Electricity Authority Market Commentary

The owners of New Zealand’s aluminium smelter recently announced a decision to close the smelter. The Authority watches electricity markets closely and will closely monitor the impact of this significant announcement, including its impact on the futures market and on market making. This highlights the importance of the Authority’s current review of the market making services that support the futures market. In this context it is timely to review the recent performance of the ASX market and the market making services that support it.

Record ASX trading volumes in 2020

So far this year there have been two new trading records set for ASX New Zealand electricity futures and options. As shown in the graph below, trading levels have increased significantly so far this year. March and June set new records for trading volumes. This is the most trading activity in the history of the market by a wide margin.

The high volumes traded in March and June coincide with changing risks over those periods. In early 2020 there was a period of coinciding HVDC and gas production outages that could have disrupted the electricity system which finished in March. The owners of the New Zealand Aluminium Smelter are conducting a review of the smelter’s future and had planned an update in March also. These risks of large disruptions to the market could have contributed to the record trading levels in March as participants sought to manage their exposure to those risks.

The high volumes traded in June were during a period of increased uncertainty for the near-term future of the market. Inflows and hydro storage have been low, particularly in the North Island. The Covid-19 lockdown disrupted the economy and electricity markets, and the long-term impacts are not clear. Uncertainty about electricity prices in the short to medium term could have contributed to the record trading levels in June as participants sought to manage that uncertainty. 

Market making services have continued throughout the uncertainty and disruption

Increased trading can potentially place more stress on market makers. The Authority closely monitors market making and is confident that the current arrangements performed well and will continue to support the market in the short to medium term.   

Figure 2 shows that market making services continued to be provided during the record trading volumes in March and June. In March as New Zealand transitioned to a Covid-19 lockdown there were always at least two market makers providing services, and in June there were at least two market makers providing services on 90% of trading days. Because the ASX’s performance reporting is binary (met/not met), this report likely underrepresents the supply of market making services, as often some services are provided even if all performance criteria are not met.

 At present, market making services are provided by four market makers in accordance with an agreement that each of them has with the ASX. Under that agreement there are a few circumstances in which they may be excused from providing services, including:

(a)       if it would be unlawful for them to trade on that day; and

(b)       if they are unable to access ASX’s trading systems.

Each market maker is also able to use up to five exemptions per month from providing services (in full or in part) at their sole discretion.

On 29 June one market maker, Mercury, did not provide market making services and was not otherwise excused from providing services under its agreement with ASX. This meant that it incurred its first strike under the backstop market making provisions in the Code. If a market maker incurs three or more strikes under the backstop regime in any 90-day period it will be subject to a mandatory market making obligation in the Code. The Authority wrote to Mercury to notify it of its strike. The Authority worked closely with Mercury and appreciated its early engagement on this issue. Mercury was otherwise compliant with its obligations in June.

Uncertainty can result in more market maker to market maker trading

Under the terms of their agreements with ASX, each market maker must offer to buy and sell 30 lots of each relevant contract for at least 25 minutes of each making window. The prices of those offers must be within 3% of each other. A market maker fulfils its obligation (and does not need to provide any more offers for that contract on either side) once it buys or sells 30 lots of the contract. Once a market maker has bought 30 lots of a contract, they do not have to sell 30 lots of the contract and vice versa.

Although all ASX bids and offers are anonymous (that is, it is not possible for traders to know who is making a bid or an offer, or who is on the other side of a trade) the ASX reports that many trades take place between market makers. If market makers unknowingly trade with each other it could result in each of them fulfilling their obligations early in the market making window. At one end of the spectrum this could occur in as few as 60 lots traded – if two market makers sell 30 lots each and the other two buy 30 lots each.

The Authority and some participants have observed this type of outcome more frequently in recent weeks. This is most likely the result of uncertainty about near term spot prices and resulting uncertainty and volatility of ASX futures prices – if market makers have different views of future prices their initial offers to buy and sell contracts in a market making session will ‘cross’ each other and result in a trade. This process provides useful information to the market about those parties’ view of future prices.

Figure 3 above shows the offers to buy and offers to sell the Q3 baseload contract at Otahuhu on Wednesday 24 June over the course of the market making window. On that day four market makers provided services - none were exempt. At that time prices for the third quarter at Otahuhu were uncertain and the price of the contract was volatile – over the course of that week closing prices fluctuated between ~$150/MWh and ~$170/MWh. There was also a lot of interest in the contract and significant volumes traded.

