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Is our electricity market hanging consumers out to dry? (Photo: Getty Images)
Is our electricity market hanging consumers out to dry? (Photo: Getty Images)

PartnersAugust 21, 2020

Consumers and the environment are paying for our broken electricity market

Is our electricity market hanging consumers out to dry? (Photo: Getty Images)
Is our electricity market hanging consumers out to dry? (Photo: Getty Images)

OPINION: In June, the Electricity Authority found that Meridian Energy unnecessarily spilled water from its hydro stations. Flick Electric Co’s chief executive, Steve O’Connor, explains why the EA’s findings don’t go far enough.

At the end of last year, we were one of a group of independent retailers to support a complaint (also known as an Undesirable Trading Situation, or UTS) that Meridian Energy and Contact Energy had unnecessarily spilled water from some of their hydro stations, despite those stations running below full capacity. 

In late June, the Electricity Authority (EA) released its preliminary findings and confirmed what we already knew to be true: that Meridian Energy had spilt significantly more water than necessary at its southern hydro lakes in order to manage price risks. The EA found that this resulted in “high prices despite excess spilling”, and costs to electricity purchasers of around $80 million. For us, it was yet another example of the abuse of market power taking place in Aotearoa’s electricity industry. 

But only Meridian’s actions were found to constitute a UTS. In our view, Contact Energy was let off the hook, with the EA stating that, “viewed in isolation … Contact’s South Island stations did not cause outcomes that were significant enough to constitute a UTS”. Respectfully, we disagree. 

While we agree with the EA’s findings that Meridian’s actions equate to a UTS, we also believe Contact isn’t blameless. In our submissions this week on the EA’s findings, we at Flick, along with the same group of independent retailers that made the original claim of a UTS, challenged the EA to be braver in its role in representing the needs of Kiwi consumers, independents and the environment. 

In contrast to the EA’s findings, our modelling shows that Contact’s spilling did, in fact, have a large negative impact by contributing to increased spot prices; by our numbers, prices were $39m higher than they should have been between November 10 and December 2 – the period before the EA ruled Meridian’s behaviour constituted a UTS – and $52m higher than they should have been between November 10 and December 18, when the EA determined that Contact breached the high standards of trading conduct rules.

The combined effect of both Meridian and Contact spilling worsened the impact on the market further. 

The EA’s preliminary decision found the timeframe for Meridian’s spilling occurred from December 3 until December 18. Our analysis showed that for both Meridian and Contact, the spilling occurred for a considerably longer period, from November 10 until January 16.

The authority’s preliminary finding shows a cost to electricity purchasers of $80m due to spilling. But if we factor in the combined impact of both Meridian and Contact spilling over a longer period of time, spot prices were $177m above what would have been economically efficient given the amount of water available.

In line with its goals of low emissions, we think the EA should be quantifying the environmental impacts of Meridian and Contact’s actions, including the cost of the unnecessary thermal generation used, and the adverse environmental impacts from thermal generation. We estimate the unnecessary spilling between November 10 and January 16 created an extra 17,485 tonnes of CO² emissions – and that’s in addition to air pollution from Huntly that includes things like sulphur dioxide and nitrogen oxides.

So why does this matter? The authority’s new strategic ambition states its role as kaitiaki in ensuring the environment is front and centre in its analysis and decision-making. The result of this UTS provides the perfect opportunity for the EA to put its words into action, especially as we move towards a future that aims to do better by our planet.

For us and other independent retailers, it represents yet another example of our anti-competitive, poorly functioning electricity market. The current, vertically integrated market structure allows gentailers (generator-retailers) to be swayed by economic influences while ignoring their social and environmental responsibilities. And it’s clear that something is wrong when they would rather waste our precious natural resources than offer low-priced, carbon-free generation into the market. 

We have already seen the fallout of these market deficiencies, with smaller retailers such as Payless Energy and Nextgen, and more recently energyclubnz, closing their doors. All have attributed high and unaffordable wholesale market prices as the primary cause for their closures. 

David Goadby, energyclubnz’s founder, cited that the prolonged, ongoing and increasing volatility in the wholesale electricity market as a major reason for the company’s exit. He, like myself, has concerns as to whether the very obvious market advantages held by the major gentailers will be adequately addressed by the EA. It is a bad outcome for energy consumers when a good, competitively priced, independent retailer offering an innovative product has to cease operations.

So what does this mean for consumers? When you don’t have a market that promotes genuine, fair competition and entities that are focused on the customer and what they need, ultimately it is the customer that pays the price. Whether that’s through poor service or high pricing, the outcome is not likely to be a good one.

We also know that electricity will soon play a much bigger role in our lives as we look to the future of energy and decarbonisation. The targets have been set, but if our model and market isn’t redesigned in a way that supports customer-centricity, innovation and determination to deliver better value and choice to use our power sustainably, then those goals are nothing more than words on paper. 

We will either move far too slowly towards decarbonisation, which has outcomes that none of us would like to comprehend, or it will happen in a way that heavily impacts the back pockets of New Zealanders. Neither is a good option.

The EA’s decision on this UTS and any remedial action that follows will set a precedent. It will tell us whether misuse of market power and market manipulation are agreed to be unacceptable by the authority, and it will tell us whether we can have confidence in the authority to ensure the integrity of our wholesale market. We hope the answer to both is yes.

This content was created in paid partnership with the Flick Electric. Learn more about our partnerships here.

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