Energy Minister Megan Woods to consider fresh electricity market reforms
Energy Minister Megan Woods is not ruling out making “structural changes” to the electricity industry and has asked officials to investigate options, in the wake of a candid report by the Electricity Authority.
Woods has effectively reopened the 2019 Electricity Price Review by saying she wants to see if some changes to the market that the ministerial review rejected might need to be implemented.
The authority estimated on Wednesday that households were paying an extra $200 a year for electricity on average because Meridian and Contact had an incentive to provide cheap electricity to the Tiwai Point aluminium smelter.
The authority’s long-awaited review of the wholesale electricity market focussed heavily on the way the smelter’s power deal might be distorting prices.
But chief executive James Stevenson-Wallace also said power firms could have an incentive to delay investment in new generation to maximise the return on their existing portfolios “as part of a rational commercial strategy”.
The prices at which some generators had offered to supply power since 2018 had risen and in some cases did not reflect underlying supply and demand conditions, the authority found.
“There is some evidence of increased incentive for generators to structure offers in a way that keeps prices high,” Stevenson-Wallace said.
Woods had downplayed the likelihood of major changes to the electricity market in the short term in April.
But she said in the wake of the Electricity Authority’s report that she had asked officials to investigate options that were proposed but not recommended by the Electricity Price Review in 2019 “to see if they should be revisited”.
The options rejected by the latter review included splitting gentailers Meridian, Genesis and Mercury into separate generation and retail businesses.
Woods said she “like many New Zealanders” was disappointed that the initial findings of the authority’s review appeared to show households and businesses “subsidising a multinational to the tune of $200 per household”.
“I welcome the consultation the EA has started, but I am not ruling out looking at what interventions might be required to ensure this can’t happen again, including the possibility of structural change in the sector,” she said.
Woods said she was particularly interested in ensuring that electricity consumers were being treated fairly, what distortions there might be in the market, and whether there was “a handbrake on new investment in renewable energy”.
Stevenson-Wallace said the EA’s review was prompted by “elevated electricity prices” over 2½ years.
The authority said it was concerned Meridian and Contact were in effect subsidising the smelter to the tune of $500 million by selling it power at a cost of between 3 and 4 cents a kilowatt-hour that could have been more efficiently used elsewhere.
The cost of that subsidy was offset for them by the fact that demand from the smelter increased prices overall elsewhere by an estimated $850m a year, he said.
“Generators are incentivised to subsidise the cost of electricity at the smelter through the Tiwai contracts.
“The cost of that support is more than offset by the higher prices paid by all other consumers for the increase in total demand for electricity.”
Energy Minister Megan Woods told Parliament in April she was taking the situation in the electricity market very seriously.
The authority proposed a variety of responses, including requiring generators to have large power contracts approved by the authority in future – or doing nothing.
A briefing paper prepared for Prime Minister Jacinda Ardern in May revealed Rio Tinto and senior government ministers had discussed changing the mining giant’s plan to close the smelter in 2024.
Electric Kiwi chief executive Luke Blincoe said he was pleased the Electricity Authority had “at long last acknowledged one of the deep-seated problems in our electricity market”.
“It’s clear – Kiwi families are spending hundreds of dollars per year more than they should on electricity,” he said.
“We are calling for the minister to address the dominant position of the large gentailers who are blatantly ripping off New Zealand via their power bills,” Blincoe said.
But Meridian chief executive Neal Barclay rejected the authority’s analysis.
“The EA analysis speculates, incorrectly in our view, that if the smelter had closed this year, prices would have promptly and permanently been much lower for at least some of the country’s residential customers,” Barclay said.
“In reality, if the smelter closed the market would adjust, so any wholesale price effects would likely be relatively short-lived. And residential price effects are hard to predict,” he said.
Barclay described the deal negotiated by the smelter as “sharp” but said the authority was wrong to believe Meridian might have got a higher price by selling its electricity elsewhere.
“The price per apple for a million apples is a lot less than the price per apple for a bag of apples. That’s how markets work”.
Cameron Burrows, chief executive of the Electricity Retailers Association, whose members include Meridian and the other major gentailers, said the electricity market was “generally performing well”.
“We have significant concerns about reopening other issues already extensively canvassed – and addressed – in the 2019 Electricity Price Review,” he said.
“In order to meet the Government’s ambitious and necessary climate goals the sector needs to invest billions of dollars to meet growing demand – that requires stable policy settings rather than revisiting completed reviews,” he said.
Stevenson-Wallace said the authority had looked at “market structure” and he singled out the significance of Meridian to the power market.
Meridian was responsible for generating 30 per cent of the country’s power and its output was pivotal 90 per cent of the time to meet demand, up from 77 per cent of the time in 2017, he said.
But the authority did not talk up the possibility of requiring Meridian or any other generators to relinquish assets, or requiring the structural separation of gentailers into separate generation and retail businesses.
Stevenson-Wallace said rebalancing generation assets would be “premature” based on its review but that could be a consideration for “other parties”.
“Broader considerations may be taken by other government agencies, but that’s outside of our current remit.”
John Harbord, chief executive of the Major Electricity Users Group, said the authority’s paper did not appear to get the heart of what had driven high wholesale prices.
“If they can’t do that, it’s going to be really difficult to restore confidence in both the EA and the wholesale market,” he said.
A spokeswoman for aluminium smelter said in response to the EA’s report that it did not receive a subsidy but paid a price for power “negotiated in a competitive market”.