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NZ Electricity Companies would be breaking EU/US rules in NZ

The Electricity Price Review is due for release at the end of this month and Al Yates, Managing Director of Ecotricity says it can’t come soon enough.

In his blog Yates explains that structural changes to the rules for trading electricity are urgently needed.

New Zealand has one of the highest vertically integrated electricity markets in the world. Yates says if European Union or US market rules were applied to any of the large vertically integrated generator/retailers in New Zealand, it would make all of these companies non-compliant.

Yates says ““Other countries have banned electricity generators selling to their own retail operations as this vertical integration has been deemed anti-competitive. It’s similar to what Enron was doing in 2000 and how they made super profits from rigging the wholesale market. New Zealand’s electricity wholesale market is far behind other international market rules including Australia, European Union and America. Furthermore, the large generator-retailers are manipulating the wholesale market including the spot market and the ASX. This is anti-competitive behaviour that ultimately keeps 100,000 New Zealanders in power poverty and makes businesses less competitive. The status quo also means there is less incentive and therefore less investment in cheaper renewables like wind”.

Currently 86% of electricity generated in New Zealand goes to generator owned retail operations. The large ‘gentailers’ (vertically integrated wholesale and retail power companies) are effectively bypassing and regularly undercutting wholesale markets. The impact has seen four independent electricity retailers exit the market in 2018, and ever increasing power prices for consumers.

Yates says “Not surprisingly, New Zealand has an uncompetitive forward wholesale electricity market with very low liquidity (10 – 15%) when compared to Australia (250%) and the US PJM market (3,000%). New Zealanders are getting a very raw deal while power companies, many with off shore shareholders, are making excessive profits”.

Yates says breaking up vertically integrated trading has worked for other countries and the change is urgently due in New Zealand to increase competition and lower the electricity costs for consumers and businesses.

It was also the reason for breaking up Telecom in 2008 which has resulted in much more competitive telecommunication costs to consumers.

Yates suggests some simple changes to the existing wholesale market.

1. Mandatory Wholesale Market Making

2. Retailers be required to trade 150% or more of their annual volumes through forward hedge markets. That way retail operators are effectively unable to hedge with their own generation without going through the wholesale market, and retail prices will be based on a competitive, not inflated wholesale market.

3. Increase the term of the market from 3 years to 10 years
Under the current forward ASX wholesale market term, three years is the maximum term a hedge contract can be entered into. The ASX forward market could be changed to eight or 10 years very easily. Three years is simply too short to allow for the following reasons;

• It’s too short a period to support cheaper and cleaner renewable investment which need upwards of eight years to support their investment. Other countries that have longer term hedge and auction markets are seeing more investment into renewable plant which in turn is bringing down wholesale costs.
• It’s too short to provide a long term view for retailers to build long term and highly competitive retail businesses.
• A secondary reserves market may also be required, which is essentially a backstop market for holding a fixed quantity of fuel (for instance, hydro or thermal capacity) which is held back and brought on only as required in emergency situations.

Ecotricity joins a growing number of electricity retailers calling for the same rules that apply in other countries to make electricity more competitive and cheaper for consumers.

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