From a consumer’s (and especially a small consumer’s) point of view,
the wholesale electricity market as it has developed has failed to control prices.
This is because competition at the wholesale level (as well as at the retail)
is ineffective.
Basically, there are too few competing generators (which wield sufficient market
power to inhibit others entering the market);
there is insufficient excess capacity to ensure effective competition;
New Zealand is probably too small to support an effectively
For effective competition to exist, there must be excess capacity
During these times the spot price of electricity rises well above
As well, to prevent gaming, there must be sufficient excess capacity to
Either of the two largest generators in NZ has the ability to do this;
Usually hydro and geothermal are cheaper than fossil fuelled thermal generation,
The ownership of the generation in each cost layer is dominated by a different company.
Therefore, we do not consider the wholesale electricity market in NZ to be
For example, further generator splits into smaller units does not seem practical,
This limits the number of effective competitors (and also, incidentally,
As well, the existing market system has failed to deliver security of supply.
The present tight capacity margin is financially advantageous for the generators,
Finally, State ownership of about two thirds of the generation capacity
At present, the State does not behave like a conventional equity investor.
That it tacitly condones the exploitation of consumers to provide funds for its social
(why should electricity consumers bear this burden, rather than the nation as a whole?)
One aspect of this is the significant revaluations of hydro generators, which are calculated
Remedies
The view of the majority of Greypower members, and members of the consumer organisations
From this viewpoint, the problems are not so much in the structure of the wholesale market,
The basic problems of too little effective competition and too little excess capacity
Our analysis3 indicates that the spot price volatility that occurred between
Our conclusion is therefore that the volatility was caused more by the generators’
We need then to find ways of reducing this excessive volatility.
Most of the remedies lie in changing the structure of the industry - more capacity, and
However, within the market itself, mandatory hedging, for example,
Further, the Vickery auction system that is used in NZ (where the marginal offer sets the
If generators were paid their offer price, the low cost generators would offer in at higher prices,
This would bring them closer to the margin, and perhaps have some effect on the
Conclusion:
What’s best for the generation industry and the SOEs,
1 As Minister of Energy, Hodgson told a woman who asked him at a public meeting why
2 Cullen has said publicly that if the State’s returns from electricity fell,
3 See Security of Supply Submission to the Security Advisory Group of
and is inherently not suitable for operating competitively.
(there must always be an unsuccessful offer at the margin).
This is not always the case in NZ.
During hydro shortages, the supply of electricity is sometimes
not enough to meet the demand and competition disappears.
production costs. Contract prices follow, and, on the evidence of the
2001 and 2003 events become locked in at higher levels even
when the shortage is over.
prevent any producer cornering the market by withdrawing capacity from it.
either could withdraw enough capacity to cause a shortage, and then sell
the output of its remaining capacity at rationing prices
(incidentally, this type of gaming occurred in Victoria in the summer of 2000).
We believe there have been instances of this happening in a minor way.
Different forms of generation
(eg hydro, gas fired combined cycle, gas or coal fired steam)
have different production costs and therefore cannot compete head on.
and are dispatched first.
Combined cycle, in the next higher cost layer, is often at the margin
because it is cheaper than gas or coal fired steam generation, which is only
used when the demand cannot be met by cheaper plant (in winter, and during shortages).
Because of this, it is more a question of the different companies complementing each
others’ generation, rather than competing with it
- of course, that was how the system was designed to operate.
effectively competitive at this time,
and we do not believe there is any simple way in which competition can be increased.
because the generation system contains a number of integrated systems
(the Waitaki, Clyde and Taupo hydro systems, Huntly Power Station)
which could not be broken up.
determines the amount of excess capacity needed to avoid gaming).
Generators have no incentive to build adequate generation to achieve an economically
optimum balance between the cost of shortages and the cost of additional capacity.
That would reduce the number of shortages that cause high spot prices,
reducing their revenues and simultaneously increasing their capital investment.
but disadvantages the national economy both directly (by reducing GDP during shortages)
and indirectly (by reducing business confidence in the reliability of the electricity supply).
(not to mention the retail market) has introduced a major (and unnecessary)
distortion in the market.
It does not provide equity for capacity expansions; indeed, it removes equity
through the special dividends it receives.
welfare policies
has been acknowledged by both the then Minister of Energy , Pete Hodgson1 and Dr. Cullen2.
from the present value of their future revenue streams based on prices set by the
marginal (thermal) generators; and serve to mask the excessive returns their owners
(predominantly SOEs) make on assets which were originally paid for by consumers
through capital levies included in the bulk tariff.
Greypower is associated with, seems to be that a return to a NZE-type industry structure
would solve the present problems.
However, even without any detailed analysis of the costs and benefits of such a change,
it is extremely unlikely that this will happen; so we must consider how the present structure
needs to be modified to overcome the manifest problems consumers are experiencing.
as in the structure of the generation industry.
have been discussed above.
Both lead the major symptom of excessively volatile spot prices during hydro shortages,
which directly damage the economy and also provide the generators with the opportunity
to raise retail and contract prices.
October 2005 and April 2006, for example, gained the generators an extra $180M,
although there was never less than five weeks usage margin above the minzone;
and the risk of non-supply was infinitesimal.
opportunism than by a real need to ration usage by raising prices.
controls both regarding pricing and capacity additions.
Also, instituting conservation campaigns as soon as the spot price rises above the
marginal production cost would both dampen the volatility and inform the public of the risks.
As well, the NZIER has proposed that retail tariffs could reflect spot prices,
with the same effects.
could reduce the effects of spot price volatility.
price for all the electricity dispatched) means that the generators in the lower cost bands
can make low offers in order to get dispatched (geothermal must run,
hydro tries to avoid spilling), since they are paid the strike price.
but still low enough to ensure dispatch.
degree of competition.
It should also lower the average price and would inform the public of the individual
generator’s price responses, which would be likely to inhibit excessive volatility.
is not necessarily best for New Zealand Incorporated
electricity prices were so high,: “In order to pay your pension”.
revenue from another source would need to be found for welfare policies
the Electricity Commission dated 11/6/06
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