Commerce Commission clears Huntly power deal to secure electricity supply

The Commerce Commission has given its final seal of approval to a deal that allows the big power companies access to Genesis Energy’s Huntly Power Station.

The competition watchdog gave its blessing to allow the big four – Genesis, Contact, Meridian and Mercury – to enter into a series of agreements referred to as the Strategic Energy Reserve Huntly Firming Option.

In energy, “firming” ensures constant supply of power to the grid, regardless of conditions at the time.

The commission found the public benefits of the proposed arrangements – which last for 10 years – likely outweighed any potential lessening of competition.

It had already provisionally approved a deal between the big power generators to support Genesis Energy’s fossil fuel-powered Huntly Power Station, which backs up the hydro- and wind-dominated national grid when conditions warrant it.

In energy, “firming” ensures constant supply of power to the grid, regardless of conditions at the time.

The arrangements give Contact, Meridian and Mercury an option to access certain notional generation capacity from Genesis’ coal- and gas-fired Rankine steam turbines at Huntly until December 31, 2035.

In exchange, Contact, Meridian and Mercury will pay an annual premium and pay for running costs incurred on their behalf.

The arrangements were proposed to provide a commercial incentive for Genesis to maintain Rankine Unit 2, a gas/coal-fired unit at Huntly Power Station, for use as “dry-year cover” when other forms of electricity generation, such as hydro generators, may not be sufficient to ensure security of supply.

The electricity sector has been in the spotlight over the last 12 months or so after last winter’s sharp price spike, which was driven by extremely dry conditions and constrained gas supply.

“The commission is aware of the difficulties currently facing the electricity sector and, after thoroughly testing the impacts of this authorisation, believes there is significant public benefit in ensuring security of supply for New Zealanders during dry years,” Commerce Commission chair John Small said.

“We have found the public benefits of these proposed arrangements likely outweigh any potential lessening of competition,” Small said.

“It is our view that, as well as improving security of supply, they will lower wholesale prices, compared to a future scenario in which Unit 2 is shut down,” he said.

The commission had previously acknowledged the urgency regarding the application by the generator-retailers and had worked “with pace” to issue a determination quickly to allow Genesis to work on Rankine Unit 2 before next winter.

It noted New Zealand’s electricity system is susceptible to “dry-year risk”: extended periods of dry weather that lower lake levels, thereby reducing the amount of hydroelectricity that may be generated and increasing the risk that there is inadequate electricity supply to meet demand.

Jamie Gray is an Auckland-based journalist, covering the financial markets, the primary sector and energy. He joined the Herald in 2011.