that they should have used to generate cheap power. They said the wastage, during a time of heavy rain, happened over more than a month.
The retailers believe Meridian and Contact profited from the wastage overall, as it meant they got a higher price for the electricity that they did sell to other retailers through the wholesale market. They allege the wastage also resulted in 6000 tonnes of unnecessary of carbon emissions, as coal and gas was burnt to produce power the hydro schemes could have supplied. What has the EA said so far? The authority sided with retailers complaining against Meridian in a detailed preliminary ruling in June, while clearing Contact.
Chief executive James Stevenson-Wallace said its preliminary view was that
Meridian was involved in an ‘‘undesirable trading situation’’ (UTS) between December 3 and 18, 2019, but Contact Energy was not.
He explained Meridian’s activities led to more expensive generation running in the North Island at a time when there was excess fuel (by which he meant water) in the south.
The EA calculated Meridian could have generated about 41 gigawatt-hours of additional renewable energy that December, had it not been for the behaviour.
Meridian said any avoidable spillage was much less.
While the authority cleared Contact in its preliminary ruling, it has since launched an investigation into whether both companies breached its ‘‘high trading standard rules’’ in relation to essentially the same complaint.
Were consumers affected? The behaviours that Meridian is alleged to have engaged in could be expected to result in higher electricity prices for consumers.
The EA did say in its preliminary ruling that most consumers would not have been ‘‘immediately’’ affected by the alleged hydro wastage. That is because most are on fixed price contracts and retailers are often hedged against movements in the spot market.
But it went on to say that ‘‘in the long run, if retailers expect there to be high spot prices during times of abundant hydro storage, then retail prices will increase for consumers’’.
Evidence that electricity prices were not high last December and that electricity futures prices did not increase at the time are not evidence that consumers wouldn’t lose out in the way the EA suggested. It was a period of huge hydro inflows when wholesale electricity prices should have been very low.
The independent retailers allege the behaviour they observed in December was essentially nothing new – suggesting the ‘‘long run effect’’ that the EA warned of was already baked into the market.
NZ Steel has claimed that the alleged UTS cost its business alone almost $1 million.
Penalties
If the EA confirms its preliminary view that Meridian was involved in a ‘‘UTS’’ then it may be forced to pay the cost of resetting spot market prices to the levels they should have been during the period in question.
That would be a hugely complicated task.
Tens of millions of dollars would be likely to be involved, but we’d really need to see the authority’s final ruling to be sure.
This would be a charge rather than a ‘‘penalty’’, though.
If there is any punitive sanction applied against either Meridian or Contact, that would come about as a result of the parallel investigation the EA is conducting into whether they breached market behaviour rules, so would be something for another day.
What if both are cleared?
Expect independent retailers to scream blue murder and for some of them to potentially shut up shop down the track saying they had lost confidence in the market.
And if the EA confirms its decision against Meridian?
Former deputy prime minister Winston Peters suggested Meridian’s board and management would have a lot of explaining to do . But don’t expect any heads to roll any time soon, in that situation.
It might perhaps depend on the size of the ‘‘reset charge’’, but
Meridian has appeared to hint that it would go to court to challenge an adverse ruling.
It said in a submission to the EA in November that ‘‘in our view the authority is still not applying the appropriate legal approach to the question of whether a UTS arose’’.
So this could drag on for years through the courts.
The big picture?
Whichever way it goes, the UTS ruling is going to be a huge deal for the electricity sector, whose structure may need a complete overhaul anyway if the Government is to put the right incentives in place to hit its 2030 ‘‘100 per cent renewable’’ target.
If a majority state-owned electricity company is intentionally spilling water that it could use to generate hydro power at near zero cost while Huntly’s gas or coal turbines are spinning, that is the wrong outcome – both from the point of view of consumers and the environment.
The question is whether it would be Meridian or ‘‘the electricity market’’ itself that would really be to blame.
After all, Meridian’s alleged actions could be explained simply by it seeking to maximise its profit.
But this situation could not have arisen in the first place if the electricity market wasn’t fundamentally flawed and the incentives it imposes on ‘‘gentailers’’ perverse.
Don’t expect the EA – which as the market regulator is an intrinsic part of that flawed system – to have too much to say about that tomorrow, though.