The electricity market
How much electricity we generate and at what price is determined by competitive bids and offers in the wholesale electricity market. The market is operated in real time by the System Operator (Transpower) and is closely regulated and monitored by the Electricity Authority (EA), ensuring all market participants act fairly to both our competitors and our customers. It’s important that the markets we operate in are open, fair and efficient because that benefits consumers and contributes to Meridian and others’ long-term success.
Wholesale electricity prices are highly variable
Wholesale market prices vary a lot in New Zealand depending on the balance between what power stations are available to generate, and how much electricity customers are requiring. Customer demand can change significantly at different times of the day or year. For example, on cold winter evenings demand for electricity is high. In summer and overnight this is typically much less.
The amount of electricity available to supply customers also varies. Wind generators are dependent on wind conditions, and hydro generators depend on rainfall and the amount of water stored in hydro lakes. Thermal generators rely on the availability of gas and coal. Maintenance outages on all types of generators can also affect availability.
Providing price certainty to our customers
Most homes and businesses are not directly exposed to wholesale price volatility as Meridian and other retailers manage it for them by offering a fixed retail price. We also offer financial contracts to businesses who buy directly from the spot electricity market to limit their exposure to price variations, and we in turn enter into financial contracts with other participants to limit our own exposure.
Delivering reliable returns to investors
Changeable weather conditions and demand for electricity, along with the price volatility they create on the wholesale market, are part and parcel of our business. In New Zealand we have agreements with stakeholders and resource consents that importantly give us flexibility in how we use lake water storage.
We also have financial contracts with other generators that shield us from higher wholesale market prices. One of these financial instruments is a hedge contract or “swaption” with Genesis Energy. We have similar financial contracts with other generators and together with a range of other financial instruments, these mechanisms help us achieve greater price certainty for our customers and more reliable returns for our investors.