The figure shows that market makers did not post quotes for most of the first five minutes of the market making window, this is allowed under the terms of the market making arrangement. Shortly before 15:35 multiple quotes were posted in quick succession, leading to trades resulting in three market makers meeting their obligations, at which point the total remaining obligation reduces to 30 lots, which was complied with by the remaining market maker yet to meet their obligation. The remaining market maker then traded within half a minute, meeting their obligation and reducing the total remaining obligation to 0 lots. Despite the market makers no longer being required to provide services, there were still offers in the market and further trades took place.

The wholesale electricity price fell in early June as contracted gas fuel became available allowing a large thermal station to generate.

However, on Monday 15 June we saw some high and volatile spot prices, especially during the morning and evening peaks.

The Authority monitors market data closely to ensure spot prices match the underlying supply and demand conditions.

Thermal generation has been running consistently in May and June 2020 as the lack of rainfall in the North Island means hydro generation is conserving water by increasing its offer prices. Higher prices mean thermal generation is economic to run.

On 15 June there was about 160MW of thermal generation not available to generate because of outages. Together with the ongoing low hydro inflows meant high prices and a lot of thermal running, including the relatively costly diesel fired generator at Whirinaki.

Under these circumstances, price tends to move a lot in response to small increases in demand, leading to volatile spot prices and higher overall prices. On 15 June we saw both high overall prices and large changes in price between trading periods.

While some of us are experiencing heavy rainfall, other parts of the country are still waiting for rain and until we get some rain in our hydro catchments, we expect high prices and price volatility to continue.

The following is an update of data provided by retailers to get a sense of what impact the response to COVID-19 has had on consumers and retailers. The data shows that most retailers did have an increase in customer enquiries regarding COVID-19, payment flexibility or payment deferral. Most retailers stopped disconnecting customers during the lockdown until recently. Customer debt up to 30 days in arrears has not increased, but this may be due to payment deferral.

This update shows data to the week ended 31 May 2020 and presents aggregated data to protect commercially sensitive information. The red square on each graph represents the time at alert level 4.

We advise caution on interpreting the aggregated data given the caveats with the data including:

1. Not all retailers responded to our request for information due to resource constraints (time and/or staff) and some retailers only provided a very limited time series i.e. only two months’ worth of data. However, the responses we have received cover over 99% of ICPs in New Zealand.
2. Some retailers may have interpreted our questions differently to each other and differently to what we intended.
3. Some data is still being revised and updated by retailers and could still change in the future.

Customer enquiries

Figure 1: Number of customer enquiries that are related to COVID-19, payment flexibility or payment deferral

Customer enquiries could be a leading indicator of customer stress, as households and businesses struggling to pay bills may enquire with their retailer about payment flexibility or deferral before the payment is overdue. Figure 1 shows the total number of customer enquiries related to COVID-19, payment flexibility or payment deferral has not increased compared to the previous month or a year ago. However, aggregating all the retailer’s data does not show the full story. One large retailer saw a decline in enquiries, as they included calls related to an information campaign they were running prior to the lockdown. Figure 2 shows the data without this retailer, and shows other retailers had an increase in the number of enquiries during alert level 4, which has since declined.

Figure 2: Number of customer enquiries that are related to COVID-19, payment flexibility or payment deferral, excluding retailer who ran information campaign prior to lockdown

Disconnections (excluding prepay retailers)

Another indicator of customer stress is disconnections for non-payment. Figure 3 shows that the number of disconnections for non-payment (for a period more than 24 hours) dropped from between 150-250 per week to almost zero in April (excluding disconnections by prepay retailers). This has been driven by retailers choosing not to disconnect for non-payment, not a reduction in non-payment. On 8 April the Authority issued a letter to retailers requesting every domestic customer experiencing payment difficulty should be treated as a vulnerable consumer[1] and should only be disconnected as an act of absolute last resort once all other options have been exhausted, providing the consumer is acting in good faith[2]. 

During May there was a small rise in disconnections, though the value is still far below the number before alert level 4.

Figure 3: Number of ICPs disconnected for non-payment for a period more than 24 hours (excludes prepay retailers)

Retailer Debt

If customer debt increased this could place retailers under stress when it comes to meeting their own payment obligations. Figure 4 shows debt from customers in arrears by up to 30 days, which would be an early indicator of increasing debt levels. Residential customers debt has started to increase. This is mostly driven by colder temperatures increasing the average monthly bill. Debt for businesses in arrears has not increased, but this should be interpreted with caution as the recorded debt does not include due payments which were given a payment extension.

Figure 4: Total debt from customers that are in arrears by up to 30 days by customer type

Right now, all these factors are contributing to high prices.

