Submissions are in for the Electricity Authority's paper on level playing fields in the electricity sector. Photo /NZME
Consumer New Zealand has called for greater separation between the big power companies’ generation and retail functions to ensure a fairer electricity market.
The independent consumer group, in its submission to an Electricity Authority’s (EA) paper, said it believed in the value of markets.
As it stands, the bulk of the market is comprised of the big four power companies, Genesis, Mercury, Meridian and Contact, who each have big generation and retail “gentailer” operations.
Consumer, in its submission, said a well-designed, well-functioning, and effectively regulated market would deliver positive outcomes for consumers by fostering innovation, providing choice, and maintaining downward pressure on prices.
“Unfortunately, this is not what we observe in the New Zealand electricity market,” it said.
“The current market is failing to deliver as intended for consumers and the broader New Zealand economy,” Consumer said.
It said the current situation was unsustainable “and must be addressed with urgency”.
“In our view, achieving greater separation between generation and retail functions is essential to promoting a fairer and more competitive electricity market.”
The EA’s paper addressed “non-discrimination obligations” aimed at giving retailers and generators access to products on the same terms as the gentailers who supply themselves internally.
In its “Level Playing Field” paper, the EA put forward options.
One of them, option two, prohibited discrimination, while another, option four, suggested complete legal separation of generation and retail.
Whether electricity generators and retailers should be structurally separated has been debated since the retail market opened more than 25 years ago.
“While the theoretical benefits of vertical integration are well known, our experience at the consumer level suggests these benefits have not been realised in practice,” Consumer said.
“In theory, vertical integration could benefit consumers by enabling gentailers to hedge internally, reducing their exposure to wholesale price volatility and lowering risk premiums.
“This, in turn, could support more stable and potentially lower retail prices.
“However, we are not seeing these theoretical benefits flow through to consumers in practice, suggesting the supposed consumer benefits of integration are not materialising.”
Consumer said that, even after adjusting for inflation, average residential prices are now around 35% higher than when the market opened.
It also noted that market concentration had stayed the same.
“Around 84% of consumers remain with one of the four largest gentailers, and independent retailers continue to struggle to gain a foothold,” it said.
“Independent retailers tell us they are unable to access hedge products at competitive rates.
“As a result, independent retailers periodically request that they be hidden on the Powerswitch results page due to the risks of acquiring too many new customers without adequate hedging.”
Consumer’s submission went on to say New Zealand consumers miss out on new offerings and pricing models that would benefit their circumstances.
At the same time, there were security of supply concerns.
“New Zealand has faced several dry-year energy crises, suggesting the supposed investment benefits of integration are not materialising,” it said.
Wholesale market transparency remained limited, further disadvantaging independent participants and reducing confidence in the system.
Vertical integration may offer efficiencies on paper, but Consumer said these have not translated to lower prices, improved reliability, or more vibrant competition.
The Major Energy Users Group (MEUG) has long raised concerns about the state of the electricity market, particularly over affordability and security of supply.
MEUG said these issues were felt acutely last winter, when fuel security issues, low lake levels and wholesale market prices of up to $820 a megawatt hour impacted many businesses.
“MEUG generally supports the proposed intervention (option two) that will give other market participants (including a number of MEUG members) access to hedge products on substantially the same terms as the gentailers supply themselves internally,” it said.
“The intervention should address many of the concerns raised primarily by independent retailers and independent generators and hopefully address issues around transparency of pricing and liquidity.”
Another vocal critic, the Northern Infrastructure Forum, made a case for a full structural separation between the generators and their retail arms.
Dunedin-based independent consultant EnergyLink said it agreed that independent retailers faced barriers to entry that are not faced by gentailers.
It said level playing field measures would be required to allow this market segment to grow to ensure there was continuing downward pressure on prices.
EnergyLink said option two would be a good place to start.
“We submit that, when it comes to keeping downward pressure on prices, the cost of new generation is the bigger issue, with LCOEs [levelised cost of electricity] of new generation having increased 50% - 80% since 2020-21, for gentailers and independent power producers alike.
“With shrinking gas supply pushing gas prices up, electricity prices have risen, but rapidly rising LCOEs are unable to counteract this rise to the extent they could have only a few years ago,” EnergyLink said.
The Electricity Retailers Association of New Zealand (ERANZ) said the EA’s proposals follow a period of policy uncertainty.
Over recent years, a range of large-scale proposals and unresolved issues have clouded long-term investment signals including the future of the Tiwai Point aluminium smelter, the Lake Onslow pumped hydro scheme, and the former government’s target of 100% renewable electricity, ERANZ said.
“These uncertainties created hesitation among participants considering new generation investments,” ERANZ - whose members include the big four gentailers - said.
Following the 2023 general election, many of these risks were either resolved or set aside, offering the sector a chance to refocus.
ERANZ noted the sector is undergoing a “renewables boom”.
Over the next five years, generators are forecast to invest about $6 billion in new renewable generation capacity covering onshore wind, geothermal, solar, and potentially offshore wind, as well as grid-scale battery storage.
“However, just as generators are beginning to respond to this stable policy environment, the EA’s decision to advance a potentially significant regulatory intervention risks reintroducing uncertainty,” ERANZ said.
The association said it was concerned that the EA was moving ahead with structural regulatory reform before a forthcoming independent Frontier Economics review of the electricity market, commissioned by the Ministry of Business, Innovation and Employment (MBIE).
In its submission, ERANZ said vertical integration served the long-term interests of consumers.
The EA’s review of winter 2024 found that gentailers’ margins during periods of wholesale market distress were lower than during normal conditions.
“Any separation of generation and retail will force retail arms to make a profit themselves, which will lead to higher consumer prices,” ERANZ said.
“Some market analysts say this price increase could be as high as 25%,” it said.
In its submission, dairy giant Fonterra, a major power user, said there was an urgent need for more generation, including both new renewable sources, and for flexible firming generation to accompany market changes.
“We share concerns of others that there is a growing disparity between wholesale prices and the Long-Run Marginal Cost (LRMC) of generation and believe this needs greater focus, including consideration of appropriate market settings and the continued availability of hedge contracts and other products to enable participants to manage risk,” the co-op said.
Jamie Gray is an Auckland-based journalist, covering the financial markets, the primary sector and energy. He joined the Herald in 2011.
The project will boost the key station's flexibility, says chief executive Malcolm Johns.