The Electricity Authority blames “tight supply conditions” for high prices.
Photo: RNZ/befunky
There is a warning that high wholesale power prices could push more small electricity retailers out of business – and hit businesses and households in the pocket.
Electric Kiwi said this week it would not accept any new customers for the time being. Chief executive Luke Blincoe said the wholesale market had “completely blown up” and wholesale prices were now above retail prices.
While the company had hedging – a sort of insurance against future price rises – that helped to spread the impact of that for its existing customers, it could not afford the cost of taking on new hedging arrangements for new customers.
“When we made the decision a week ago the wholesale market had gone up 48 percent in six months, it’s probably gone up by another quarter in the last week so there’s no viable retail competition we can offer.”
The Electricity Authority blames “tight supply conditions” for the high prices. The hydro lakes were lower than they normally would be at this time of year, so hydro generators were conserving storage to get through winter demand, it said.
It said there was also declining gas availability which meant more coal, which was more expensive, was being burnt.
But Blincoe and other market participants say there is something more structural going on.
Margaret Cooney, chief operating officer at Octopus Energy, said electricity futures prices for power bought a year or more in advance had more than doubled sine 2018, even though demand had stayed fairly flat.
“It’s not just us contending with it, it’s also any of the major industrials – those large commercial customers, Foodstuffs, Countdown, that are purchasing off the wholesale market. I think there’s also quite a few small business customers in New Zealand that have already had really substantial price increases because the cost increases flow through more quickly to those customers.”
Another provider, Raw Energy, is understood to have left the market recently. Flick has abandoned, at least for now, its wholesale pricing offer. Energyclubnz also closed and handed its customers to Contact.
Blincoe said the underlying problem was not a dry year or gas supply issues. “It’s a systemic under-build and the market power issues in the wholesale market blocking new investment from new people and new generation. We’ve got high wholesale prices but that’s not attracting new players into generation at any great scale. That tells you something is fundamentally wrong with the market structure.”
The problem for independent retailers hoping to disrupt the market was that the big gentailers, which generate electricity, could sell it to their retail arms at a lower price than they offered the wider market, he said.
He said the government or Electricity Authority should implement a non-discriminatory pricing regime, or virtual separation of wholesale and retail electricity businesses.
“They could be separate entities with the same owner, they need to have an arms’ length arrangement so the retail business is exposed to the actual market, which means the generation business is also exposed to real transactions. That would level the playing field for independent retailers and independent generators to come in.”
Cooney agreed there had been “chronic underinvestment” in new generation and said that was “coming home to roost”. “The other thing is that the Electricity Authority has these responsibilities for making sure competition works well and they haven’t been doing the job they need to do in terms of making sure that people are playing on an even keel and that arrangements in the market really support the level of investment and innovation we need on the generation side, and the retail side.”
The big four gentailers have about 80 percent of the retail market and generate 90 percent of the electricity that is sold to retailers and large commercial users.
Because the market price is determined based on the marginal unit of input, gentailers make more profits when supply is tight and they have to turn to more expensive generation.
Industry players say that means there is less incentive to increase generation options in the system, making it more vulnerable to supply shocks.
Powerswitch general manager Paul Fuge said it was hard to see how businesses such as Electric Kiwi could function with the current wholesale prices.
“Any new customer they take on, they’re losing money.
“If it doesn’t improve we could see more retailers decide to go into hibernation… it is having a cooling effect on retail competition, which is bad for consumers. Our position for some time has been this market is not serving customers well.
“If you have a market where you’re competing against the people who are generating the electricity and sell themselves electricity, it doesn’t take a market expert to see the flaws in that.”
He said it could be a good time, 25 years after the electricity market reforms that created this scenario, to look at the fundamentals of the market structure again.
An Electricity Authority spokesperson said it took complaints about the market seriously and took a keen interest when areas of concern were presented.
“We initiated a review in December 2023 which is looking at whether the availability and pricing of risk management options, particularly over-the-counter contracts, creates a barrier to entry or expansion by retailers, and therefore harms competition.”
It said it was also engaging with the Commerce Commission to complete internal analysis and had requested information from independent and gentailer companies.
“We will present initial views on whether risk management availability and pricing is creating a barrier to retail competition for stakeholder feedback later this year.”
A number of smaller retailers complained to the Commerce Commission last year, claiming the gentailers were misusing their market power and engaging in anticompetitive contracts.
They said gentailers were creating a margin squeeze by inflating wholesale prices and not providing adequate hedge contracts for smaller players to manage volatility.
The commission said its view was that the concerns were better addressed in the context of the authority’s review.
“Although it is an Electricity Authority project, the commission is providing our competition expertise on an ongoing basis. In our view, combining efforts in this way allows us to more effectively assess potential issues, using the combined expertise of the EA and the commission.”
The spokesperson said although it had decided not to open an investigation last year, it was engaging with the sector through the project and broader work.
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