Limited rain

The drought in the North Island has meant storage levels in Lake Taupo are in the lowest 6 percent for this time of year, while inflows are in the lowest 1 percent. Some lakes in the South Island also have little storage at a time when we would expect inflows, although the situation is nowhere near as extreme. When water — the fuel for hydro generators — is low, especially heading into winter, hydro generators offer it at higher prices to try to conserve it for later in the winter when demand is higher. This tends to lead to higher prices and more thermal plant running, which is what we have observed.

Maintenance

There is an unusually large amount of generation on outage for the time of year. Some generator plant maintenance, particularly in the North Island, is likely to have been delayed due to the scheduled HVDC outage that affected the first four months of 2020, and the subsequent COVID-19 lockdown. The HVDC outage was a large and complex outage that reduced the capacity to export from the South Island to the North Island. As a result, more North Island generation was required, and regular maintenance deferred to later in the year than is usual. For example, in the week beginning 18 May 2020 about 200MW of the Waikato river hydro generation was out. Maintenance on generation is usually done when there is less demand (usually over the summer months).

Increased demand and no wind

It has been noticeably colder in recent days and it is a characteristic of New Zealand that cold weather is often associated with light wind, and this sort of settled weather has been common this autumn. This has the twin effects of increasing demand for heating and lowering generation from wind farms. For example, there was low wind generation in the last week of May, particularly during the evenings on 28 and 29 May.

An increase in supply has led to lower prices

Contact Energy’s CCGT at Stratford has not been running because Contact’s contracted gas only becomes available from the beginning of June. This is a large proportion of generation that has not been running. On 2 June TCC began to run for the first time since February, and spot prices were relatively low compared to recent weeks. This reinforces the view that a lack of supply has caused the spot prices we have observed recently.

Managing risk

Retailers can manage the risk of high spot prices through the hedge market. The forward price for contracts for the second quarter of 2020 was under $80 for about seven weeks earlier this year. These contracts will be paying off now for anyone that purchased them. Similarly, the forward price for quarter three has been at or under $100 since late March so retailers can ensure they are covered for winter.

The impact of COVID-19 and alert levels

Moving levels as part of the Government’s COVID response has caused some effects in the spot market that have not been seen before. The restrictions of alert levels 3 and 4 led to lower demand and the transitions in and out of levels have caused demand to change in ways that market participants have not experienced before. For example, forecasts of demand have been inaccurate as we have moved out of level 3, causing forecast prices to underestimate the actual prices.

Overall the spot market is behaving how we expect it to behave. The spot price is responding to scarce resources and ensuring ongoing supply. Scarce supply is leading to more expensive generating plant in operation and higher prices, and more demand is having the same effect.

The following is an update of data provided by retailers to get a sense of what impact the response to COVID-19 has had on consumers and retailers. The data shows that most retailers did have an increase in customer enquiries regarding COVID-19, payment flexibility or payment deferral. Most retailers stopped disconnecting customers during the lockdown until recently. Customer debt up to 30 days in arrears has not increased, but this may be due to payment deferral.

This update shows data to the week ended 31 May 2020 and presents aggregated data to protect commercially sensitive information. The red square on each graph represents the time at alert level 4.

We advise caution on interpreting the aggregated data given the caveats with the data including:

1. Not all retailers responded to our request for information due to resource constraints (time and/or staff) and some retailers only provided a very limited time series i.e. only two months’ worth of data.  However, the responses we have received cover over 99% of ICPs in New Zealand. 
2. Some retailers may have interpreted our questions differently to each other and differently to what we intended.
3. Some data is still being revised and updated by retailers and could still change in the future. 

Customer enquiries

Figure 1: Number of customer enquiries that are related to COVID-19, payment flexibility or payment deferral

Customer enquiries could be a leading indicator of customer stress, as households and businesses struggling to pay bills may enquire with their retailer about payment flexibility or deferral before the payment is overdue. Figure 1 shows the total number of customer enquiries related to COVID-19, payment flexibility or payment deferral has not increased compared to the previous month or a year ago. However, aggregating all the retailer’s data does not show the full story. One large retailer saw a decline in enquiries, as they included calls related to an information campaign they were running prior to the lockdown. Figure 2 shows the data without this retailer, and shows other retailers had an increase in the number of enquiries during alert level 4, which has since declined.

Figure 2: Number of customer enquiries that are related to COVID-19, payment flexibility or payment deferral, excluding retailer who ran information campaign prior to lockdown

Disconnections (excluding prepay retailers)

Another indicator of customer stress is disconnections for non-payment. Figure 3 shows that the number of disconnections for non-payment (for a period more than 24 hours) dropped from between 150-250 per week to almost zero in April (excluding disconnections by prepay retailers). This has been driven by retailers choosing not to disconnect for non-payment, not a reduction in non-payment. On 8 April the Authority issued a letter to retailers requesting every domestic customer experiencing payment difficulty should be treated as a vulnerable consumer[1] and should only be disconnected as an act of absolute last resort once all other options have been exhausted, providing the consumer is acting in good faith[2]. 

