Electricity Authority - intervention regarding large power supply contracts
EA restricts 150MW+ contracts over Tiwai concerns
By Eamon Rood, Energy News
The Electricity Authority is restricting generation firms from offering large power supply contracts that it says distort prices on the wholesale market.
The EA is aiming to get ahead of negotiations around the Tiwai aluminium smelter’s next supply contract.
An urgent code amendment prohibits contracts of 150 megawatts for the next nine months unless generators meet certain conditions. The Tiwai deal is the only agreement that currently meets that threshold but the EA says it is aware of other potential contracts that could shift market prices.
The regulator says the intervention is to protect consumers from overpaying for electricity. It argues that very large contracts affect other prices across the market, and the cheap rates enjoyed by New Zealand Aluminium Smelters are in effect subsidised by other electricity customers.
Suppliers eyeing big contracts must now get clearance from the regulator and demonstrate the contract has a net-positive value. And the buyer must be able to on-sell any unused electricity.
Generators must disclose details to the EA within five days of signing any agreement.
They must provide supporting information that explains the rationale underpinning pricing, outlines implications of resale conditions, and offers forecast impacts on the group financial performance of each affected generator.
The urgent code amendment takes effect the day after it is gazetted and the EA is consulting on a permanent change while the temporary measure is in place.
Intervention follows the Authority’s earlier moves to improve competition in the wholesale market.
These include trading conduct rule reforms; commercial market making; changes to transmission pricing rules; and work to implement real-time pricing.
General manager of market policy Andrew Doube says the regulator has observed that contracts of a certain size negatively affect other consumers.
The EA highlighted the Tiwai contracts offered by Meridian Energy and Contact Energy in its inefficient price discrimination issues paper last October.
“The Authority estimated the impact of the contract could potentially lead to households paying up to $200 extra on their electricity bills each year,” Doube says.
“This is because the cut-price electricity deal negotiated to keep the smelter operating could have been less than the cost of producing the electricity, effectively maintaining demand and keeping prices high in the wholesale market.
“It was estimated that it enabled a wealth transfer from consumers not party to the contract to generators of as much as $850 million a year.”
The parties to that contract agreed to a three-year extension in January 2021. While the Authority didn’t definitively determine any inefficiency, it decided following consultation that a timely and targeted intervention was required.
“This is all the more urgent given the recent announcement that NZAS is seeking to negotiate a new deal with generators when its current contract expires at the end of 2024,” Doube says.
Tiwai’s supplier, Meridian Energy, acknowledged the change in a brief note to the NZX today.
“Meridian’s submission to the EA will aim to ensure the market continues to operate in the long-term interests of consumers. We will now take the time to work through the detail of the amendments and the consultation paper,” chief executive Neal Barclay says.
The Consumer Advocacy Council welcomed the move.
“We applaud the Authority in sending a very clear message to the generators that they must not settle on contracts that disadvantage residential and small business consumers,” council chair Deborah Hart says.
“We accept that an operation consuming so much power, 24/7, should get a discounted rate, but that rate must be fair and reasonable for all consumers and not repeat the mistakes of the past.
“Consumers’ interests must be taken into account by the generators in negotiations for all contracts. We are pleased that the Authority is protecting consumers with urgency given new contract negotiations for Tiwai Point are underway.”
The EA has released a consultation paper, Inefficient Price Discrimination in very large electricity contracts, seeking feedback on a permanent solution.
It believes a code amendment prohibiting very large contracts containing inefficient price discrimination is needed alongside greater transparency and monitoring. But it’s wary of unintentionally delaying renewables deployment through measures that discourage investment or adversely affecting risk premiums in contracts.
To avoid this, the EA proposes an amendment targeting electricity use agreements for large load customers.
“Given very few contracts are large enough to result in inefficient price discrimination, the Authority expects only a handful of contracts would be required to comply with the proposed amendments each decade.
“This reduces administrative and compliance costs to the Authority and participants, reduces the risk of unintended consequences and ensures the proposed amendments do not impose unnecessary costs or slow processes for other contracts.”
It’s also consulting on a voluntary clearance process to give generators the option to gain assurance the regulator won’t investigate a proposed contract later.
This still requires firms to provide the same supporting information under the proposed disclosure regime. But ‘cleared’ contracts would be specifically exempt from regulatory action for breaching the prohibition clause. This would remain unless key parts of the contract are later changed or supporting information is found to be incomplete or inaccurate.
Submissions close 29 September.
Consumer Advocacy Council backs Electricity Authority move to protect small consumers over Tiwai contract
Current negotiations for a new electricity supply contract for the Tiwai Point aluminium smelter must not disadvantage New Zealand consumers, the Consumer Advocacy Council said today.
The Electricity Authority has this morning released an urgent amendment to the Electricity Industry Participation Code 2010 to impose restrictions on very large electricity contracts, those above 150MW, that could force small consumers to pay more than they should.
Meridian and Contact are currently negotiating a new contract to supply the smelter from the end of 2024 which meets that threshold.
“We applaud the Authority in sending a very clear message to the generators that they must not settle on contracts that disadvantage residential and small business consumers. These deals must always be in the long-term benefit of consumers,” said Consumer Advocacy Council Chair Deborah Hart.
“In October 2021, a review into the wholesale electricity market competition by the Authority criticised a previous contract by Meridian and Contact which provided super cheap power to Tiwai Pt meaning consumers could be subsidising Tiwai by up to $200 per household each year. That was effectively a transfer of as much as $500M in total every year of the contract to the owners of the smelter.
“The Council represents the voice of five million residential consumers and 500,000 SMEs. Consumers’ interests must be taken into account by the generators in negotiations for all contracts. We are pleased that the Authority is protecting consumers with urgency given new contract negotiations for Tiwai Pt are underway.
“We accept that an operation consuming so much power, 24/7, should get a discounted rate, but that rate must be fair and reasonable for all consumers and not repeat the mistakes of the past,” said Deborah Hart.
The Consumer Advocacy Council
The Consumer Advocacy Council is the independent advocate for residential and small business electricity consumers in Aotearoa New Zealand. It aims to protect the interests of some five million residential consumers and half a million small businesses in relation to electricity. The council was established last year following a recommendation from the 2018/19 Electricity Pricing Review which found that small electricity consumers were struggling to be heard by the electricity sector. Our aim is to be a strong voice for small consumers by providing evidence-based advocacy on policy and regulatory consultations, and in decision-making processes.
Posted: 18 August 2022