Of the hundreds of pages making up the so-called Wolak Report on the use of market power in the wholesale electricity market, it is 20 pages right at the end which are exciting most interest as the Ministerial Review of the market proceeds. Appendix One of the report reflects on various possible remedies, noting “virtually all electricity markets currently operating around the world have experienced periods when suppliers have been able to exercise substantial unilateral market power.”

Wolak identifies the uneven spread of generation asset ownership between the North and South Islands as a key issue. When hydro dam water levels are low, wholesale electricity prices tend to rise and thermal generation units face less competition. “The only discipline on the offer prices of the thermal generation unit owner comes from the offer prices of other thermal generation unit owners.” However, with only Contact and Genesis owning substantial thermal generation resource, and only Contact having a national spread of generation assets, Wolak says there is clearly insufficient competition to discipline suppliers against using market power. Creating a larger number of thermal generation owners would increase competition and could be achieved by limiting the right of existing thermal generators to build new thermal plant, and one or both of the other two large suppliers or a new entrant building a large new thermal power station. It is worth noting the Todd group may be capable of fulfilling this role and has been discussing its potential to build a new gas-fired power station for some time.

Finally, “existing fossil fuel generators could be ordered to divest some of their fossil fuel generation capacity to one of the two firms that currently do not own significant fossil fuel generation capacity, or to a new entrant.” A combination of these three structural remedies may act to create the missing competition Wolak observes among thermal generators when hydro water levels are low. Major Electricity Users’ Group Executive Director Ralph Matthes is sceptical asset reallocation will fix a problem not present for 70% of the time, and believes there is still a big missed opportunity to develop better risk management tools such as financial transmission rights and locational regional allocations.

He says “I think we would have had to have exhausted all the levers to get the financial incentives working” before moving to a solution such as asset reallocation, which would present a variety of real-world challenges for generator retailers, whose forward contracts for supply are based on their existing asset mixes.

 Copyright © Media Information Ltd
NZ Energy & Environment Business Week