Electricity Authority intervenes to encourage inter-island competition
by Pattrick Smellie
Aug. 2 – The Electricity Authority is to commandeer funds normally shared among industry participants to create a new protection against sky-high wholesale market spot price spikes like those that hit the market on Saturday, March 26.
The establishment of a new financial transmission rights (FTR) market ends 15 years of inconclusive debate since the wholesale electricity market was first established in 1996 and represents a second significant intervention on controversial spot market price issues.
The EA intervened to reset prices recorded in the upper North Island on March 26, after spot prices went as high as $20,800 per Megawatt hour during a routine maintenance outage by the national grid operator, Transpower.
State-owned generators Meridian Energy and MightyRiverPower were caught out in the price spike, and would face wiping tens of millions of dollars off annual profits if the original March 26 prices are allowed to stand.
Those funds would then have been redistributed among generators and major industrial plants that have direct connections to the national grid, and are located to the south of the constraints that disrupted the market that day.
The EA intends to reset all prices from March 26 to no more than $3000 per MWh, although Contact Energy, Genesis Energy and Todd Energy last week succeeded in gaining a stay on that decision in the High Court.
The trio contend the EA’s decision effectively rewards poor risk management. A number of major and minor Auckland electricity consumers, including Auckland Museum and TVNZ, were also hit by the price spikes.
Meridian and MRP fear if such outcomes are allowed to stand, they will discourage electricity retailers from competing anywhere other than in areas where they own generation assets.
“Holding an FTR or multiple FTRs should provide retailers with the confidence to either enter new areas or compete more strongly in areas where they have existing customers,” the EA said.
Electricity reforms implemented last year have compelled the Genesis and MRP to establish South Island customer bases, and placed Meridian under pressure to increase its customer numbers in the North Island.
FTRs are described as a “special type of hedge product that protects the issuer of FTRs from exceptional movements in the spot market, such as occurred on 26 March this year.”
“FTRs differ from other hedge contracts in that they are funded by surplus money arising from spot market pricing arrangements. Regulatory intervention has been necessary to enable the surplus funds arising in the spot market to be issued as FTRs,” the authority said in a statement.
Initially, FTRs will only be offered between two of the 250 “nodes” on the national grid, at Benmore and Otahuhu, both key points on the grid for South Island and Auckland electricity load respectively.
In a practical example of how the system would work, the EA gives a scenario where the wholesale electricity price is $10 per MWh at Benmore, but $100 per MWh at Otahuhu.
The holder of a Benmore-Otahuhu FTR would not face the $100 price at Otahuhu, but would instead be paid back the $90 per MWh difference, minus the cost of the FTR.
“The holder reduces their price risk between the North and South Islands and vice versa,” the EA says.
FTRs to hedge against the risk of surging wholesale prices within either island will be the subject of further work, with options either to expand the FTR market or “adopting a different approach.
”The number of FTRs available in any one month will be determined by the EA’s FTR manager, based on predicted market conditions, and will be available for a given month up to two years in advance.