What’s behind recent high wholesale power prices and what does it mean for Kiwi households?
It’s been a topsy-turvy few months in the electricity market here in Aotearoa, and you’d be forgiven for finding it hard to keep up with what’s been going on.
In Flick’s time in the industry, we’ve seen lots happen, but the recent uptick in media stories, discussions and discord around unprecedented high wholesale prices has seen movement from industry powers-that-be unlike we’ve seen before.
The recent creation of the Energy Competition Task Force, which now has the job of strengthening the electricity market in Aotearoa, is a sign that momentum for change is building, and at this early stage, we’re cautiously optimistic that it’s good news for independent retailers and Kiwi households.
So, what’s been going on, what exactly is the Energy Competition Task Force, and what will it mean for Kiwis? Strap yourselves in for our #CleverFlicker wrap-up (because, ya know, #knowledgeispower!).
High wholesale prices impact businesses and consumers
Spot prices on the wholesale market have been increasing over recent months and rose rapidly in late July and August.
To give you an idea of what that looked like – from 1 January 2024 to 15 July 2024 wholesale prices sat at an NZ average of 23.2 c/kWh, but in the 4 weeks from Monday 29 July until Monday 19 August, prices jumped up to an average of 55.2 c/kWh, and at one trading period soared to over 159 c/kWh. Yikes!
Those eyewateringly high wholesale prices have put pressure on local businesses that rely on electricity, and with Winstone Pulp confirming that they’ll be permanently closing their Kariori pulp mill and Tangiwai sawmill and citing electricity costs as a cause in their decision. It’s a sad outcome that will have a major impact on the surrounding communities.
Some electricity retailers have had to stop taking on new customers, while others, like us at Flick, have had to adjust our growth in the short term because the cost of taking on new customers is too high. Ultimately that means less choice for Kiwis and inevitably, higher power costs too.
Symptoms of a market structure that keeps prices high
Seasonally, wholesale prices trend higher in winter because of an increase in demand from heating and rain that falls as snow in the large South Island hydro catchments. This year, however, inflows were particularly low, with hydro storage dropping to 54% of the historic average. Gas supply has also been an issue.
But this current situation feels a little like déjà vu, and if you’ve been with us for a while you’ll know we’ve been calling for a market overhaul for years. It’s our view that these recurring sky-high prices aren’t just the symptoms of short supply – they’re also the symptom of a market structure that allows power prices to keep rising.
Previously, the Electricity Authority (EA) has found evidence that the market structure gives gentailers both an incentive and an ability to exercise market power. They are also well within the rule book to sell power from their generation arm to their retail arm at much cheaper prices than they sell to independent retailers. So it’s pretty clear in our view that the market setup is far from a level playing field.
Mounting calls for market intervention
Why does all that matter? Because we stand for a fair, competitive and innovative electricity market, and in our view, what we’ve currently got doesn’t deliver that. Far from it. Instead it limits competition (in any sort of market, the more competition, the better!), restricts customers’ choice of retailers, and keeps wholesale electricity prices high.
This latest high-price event has brought more attention to the market issues, and that’s meant we’re seeing more chat and more voices in the mix raising their concerns, including independent retailers, the Major Energy Users Group (who represent large electricity users in the trades and industrial sectors), politicians and media commentators.
The Government and Electricity Authority response
We’ve been pushing for change for a long time and we’re still going… which tells you where things are at! It’s not nearly where we hoped the industry would be, 10 years after our inception, and most of the tweaks that have been made by the EA in the interests of increasing competition and bringing down power prices have really just been that: minor tweaks. There’s been no real movement to deal with the root of the problem – the market structure.
But – yay – in good news the recent wholesale market situation seems to have spurred a flurry of action from the Government, which is flowing onto the EA too. The establishment of the new Energy Competition Task Force is one such action, with the team including regulatory and competition experts from the Commerce Commission and the EA.
It’s a promising step, with the Task Force focusing on work to improve the energy market for the long-term benefit of Kiwi households. John Small, who chairs the Commerce Commission, says this “should lead to lower average prices for consumers and greater energy security.” That’s what we’re hoping for!
The big job ahead of the Energy Competition Task Force
In a recent media statement, the Energy Task Force outlined that it’s working on two packages and eight initiatives to address market issues. The first package will look at ways to help new generators and retailers enter and better compete in the market, including leveling the playing field across gentailers and retailers (e.g. requiring gentailers to treat the retail arm of their business the same as they treat other retailers).
The second package will consider options to give consumers more choice and empowerment to manage their energy use and costs, such as offering rewards for selling power back to the grid (e.g. if you’ve got solar generation and a battery) and rebates from lines companies for those who export electricity at peak times.
From their establishment in late August through to confirming their programme of work in early September, the Task Force has moved pretty quickly, and we reckon it’s a positive sign that they’re serious about opening doors for real progress in the industry.
And… action!
All of this to say that we’re quietly hopeful that our years of pushing for market reform may finally result in some action that helps to make power prices fairer for Kiwi households, for what is an essential service. The recent high wholesale prices and their far-reaching impacts are a prime example of why action is needed: whether it’s high power prices, job losses or a lack of choice when it comes to energy retailers, ultimately, it’s everyday Kiwis who pay the price.