Wholesale power rethink needed - Flick

The structure of the wholesale power market is facing increasing pressure. Photo / 123RF

All electricity retailers should be required to buy their supplies through the spot power market and hedge markets to level an unfair playing field, Flick Electric says.

The current market structure, in which generators are able to sell directly to their retail arms under fixed-price, variable volume contracts, effectively shields the major listed players from the more volatile wholesale and futures prices that their smaller rivals face, Flick told the Electricity Authority.

Making all retailers buy power through the market would put all retailers on the same footing. Putting all the market's volume through the spot and hedge markets, from about 14 per cent now, would also increase confidence in the pricing in those markets.

"Generators will be competing for customers for their entire generation – instead of maximising profits from their net generation volumes," Flick said in a submission to the authority.

"It is clear the advantages of vertical integration are benefiting the vertically incumbents at the expense of thriving retail competition."

The structure of the wholesale power market, established in 1996, is facing increasing pressure.

Rise of the retailer

Some practices, designed when most of the country's power retailers had at least some of their own generation, have been curtailed in recent years to protect customers and the growing clutch of retailing firms – like Z Energy-controlled Flick – which have no generation.

The prospect of rising carbon costs, and an increasing share of intermittent solar and wind generation, will also require a redesign of the market if renewable generators are not to receive windfall gains at the expense of higher power prices for consumers, Genesis Energy said in March.

This week, energyclubnz, previously the third-fastest growing retailer in the market, quit after three years. Founder David Goadby said he had no confidence the advantage the major generator-retailers have in the wholesale market would be addressed.

Nor was the company the first retail casualty in a market where sustained periods of high prices can quickly make smaller firms unprofitable and strain their balance sheets by requiring large sums of capital as prudential security for their spot market obligations.

Nelson-based Nextgen shut last July amid high wholesale prices, as did Dunedin-based Payless Energy eight months earlier after prices soared during gas shortages and low hydro lake levels.

Even firms with generation have got out. King Country Energy and Opunake Hydro quit retailing in 2018 due to the level of competition and the increasing volatility of spot power prices.

More competition

The Electricity Authority has succeeded in encouraging competition; there are more than 40 brands in the market and the five major players supplied 86 per cent of the country's power accounts in December – down from 95 per cent eight years earlier.

But the regulator has also spent much of the past 10 years trying to find ways to improve the range of hedge products that retailers and major power users can draw on to manage the risks they face from transmission constraints and high spot power prices.

In January, it imposed tighter pricing and volume rules on the four major generators – Contact Energy, Genesis Energy, Meridian Energy and Mercury NZ – which 'voluntarily' offer volume into the electricity futures market run by the ASX.

It is now considering making the arrangements mandatory and drawing Trustpower, the country's fifth-largest retailer, into the pool. Other options could include moving to a more commercial model that could also draw in banks and trading houses.

In a joint submission, independent retailers including Ecotricity, Electric Kiwi, Pulse Energy, Vocus and energyclub, earlier this month said the need for hedge market reform stems from the vertical integration of the major players and the refusal of the authority to question that.

While some form of separation of retail and generation activities might be beyond the scope of the hedge market review, they said the authority's obligation was to promote competition and it could not do that if it failed to address the "unambiguous" problem of vertical integration.

"Vertical-integration of transmission and generation was originally a feature of the market, as was vertical-integration of distribution and retail. The market has been oligopolistic for the last 20 years, and market concentration is also an enduring feature of the New Zealand market.

"Just because vertical-integration is a feature of the New Zealand market does not make it desirable or something that should endure."