Meridian has today submitted its response to the Electricity Authority’s wholesale market review.
Meridian’s Chief Executive, Neal Barclay welcomed the ongoing monitoring of the wholesale market saying the Authority’s work needs to provide consumers and market participants with confidence that the market is operating for the long-term benefit of consumers. But Meridian believes there are shortcomings in the analysis completed by the Authority as part of this latest wholesale market review.
“Meridian believes the Authority’s analysis in this review is not supported by real-world evidence and so risks leading to decisions with unintended consequences that ultimately do not benefit consumers or address any identified harm,” says Barclay.
There has been no shortage of wholesale market scrutiny. This is the tenth review the Authority has carried out since the Pohokura gas production outages in Spring 2018. During the review period, the electricity spot market has seen higher demand, continued gas supply uncertainty, uncertainty over the future of the Tiwai Point aluminium smelter, high gas spot prices, drier conditions in the country’s hydro catchments, and significantly increased emissions costs for thermal and geothermal generators. All these factors have led to relatively elevated wholesale prices during the review period.
“It’s very important to remember that most households have been entirely insulated from higher wholesale prices because of fixed price residential contracts, competitive pressures and retailers’ longer-term view of pricing. Data from the Ministry of Business Innovation and Employment supports this fact, showing the cost of residential electricity has fallen in every year of the review period,” adds Barclay.
Meridian agrees with the Authority’s conclusion that no evidence of the exercise of market power was found. However, in speculating about whether prices have been determined in a competitive environment, much of the Authority’s analysis misses the mark and does not adequately recognise the effect of gas market uncertainty on hydro storage management and the impact of hydro offer prices on long-term security of supply. By questioning whether hydro offers could have been lower the Authority seems to assume a “free lunch” whereby hydro generation can be increased through lower offer prices without impacting lake levels, security of supply, and prices in future.
“In our response we encourage the Authority to better understand the use of offer prices to manage hydro storage and suggest the Authority should focus on the widely acknowledged uncertainty regarding gas supply and consider options to reduce that uncertainty for market participants,” says Barclay.
If at any point the Authority finds market power has been exercised, it already has the necessary tools at its disposal to address that issue via the new trading conduct rules introduced in June 2021.
Meridian was also surprised by the Authority’s focus on a single transaction rather than market dynamics, namely the contract with the New Zealand Aluminium Smelter (NZAS). After 50 years of smelting operations in New Zealand, the smelter owners agreed to postpone their planned exit from New Zealand by just over 3 years from August 2021 to December 2024.
“Meridian has been transparent about its intentions in negotiating with the smelter and the fact that this agreement was a transitional arrangement that helps support a managed exit from Aotearoa,” says Barclay.
The contract price is sharp, but is not below the price that Meridian could have received for its generation under alternative scenarios. The sharp price also recognises the scale of NZAS, and the demand response options that Meridian can call on from NZAS in a dry year. Meridian’s intention in making the deal was to avoid wasted hydro generation and deliver broader benefits to the country, such as:
- Time for the Southland community to attract and secure new industries and jobs. The smelter is Southland’s largest employer, and its exit has a far-reaching impact on the region’s economy.
- Time for generators and Transpower to plan and build necessary new transmission, generation, and battery storage options that would mitigate the waste of hydro generation.
Barclay says, “If we follow the Authority’s thinking around the smelter exit contract, there are potentially negative implications for other large electricity consumers, and our country’s collective goal to create a zero-emissions economy with more opportunities and jobs.”
“We believe the Authority’s view that this contract is an example of inefficient price discrimination is not supported by the evidence available and the potential intervention options the Authority has proposed could impose material costs on consumers,” adds Barclay.
A copy of Meridian’s submission is linked below:
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Meridian Energy Media Team
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