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Electricity Market Damaging Investment Reputation

The electricity market is damaging New Zealand’s reputation for future investment

The volatility of spot electricity prices over the last 72 hours requires urgent review according to Terrence Currie, Chairman of the Major Electricity Users’ Group (MEUG).

Mr Currie said pressure on the wholesale electricity market was inevitable following the failure of critical high voltage transmission power pylons feeding the Cook Strait HVDC cable on Friday because of extreme gale force winds.

Electricity spot prices jumped immediately to about 80 c/kWh (equivalent to $800/MWh) from the average for this time of year of below 5 c/kWh (equivalent to $50/MWh). There have been a number of severe price spikes since Friday and prices have varied hundreds of dollars per MWh from half hour to half hour. As at the time this media release is being released at just after 3pm today, indicative spot prices are being posted at above $1 per kWh ($1,000/MWh).

“It is completely unrealistic to expect end users’, or for that matter prospective new entrant generators and retailers, to operate in such an unstable wholesale market.

Some one needs to determine whether it is the offer behaviour of generators or inherent flaws in the market mechanisms that are causing the price instability.

“A reasonable measure of where spot prices might be expected to peak at is the 20 c/kWh (equivalent to $200/MWh) to be used for the dry-year reserve Whirinaki plant due to come on-stream mid 2004. One assumes from the latest Government Policy Statement on Electricity that electricity costing more than 20 cents a unit is “unacceptable”. Even at that price the cost of the highest cost fuels should be more than covered.

“In any other market where an extreme weather event radically affected supply and prices we would see suppliers taking a reasonable stance to protect their own interests and the interests of end users’. For example when a drought affects farmers in the east coast of the country then farmers from throughout New Zealand rally around to supply feedstock to those affected. You do not find those farmers with feedstock and transport firms taking advantage of such extreme weather events by demanding extreme prices.

In respect of the electricity sector it is either the pricing behaviour of electricity suppliers or a fundamentally flawed market that is ruining major users’ businesses, and New Zealand’s reputation for future investment.

While MEUG remains committed to improving the electricity market design including reducing the market power of the current supply oligopoly; it is difficult to retain confidence in that strategy when the market performs so poorly consequent to the failure of key transmission lines. If it is not the design of the market then the blame falls fairly and squarely back on the electricity suppliers who must accept they are risking the future of the electricity market being handed over to the central planners again.

Mr Currie concluded, “The energy intensive industries have lost confidence in the ability of the sector to provide secure supplies of electricity at competitive prices. Manufacturers have a poor choice between taking the risk of being prone to extreme spot prices even in force majeure type events or overly high hedges because of the limited competition by suppliers. Improving competition and therefore an understanding by suppliers about reasonable pricing when extreme events occur as happens in other commodity markets is urgently needed, along with a thorough review of how the wholesale electricity market performs.

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