Regulator's 'Big Saturday' ruling risks reducing competition in the retail electricity market, says Powershop's Ari Sargent

By Gareth Vaughan

The Electricity Authority's ruling on the huge wholesale electricity market price spike in the upper North Island on Saturday March 26 gives electricity generators the comfort that they can charge excessively high prices and get away with it, meaning small retailers may ultimately decide the risks are too great and quit the industry, says Powershop CEO Ari Sargent.

That said, Sargent also told interest.co.nz in a Double Shot interview that it was probably time electricity generators were remunerated for having capacity available, and not just for producing energy.

On Saturday March 26 upper North Island wholesale electricity prices, in a market with no price ceiling or floor, spiked to more than 200 times normal levels during scheduled Transpower maintenance between the Waikato and Auckland. A total of 35 entities including retailer Powershop, its parent Meridian Energy, Mighty River Power, Air New Zealand, ASB, Westpac and the Auckland Museum, complained to regulator the Electricity Authority.

They blamed state owned enterprise Genesis Energy, earmarked by the National-led government for a partial privatisation after November's election, which they say had the market cornered during the outage through its Huntly power station and ruthlessly exploited this market power through unprecedented high prices.

'Undesirable trading situation'

The Electricity Authority has acknowledged an undesirable trading situation occurred and ordered prices to be reset no higher than NZ$3,000 per megawatt hour, way down on the NZ$19,000 to NZ$20,000 Genesis charged between 10:30am and 5:30pm on March 26 for Hamilton and regions north of Hamilton. However, the Electricity Authority said it didn't believe Genesis' behaviour materially breached the law, or that the SOE engaged in manipulative or attempted manipulative trading activity.

Sargent, who dubbed March 26 "Big Saturday" for Genesis, said it was good the regulator had stepped in, but it hadn't gone far enough.

"What they’ve done is certainly improve the situation but it still leaves a lot of uncertainty for the future," said Sargent. "I think the fundamental issue that they haven’t really grappled with is the behaviour of a (market) participant."

The unfortunate reality, Sargent said, was because Genesis'  behaviour hasn’t been ruled as unacceptable, opportunities remained for generators such as Genesis, Contact Energy, Meridian, Mighty River Power and TrustPower who are also retailers, to do similar things in similar circumstances again.

"And that’s our main concern, that it really comes back to a market purest's view versus what does the real market look like?"

"It's a small market with a small number of players with known opportunities for transient market power to exist. And really no rules around what should happen in those circumstances. As wholesale prices get more volatile there’s more risk and that increases the cost to energy retailers," Sargent said.

"That’s the first and most direct impact."

Small retailers could be 'scared away'; End users will pay

The second impact, potentially equally as important over a longer timeframe, was independent retailers like Powershop, which has about 32,000 customers and is trying to "carve a niche" in the market, will be "scared away" given the reality was a new benchmark had been set.

"The risks are so unmanageable and the only way to manage them is to hedge with the party that’s controlling that risk and it’s just an untenable situation," said Sargent.

"I think it needs to be clear, either through direct rules or through precedent setting around situations like this, that this sort of behaviour’s not tolerable, that the authority recognizes that the market in practice is different from the market in reality in certain circumstances, and attempts to restrain market behaviour to replicate what a more competitive situation might look like."

Sargent said he agreed with Genesis that market participants needed to take responsibility for their own risk management decisions. One of Genesis' defenses has been that electricity buyers could have hedged their risk with Genesis or Contact. See more from Genesis on the events of March 26 here.

However, Sargent said hedging yourself against market price volatility driven by supply and demand conditions was one thing. But trying to hedge against a participants’ market behaviour, when a large proportion of the risk comes from the same counter party, was a different kettle of fish altogether. The reality of the New Zealand market was that from time to time any of the major generators will have transient market power.

"The lack of the (Electricity) Authority dealing with the behavioural issue means that anyone of these generators, from time to time, can now exercise that market power, within maybe some defined limits," said Sargent.  "It will increase volatility and it will increase wholesale prices. Ultimately end users will pay for that."

Offers made a day in advance and we had no control over variables, says Genesis

In its defence, Genesis has also said that high offers alone can't be evidence of manipulative activity, especially when they were submitted to the market a day in advance, and that it had no control over "two critical variables" that led to high prices: Demand being higher than forecast, and Contact withdrawing generation from the market.

Sargent acknowledged there were a "whole range of things" in the factual mix.

"But I can’t get past the offer curve of Genesis. That for 12 years they’ve never had an offer that looks anything like $20,000 and on a Saturday for an eight hour period during a (Transpower) transmission outage they’ve put in an $18,000 to $20,000 offer," Sargent said. "They deliberately submitted an offer curve that was designed around the timing of that transmission outage." See the Genesis offer curves on pages 26 and 27 here.

As for having a day's warning of the high prices, that wasn't enough for the likes of Powershop.

"As a retailer it’s not realistic for us to see $20,000 prices on a Friday for Saturday and actually be able to do anything about it.," said Sargent.

'Reward generators for having capacity available, not just for producing energy'

Sargent suggests that "probably" what motivated Genesis was a long running dispute with the electricity industry over the funding of its Huntly power station. He suggests it might be time for generators to be paid for having capacity available, not just for producing energy.

"They spend a lot of money to have that plant and a lot of the time that plant sits idle. I have a certain amount of sympathy with that argument – participants don’t get paid for having capacity sitting idle. It may be time now to review that structure and it could be time to introduce a capacity component to the market," said Sargent.

"Rewarding generators for having capacity available, not just for producing energy, is one option."

Of the Electricity Authority's decision to reset prices for March 26, Genesis has said it will consider the impact of the decision on its future commercial decisions for the dual coal and gas fired units at Huntly.

"It is clear to the Company that while many continue to ask that Genesis Energy maintain the availability of Units 1 to 4 for security of supply purposes, the market has signalled its unwillingness to meet the costs to maintain the units," Genesis said.

Meanwhile, Sargent's not keen on setting a price ceiling or floor.

"Ceilings in particular tend to justify generators offering at that level," Sargent said. "So if you were, for example, to set a cap at $3,000 or $20,000 or whatever, I’m convinced that you would see a number of generation offers sitting around that level. So rather than restraining market power, in certain circumstances you actually create opportunities."

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