Meridian has submitted its response to the Electricity Authority’s preliminary decision that Meridian caused an Undesirable Trading Situation (UTS) during a 16-day period in December 2019. The submission can be viewed here.
Chief Executive Neal Barclay said that the company believes its actions did not constitute a UTS.
“Meridian disagrees with the Authority’s preliminary finding. We care about our customers and the environment and we stand by our decision to manage safety and our environmental obligations during this flood event,” said Barclay.
After every significant weather event (flood or drought) we take a critical look at how we operated and look at what we can learn and improve for future events. We will learn from this. But we also ask the Authority to support the market by providing some clear guidance on generation offers at times of spill, or other changes to the Code governing market operations that would clarify the uncertainty created by its preliminary decision.”
“The issues are highly technical and were largely misrepresented in the media by some of our competitors when the preliminary findings were released,” says Barclay.
The preliminary decision has not recognised the full extent of the flood event that Meridian and other hydro generators were managing.
“The Authority’s investigation covered a period of truly exceptional South Island flood conditions with inflows among the highest ever recorded,” added Barclay. “Meridian was forced to spill water from all of our hydro structures for the first time in the company’s history. At the same time, Meridian generated more hydro power than any December on record.”
New Zealand hydro catchments have limited storage so when big weather events occur, spill is unavoidable.
“As most people will appreciate, weather forecasts are never 100% accurate so we always take a conservative approach and proactively release water in a controlled fashion, because getting it wrong and causing damage to people and property downstream is simply not an option. This event occurred at a time when natural rivers were bursting their banks, inundating areas and damaging electricity transmission and other infrastructure,” said Barclay.
“The Authority has undertaken extensive modelling over the last six months and with the benefit of perfect hindsight they have concluded that all South Island hydro generators could have generated more during the flood event. We don’t necessarily agree with the logic of their modelled approach but even so, the Authority has acknowledged errors in their estimate of ‘avoidable spill’ they included in the preliminary decision. It now appears the amount of potential energy not generated was very small - about 0.3% of the total volume of water South Island hydro generators managed in December and the avoidable spill was well within the margin of error for spill measurement in an event of this magnitude,” said Barclay.
Retail consumers were not and will not be impacted by this event, which is contrary to claims made by some retailers who do not manage renewable infrastructure.
“Importantly, most consumers were not impacted by this event. Because most people are on fixed price contracts, they are insulated from changes in the spot price,” added Barclay. The Authority noted in its preliminary decision paper there was ‘no immediate effect on consumers due to most consumers being on fixed price contracts’. Meridian agrees and regardless of the Authority’s final decision, this will not change.
Unfortunately, this fact was absent in most reporting of the preliminary decision. “Inaccurate claims from some of Meridian's competitors that many consumers were substantially out of pocket, are simply not true,” said Barclay.
The preliminary decision is the latest development in a long-standing industry debate between the Authority and generators as to whether locational price risks are more efficiently managed via generator offers or via hedges purchased in the electricity futures markets.
The Authority’s preliminary decision contradicts several prior decisions it has made, which found that managing locational price risks via generator offers does not cause a UTS. The Authority has previously acknowledged that it is standard practice in the New Zealand electricity market to offer generation in a way that takes into account all the costs of doing business, including costs that arise as a result of transmission constraints.
In 2017 Meridian asked the Authority to amend the rules relating to transmission constraints and locational price risks to provide more certainty. The Authority has still not done so and seems to be using this decision to effectively change the market rules without appropriate consultation or analysis.
“If the Authority wants to change the way the market operates it should do so by following the correct process. And as part of that process it will need to assess whether those reforms would truly benefit consumers in the long term. Let’s not lose sight of the fact our market is globally recognised as world-leading and well-functioning. The International Energy Agency says New Zealand is a success story for the development of renewable energy without the aid of government subsidies and recent MBIE data shows average household electricity bills at their lowest in real terms since 2009.”
“The lack of guidance from the Authority has unfortunately resulted in a UTS lottery, where generators are unclear as to the rules or if they are in the Authority’s view breaking them. This is not best practice for a market regulator,” says Barclay.
“Fundamental to market confidence is clarity of the Code which sets out clearly how the Authority wants the market to operate. A gap has opened up between the current Code and the Authority’s expectations. Meridian wants this gap closed for the benefit of all,” says Barclay.
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