In a land where water and wind are abundant resources you might ask why we all pay so much for power.
The answer sadly, is simple. For far too long now, Aotearoa New Zealand’s electricity market has been dominated by a handful of large ‘gentailers’, which are companies that both generate and sell power. They’ve been able to build billions of dollars worth of generation assets over time, thanks in part to generations of taxpayers who’ve funded the building of dams.
So, what’s ‘big power’ up to?
The gentailers sell the power they generate to independent retailers (those who don’t generate) at different-and more expensive-prices than they sell to their own retail arm. What’s wrong with that you may ask, they’re allowed to make money aren’t they!? Well, it means that they’re able to use this market power not just to make whopping profits, but also to make it pretty tough for anyone else to compete.
Most people know how vital competition is for better outcomes for consumers in any industry, from fuel to supermarkets. Newer companies like Flick set up shop to challenge the status quo with innovation, new products and better customer service, like no locked-in contracts. But we have to pay way more to get power from the wholesale market. Meanwhile just because the gentailers sell themselves power for cheaper, it doesn’t mean they pass cheaper prices on to consumers…ugh. In fact, their retail prices are often higher than the independents like Flick who only sell, not generate electricity.
There have been some small changes to the electricity market following the Electricity Price Review last year, but this was mostly focused on the retail side of the market and only tinkered around the edges of the big problem of the flawed wholesale electricity market.
So what’s Flick doing?
We’re not flicking around, we know that consumers deserve better so we’re working hard to push for change to the wholesale market so that all New Zealanders benefit. We’re doing grunt work behind the scenes, like submissions, working with the government and of course calling out dodgy behaviour with the authorities.
That’s why we’re pumped to see the Electricity Authority’s (EA) decision this week on the Undesirable Trading Situation (UTS) Claim that was made in 2019 by us along with Haast Energy Trading, Electric Kiwi, Ecotricity, Vocus, Oji Fibre, and Pulse Energy Alliance.
What happened?
We saw that in December 2019, when water was abundant and could have been used to produce electricity to sell onto the wholesale market, it was instead being spilled. This meant prices were higher than they should have been when there was so much water. Instead prices went up, and coal and gas was used instead of water to supply the country’s electricity needs, resulting in needless carbon emissions.
This week the EA agreed that water was “abundant, cheap and available for generation” from 03 to 27 December last year, and that this abundance should have increased competitive pressure, but did not.
Next up the EA will decide on actions to correct the market, to make up for the $70 million excess paid for power last year. Once they’ve done that, we’ll know what it might mean for all of us-retailers and consumers-who’ve paid too much for power for those 4 weeks or so. Show us the money!!
Is anyone going to the slammer for this?
Not the slammer, but we hope that those who profited will have to stump up, make this right and be given a meaningful penalty for it all, to make them think twice before using their power to ride roughshod over consumers again.
The EA didn’t lay blame for what went on last December. We get that the role of the UTS investigation wasn’t to point fingers, but only to identify and correct so called undesirable situations.
However the question remains of how the EA will ensure this sort of market manipulation is nipped in the bud.
Our Chief Executive, Steve O’Connor, says one thing is for sure, Meridian needs more than a slap on the wrist with a wet bus ticket.
“It’s now critical that the EA sends a strong message to gentailers with a tough penalty, otherwise there’s no real disincentive to stop them misusing market power.”
The fight’s not over
We’re holding out hope Meridian and Genesis will be held to account in separate investigations that are underway into potential breaches of the electricity code, with a decision due on these early next year.
Should consumers care?
Yes! This isn’t just an industry matter because ultimately the use of market power is keeping prices higher than they need to be and that impacts on bills for homes and businesses too.
It’s not good enough that Meridian has been ignoring the social responsibility associated with managing public assets and maintaining a social license to operate. The big power companies are flogging their assets and are incentivised to maximise profits, with little regard for a wider social responsibility to deliver fair prices for electricity – an essential ingredient for New Zealand’s economic growth and individuals’ well-being.
“It’s a relief to see the watchdog is on track to holding Meridian to account. Meridian should have been generating electricity when water was plentiful. Instead they’ve been using their part-government owned assets to lift wholesale prices and maximise their profits,” says Steve. But sorting this one spilling situation won’t be enough for long term fundamental change to level the playing field in the market so competition thrives and customers reep the rewards.
The electricity market is fundamentally flawed, because it allows gentailers to manipulate the market in the first place.
So what needs to happen?
The government and EA need to address the dominance of a small number of large incumbent gentailers in the wholesale market. Getting this sorted will address the cause of the fundamental underlying issue that has and will continue to stifle retail competition.
“To do this, the EA needs to focus on making sure long-term structural change, ideally vertical separation of gentailers, so they can’t increase wholesale prices and use market power to stifle competition,” says Steve.
While it would be great to separate the generators completely from retailers, there are other changes that could achieve some bangin’ results a little quicker.
Our wish list this Christmas:
All retailers must be required to purchase electricity on the same markets as independent retailers without any internal arrangements.
A competitive wholesale price will flow into retail offerings with consumers getting the best competitive deals for their long-term benefit.
This change could be done quickly, and would get better outcomes for consumers without having to split the generators from their retail arms, which we’d love to see but would take longer to do.
And help our planet too, please
We’ve seen how Meridian’s needless water spilling resulted in 6,000 tonnes of avoidable CO2 emissions. Crikey! With the market as it is, the country’s 100 percent renewable energy goals are at stake too. The wholesale market is not currently set up to achieve the goals and targets we’re aiming for. If the market was functioning well, existing or new participants would be incentivised to solve the dry year or storage problem rather than the government having to build storage as they are investigating. What’s been overlooked is that the dominance of gentailers is also hindering independent investment in new renewable generation capacity, which has consequences for achieving your 100 percent renewable electricity target. There are wind farms, consented ready to be built that right now are being wind banked rather than built.
Meanwhile, the dominance of gentailers in the wholesale market limits the ability of independent intermittent generators to secure long-term contracts to underpin their investment.
We know there’s lots of other stuff on people’s minds right now, it’s been a tough year and focus should fairly be on the lighter side of life in the days before Christmas. The reason we’ve chosen to shed a light on this issue right now, is because otherwise it could quite nicely be slipped under the rug by those who’d rather it didn’t get attention. Here’s to more good news for 2021, and you’ll see more from us as we keep fighting the good fight and giving you the tools to support change top. In the meantime, to find out more about the market and what we’re up to, head on over to our blog.