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“A Fairer Electricity Market Needed” - Consumer New Zealand
Consumer New Zealand has called for a fairer electricity market in a letter to the Electricity Authority (EA).
In its paper submission to EA, the independent group highlighted the need for a greater separation between the generation and retail functions of the big power companies. The electricity market is dominated by the big four power companies, Genesis, Mercury, Meridian and Contact, who each have big generation and retail “gentailer” operations.
The submission states that a properly regulated and well-designed market would result in a positive outcome for consumers, foster greater innovation, and decrease pricing pressures.
Current electricity sector ‘unsustainable’
In its paper, it said that the current system was unsustainable and “must be addressed with urgency”.
“Unfortunately, (a fair system) is not what we observe in the New Zealand electricity market … The current market is failing to deliver as intended for consumers and the broader New Zealand economy,”
“In our view, achieving greater separation between generation and retail functions is essential to promoting a fairer and more competitive electricity market.”
According to its submission, New Zealand consumers are missing out on new offerings and pricing models that could improve their energy costs. The current energy state has also raised concerns about security and supply.
“New Zealand has faced several dry-year energy crises, suggesting the supposed investment benefits of integration are not materialising,” it said.
The paper pushed for “non-discrimination obligations” that could give electricity retailers and generators access to products on the same terms as the gentailers who supply themselves internally.
The vertical integration of energy debate
Vertical integration is a concept that has been debated since the retail market opened more than 25 years ago. The Electricity Authority has previously discussed the option of complete legal separation of generation and electricity retail in its “Level Playing Field” paper.
While it may seem efficient on paper, Consumer New Zealand stated that these benefits have not translated to lower prices, improved reliability, or healthier market competition.
“While the theoretical benefits of vertical integration are well known, our experience at the consumer level suggests these benefits have not been realised in practice.”
“In theory, vertical integration could benefit consumers by enabling gentailers to hedge internally, reducing their exposure to wholesale price volatility and lowering risk premiums … This, in turn, could support more stable and potentially lower retail prices.”
“However, we are not seeing these theoretical benefits flow through to consumers in practice, suggesting the supposed consumer benefits of integration are not materialising.”
Consumer New Zealand also noted that market concentration in the energy sector had remained the same. It stated that, even after adjusting for inflation, average residential electricity prices are now approximately 35% higher than when the market opened.
“Around 84% of consumers remain with one of the four largest gentailers, and independent retailers continue to struggle to gain a foothold.”
Independent retailers tell us they are unable to access hedge products at competitive rates … As a result, independent retailers periodically request that they be hidden on the Powerswitch results page due to the risks of acquiring too many new customers without adequate hedging.”
The industry responds
The Major Energy Users Group (MEUG) has long raised concerns about New Zealand’s electricity market. It stated that supply issues were most felt last winter, when fuel security issues, low lake levels, and wholesale market prices of up to $820 per megawatt-hour impacted many businesses.
“MEUG generally supports the proposed intervention that will give other market participants (including a number of MEUG members) access to hedge products on substantially the same terms as the gentailers supply themselves internally,” it said.
“The intervention should address many of the concerns raised primarily by independent retailers and independent generators, and hopefully address issues around transparency of pricing and liquidity.”
The Northern Infrastructure Forum and EnergyLink had called for a full structural separation between the generators and their retail arms. According to EnergyLink, independent retailers faced barriers not experienced by gentailers. Allowing these retailers to grow by levelling the playing field would put downward pressure on prices.
“We submit that, when it comes to keeping downward pressure on prices, the cost of new generation is the bigger issue, with LCOEs [levelised cost of electricity] of new generation having increased 50% - 80% since 2020-21, for gentailers and independent power producers alike.
“With shrinking gas supply pushing gas prices up, electricity prices have risen, but rapidly rising LCOEs are unable to counteract this rise to the extent they could have only a few years ago,” EnergyLink said.
The Electricity Retailers Association of New Zealand (ERANZ) said the EA’s proposals follow a period of policy uncertainty.
“Over recent years, a range of large-scale proposals and unresolved issues have clouded long-term investment signals, including the future of the Tiwai Point aluminium smelter, the Lake Onslow pumped hydro scheme, and the former government’s target of 100% renewable electricity,” ERANZ said.
“These uncertainties created hesitation among participants considering new generation investments,”
ERANZ maintained that vertical integration benefited the long-term interests of consumers. Its review during winter 2024 found that gentailers’ margins were lower during periods of wholesale market distress than in normal conditions.
“Any separation of generation and retail will force retail arms to make a profit themselves, which will lead to higher consumer prices,” ERANZ said.
“Some market analysts say this price increase could be as high as 25%.”
ERANZ noted the energy sector is undergoing a “renewables boom”. Generators are forecasted to invest about $6 billion in renewable generation capacity, covering wind, geothermal, solar, as well as grid-scale battery storage.
“However, just as generators are beginning to respond to this stable policy environment, the EA’s decision to advance a potentially significant regulatory intervention risks reintroducing uncertainty,” ERANZ said.
Key takeaway
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