With power-related chat making the news frequently at the moment, it’s time for a little behind-the-scenes de-brief of what’s been going on. Here’s our take on it.

Our petition goes to Select Committee

Rome wasn’t built in a day, and the same could be said for getting our petition to Parliament, originally submitted in February this year. It finally made it to the Economic Development, Science, and Innovation Committee last week, where Sunil, our acting CE, gave an oral submission (check out the live stream here).

For new Flicksters, our petition to reform NZ’s electricity market and bring down power prices was signed by over 11,000 Kiwis. What’s it about? Well, currently, gentailers (companies that both generate and sell power, also known as vertically-integrated companies) are able to hold back generation for their own retail brands and sell electricity to them for a cheaper price than to independent retailers (called Internal Transfer Pricing).

We’re asking the Government and the Electricity Authority (EA) to ensure a fair, competitive market for all retailers by splitting up gentailers, or ensuring all generation is sold into the open market at the gentailers’ internal transfer price, or ensuring there’s no price discrimination between vertically-integrated and independent retailers.

Gentailers have been handed billions of dollars worth of generational assets over the last few decades, as well as a market structure that incentivises them to use their dominance to stifle retail competition and innovation. While the current structure remains, it’ll continue to keep power prices and power bills higher than they would otherwise be with a level playing field and strong competition. Ultimately, structural change will bring more choice, innovation and downward pressure on power prices… and that’s exactly what’s needed! We’ll keep you posted on the next steps.

EA’s consultation paper on wholesale market competition says structural change is ‘not currently justified’

Earlier this month the EA released its consultation paper on promoting competition in the wholesale market. This follows its initial wholesale market review which found that the rise in spot prices since 2018 couldn’t be fully explained by market conditions, and that with our market dominated by four large gentailers, the higher prices may indicate the use of market power and an incentive to keep prices high (AKA economic withholding).

The consultation paper emphasised the need for more and faster new generation build to increase competition, as well as improving monitoring and enforcement rules around trading electricity to ensure prices truly reflect the underlying costs. However, they stated that “Fundamental structural change is not currently justified by the available evidence and may risk unintended consequences.”

Our view: while we agree that more generation, and better monitoring and enforcement of rules are needed, these recommendations don’t target the root cause of the dysfunction: the market structure. It’s that very structure that gives gentailers access to cheaper, stable wholesale prices, while independents operate on tight margins within a highly unpredictable market. The changes recommended by the EA won’t impact gentailers decisions about when to invest in new generation, nor their incentive to keep supply tight and wholesale prices high.

Buying electricity hedges gets even harder for independents

One way that independent retailers like us purchase electricity is through the ASX electricity futures market. While the wholesale market fluctuates every 30 minutes, the futures market is a way to buy hedges in advance at a specific price – this helps us to manage our risk by knowing the amount we can buy, and the cost we can buy it for. Prices on the ASX are largely determined by the generators, and are currently high (averaging around $200/MWh for 2023 annual contracts).

Most independents have used one large brokerage firm for these transactions, but, as of 31 October 2022, that brokerage firm is no longer offering this service, so most smaller retailers are now unable to use the futures market to purchase electricity.

A work-around has been to buy hedges directly from generators (called ‘off-market contracts’), but independent retailers are now finding that generators are either refusing to respond to contract requests, refusing to deal, or refusing to deal on reasonable terms. There’s also zero price transparency for these trades (sort of like a tender process).

So the EA is seeking urgent feedback on the issue, stating that it “would be very concerned – and would respond accordingly – if a market participant was to arbitrarily take advantage of the situation and subsequently cause harm to consumers.”

Our view: we’re in the same boat as other independents and encountering generators who are unwilling to respond to requests or offer contracts, while also staring down the barrel of eye-wateringly high futures prices (largely set by the generators). For us, it’s yet another example that gentailers have too much market power at their disposal – and they’ll push the boundaries of the market to use that power when they want to.

Big 4’s profits

In August NZ’s ‘big 4’ – Genesis, Contact, Meridian and Mercury – collectively reported profits for the last financial year, with the data showing the combined profits (EBITDAF) of Genesis, Meridian and Mercury totalled $2.27b for the year ending June (up from $2.01b last year).

Sales and acquisitions play a significant role in these numbers, but across all four companies a big portion of profits came from their generation arms, selling electricity on the wholesale market. Interestingly, over the last financial year spot prices reached record highs, but gentailers’ own retail businesses were shielded from these prices thanks to their internal transfer prices.

Our view: we don’t disapprove of any company making a profit. But when there are clear signs of market power, an incentive and ability to keep generation supply tight, as well as benefits like internal transfer pricing, we take issue.

Independents survive on the smell of an oily rag and are at the mercy of a volatile wholesale market (no internal transfer pricing for us), yet it is also us who are driving innovation, better customer service and better pricing for our customers. Ultimately, the market structure and design allows gentailers to quash industry competition and push up the price of power for Kiwi consumers. The tidal wave of issues, complaints and evidence of an unfair market continues to build and, eventually, something will have to give.