Consumers may yet cash in

Customers could benefit if electricity wholesale prices remain below pre-April 1 levels

By Mark Reynolds

Financial market dealers, whose work has dried up following the evaporation of volatility on our interest rates markets, are turning to electricity markets to get their daily fix of adrenalin.

Wholesale power prices have been see-sawing wildly since restructuring of the Electricity Corporation from April made the generation and supply of energy a much more competitive game. That means traders who can pick the peaks and troughs in electricity markets are in demand.

Okay, so our electricity trading jockeys are in a different league to the New York bond dealers that Tom Wolfe immortalised in Bonfire of the Vanities because of their nerves of steel while administering multibillion-dollar money-market transfers. But the powerbrokers here have nevertheless been dealing in some serious value.

In recent weeks, they have been exchanging blocks of electricity production at prices of up to $9000 a megawatt hour. With some power generation plants capable of producing 750 megawatts at a time, a single deal can amount to millions of dollars.

The New Zealand wholesale electricity market started three years ago, following the split of Contact Energy from ECNZ. The market has grown steadily over the past three years, as owners of new power generation plants like the Stratford facility in Taranaki and the Southdown plant in South Auckland have had to use the market to dispose of surplus power.

Some electricity companies are net buyers on the wholesale market, because they have more retail customers than generation capability. The biggest of these are TransAlta, TrustPower and Mighty River Power (a company that was split from ECNZ and owns the Mercury Energy customer base). Other electricity companies are net sellers because they have more production capacity than retail customers. These include Contact Energy and two other ECNZ spinoffs, Meridian Energy and Genesis Power.

Generally, the net buyers do well when the wholesale price is low, because they can cheaply buy enough energy to supply their retail customers. The net sellers do well out of high demand or supply constraints that cause prices to spike.

What makes the wholesale power market especially interesting now is that since April 1 it has become much more competitive. From that date the ECNZ was split into the three companies mentioned above - Genesis, Meridian and Mighty River Power. The three companies are capable of producing more than half of the nation's power needs. Since April 1, instead of having a collective production programme as was the case when they all operated under the Electricity Corporation umbrella, they are now competing fiercely to make sure they have sufficient contracts with buyers to ensure they have a market for the power they are capable of producing.

This is leading to some extremes on the market. On the one hand, Meridian Energy, which has an abundance of cheap power available from its hydro-power stations in the South Island, is swamping the market with outrageously-low prices that do not look to be sustainable given its requirement to earn the Government a reasonable return on its assets.

Meridian's extraordinary bidding pattern is the main reason that wholesale power prices have on average halved since the April 1 split - to about $35 a megawatt hour this week. At the other end of the scale, the market has seen prices regularly spike up to $1000 a megawatt hour because the uncoordinated strategies of the newly created state-owned enterprises lead to periodic shortages of supply. This has mainly occurred at high usage times when the cheap South Island hydropower could not be quickly or efficiently transferred to high-demand markets in the Auckland region.

Compounding the situation has been a series of generation problems in the North Island, including faults at the Huntly power station and the new Stratford plant in Taranaki. There have also been localised constraints on the power distribution system, which have seen some powerlines reach their load limits, resulting in the very high prices of up to $9000 in parts of the upper North Island.

Consumers do not see the volatility that is occurring on wholesale markets because most electricity companies which have large retail customer bases smooth out the impact on their tariff charges. Retail customers are, therefore, likely to see only downward or upward retail price movements if electricity companies experience sustained competitive or profitability pressures coming on the wholesale market.

In that respect, the wholesale power market is just like the wholesale interest rate market, which only has an impact on mortgage interest rates if changes are sustained for a long period of time.

At present, it would appear the wholesale prices on average will stay below their pre-April 1 levels. If that proves to be the case, consumers might yet receive en masse a benefit from the Government's move to instill more competition in the power industry.