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A finding made by the Electricity Authority revealed that an undesirable trading situation (UTS) caused power prices to shoot up and extra fossil fuels to be burnt. In December last year, UTS happened for 3 weeks when Meridian Energy Limited (NZX: MEL) and Contact Energy Limited (NZX: CEN) leaked excess water from South Island hydro dams, leading to the spike in the wholesale prices.
The Electricity Authority confirmed on 22 December that a UTS occurred between 3 December and 27 December 2019. A group of minor power consumers and distributors had lodged a complaint about the price increase that affected the customers noticeably.
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UTS is a problem outside the usual functioning of the electricity market that can wane the confidence of consumers, and tarnish the image of the wholesale market, and cannot be resolved by other provisions of the Code of the Electricity Authority.
The Authority indicated that the effect of the incident on the prices was about NZ$70 million.
Preliminary ruling of Electricity Authority
In a preliminary ruling, the Electricity Authority stated that Meridian Energy hiked the power prices in December by unnecessarily spilling excess water from South Island hydro dams, which could have been utilised for the electricity generation.
The Authority added that the incident may result in other electricity retailers paying an additional amount for power in the wholesale market.
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The probe by the Authority stemmed from a complaint lodged by a consortium of 7 independent power retailers, who had accused both Contact Energy and Meridian of fixing electricity rates and indirectly generating carbon emissions of 6000 tonnes.
Wholesale market in the UTS period was quite unusual
Electricity Authority chief executive James Stevenson-Wallace stated that they had witnessed an extreme weather event in South Island with serious rainfall and lake heights rising much above the maximum levels.
Generators met with record inflows, resource and operational restrictions, while the North Island generation aimed at saving fuel ahead of inevitable outage of gas and HVDC. He also stated that a normal response was not noticed, which implied reduced electricity spot prices led by reduced offers from those generators that spill out excess water.
There was a lack of competitive interest, which meant that despite an ample supply of water and no increased demand during the time, prices remained considerably on a higher side, he added. Water was lost when it should have been used to produce electricity.
The Authority will also investigate possible solutions, including the resetting rates for the 3-week period, which may result in reimbursements to suppliers who paid extra.
Energy Minister Megan Woods also stated that customers counted on a dynamic market to give fair prices, and work will be done so that such a situation does not come up again.
