Dairy giant seeks power price action

Fonterra has joined independent electricity retailers in calling for the Electricity Authority to take stronger action to correct an ‘‘undesirable trading situation’’ in the electricity market.

New Zealand’s biggest company told the Electricity Authority in a submission that it needed to restore confidence in the market.

The electricity market was ‘‘complex and opaque’’ and its current structure was no longer fit for purpose, Fonterra also said.

The dairy giant uses about 1160 gigawatt-hours of electricity each year. That is expected to increase in the coming decades as it replaces coal boilers at its factories with electric ones and other alternatives in a bid to cut its carbon emissions.

But Fonterra portfolio manager Bruce Turner said an ‘‘undesirable trading situation’’ (UTS) in 2019 provided ‘‘considerable evidence of market power being used’’ to drive up electricity prices.

The Electricity Authority determined last year, in response to a complaint from several electricity retailers, that a combination of factors pushed spot market electricity prices above the level they should have been in December 2019, creating the UTS.

Authority chief executive James Stevenson-Wallace told Stuff in March that ‘‘front and centre’’ of those factors was Meridian Energy withholding hydro generation from its Waitaki hydro scheme to prevent a fall in wholesale prices in the South Island.

The authority proposed resetting spot market prices by a nominal total of $80 million in a draft decision on ‘‘actions to correct’’ the UTS in March.

But it said it could not ‘‘unspill water’’ and Stevenson-Wallace has declined to provide an assurance that generators would not benefit financially from undesirable behaviour under its proposed fix, or that power users would be fully compensated. Meridian has said the proposed reset would cost it about $2m.

Turner told the authority that in Fonterra’s view, the market behaviour uncovered by the UTS ‘‘was an example of the extreme end of a not uncommon practice’’.

Wholesale buyers ‘‘as well as downstream consumers’’ would be left in ‘‘a net negative position’’ despite the authority’s proposed fix, he said. ‘‘This UTS resolution comes at a critical point in time for the EA,’’ Turner told the authority.

‘‘New Zealand’s zero carbon goals will see significant electrification as consumers change to electrical technologies in order to reduce emissions profiles.

‘‘The EA must take this opportunity to restore confidence in the market and seek to ensure that the supply side is unable to earn systematic economic rent.’’

Independent electricity retailers also criticised the Electricity Authority’s proposed fix in their submissions.

Electric Kiwi and Haast Energy said in a submission that the remedy should ‘‘ensure no market participant that was a party to or contributed to the UTS benefits financially from it’’.

But Meridian submitted that the authority was proposing to reset spot prices at too a low price; $13.70 a megawatt-hour when Meridian said the figure should be $19.98 according to the authority’s own analysis.

In a possible further complication, the ASX warned that retrospectively resetting spot prices was likely to have ‘‘significant and lasting undesirable impacts’’ on the market for hedging electricity. Such contracts are frequently traded on the ASX.

The ASX would prefer to see an ‘‘off-market mechanism’’ used to address the UTS, its general manager of commodities, Bradley Campbell, said.