During May there was a small rise in disconnections, though the value is still far below the number before alert level 4.

Figure 3: Number of ICPs disconnected for non-payment for a period more than 24 hours (excludes prepay retailers)

Retailer Debt

If customer debt increased this could place retailers under stress when it comes to meeting their own payment obligations. Figure 4 shows debt from customers in arrears by up to 30 days, which would be an early indicator of increasing debt levels. Residential customers debt has started to increase. This is mostly driven by colder temperatures increasing the average monthly bill. Debt for businesses in arrears has not increased, but this should be interpreted with caution as the recorded debt does not include due payments which were given a payment extension.

Figure 4: Total debt from customers that are in arrears by up to 30 days by customer type

From 26 May 2020

The Authority requested both qualitative and quantitative information to understand the impact of COVID-19 and the Alert Level system on competition in, efficiency and reliability of the electricity industry and what that means for consumers.

To protect the confidentiality and commercial sensitivity of the information provided by retailers, our findings report on the combined total of all retailers. Nonetheless, there are some observations we can draw on at the aggregate level. Our analysis here is also restricted to the overall total. For example, you will not be able to see the different impact of COVID-19 on individual retailers. Significant changes to smaller retailers may also not be apparent in the graphs because the change is small relative to the total. 

We advise caution from drawing too many observations and conclusions from the aggregated data given the caveats with the data including:

1. Not all retailers responded to our request for information due to resource constraints (time and/or staff) and some retailers only provided a very limited time series i.e. only two months’ worth of data.  However, the responses we have received cover over 99% of ICPs in New Zealand. 
2. Some retailers may have interpreted our questions differently to each other and differently to what we intended.
3. Some data is still being revised and updated by retailers and could still change in the future. 

The latest data point on the graphs below is the week ended 10 May 2020. The graphs show the aggregated data of all retailers who provided us information¹ (29 retailers) and an aggregated series of only retailers who provided a full data series from January 2019 (20 retailers) to allow for more meaningful comparisons to historical data.  

Customer enquiries

All else equal we would expect there to be an increase in the number of customer enquiries relating to payment flexibility or deferral resulting from COVID-19 and the lockdown as it affected people’s ability to pay for goods and services, including electricity. However, Figure 1 shows the total number of customer enquiries related to COVID-19, payment flexibility or payment deferral has not increased compared to the previous month or a year ago. This lack of increase does not necessarily suggest that people are not experiencing payment difficulties. We know there has been a reduction in enquiries due to some retailers choosing not to send credit/payment-prompting communication to their customers during the lockdown.

Figure 1: Number of customer enquiries that are related to COVID-19, payment flexibility or payment deferral

Disconnections (excluding prepay retailers)

As a result of COVID-19 and the lockdown, all else equal, we would expect there to be an increase in the number of disconnections over time as people are unable to pay their electricity bills.  However, Figure 2 shows a decrease in the number of disconnections for non-payment (for a period more than 24 hours) as retailers chose not to disconnect customers during this initial period. On 8 April the Authority issued a letter to retailers requesting every domestic customer experiencing payment difficulty should be treated as a vulnerable consumer² and should only be disconnected as an act of absolute last resort once all other options have been exhausted, providing the consumer is acting in good faith³. 

Disconnections for non-payment for a period more than 24 hours has largely remained at zero since the week ending 5 April 2020.

Figure 2: Number of ICPs disconnected for non-payment for a period more than 24 hours (excludes prepay retailers)

With COVID-19 and alert levels affecting people’s incomes and retailers reducing the number of disconnections from non-payment, all else equal, we would expect there to be an increase in the amount of debt. However, Figure 3 shows no noticeable increase relative to historical levels. This lack of increase could be due to increases in the amount of debt written⁴ off and/or extensions to payment deadlines provided by retailers⁵. We will continue to monitor the situation and publish our insights on our website.

Figure 3: (A) Total debt from customers that are in arrears by up to 30 days and (B) Total debt from customer accounts where invoice payment is more than 30 days overdue and the ICP supplied has not been scheduled for disconnection⁶

Wholesale spot electricity prices started departing from long term averages around June/July 2018. This short report describes the drivers for this. Read the market insight here.

The chart shows the amount of transmission price risk covered by FTRs each year since this market was launched in 2013.

Source: ftr.co.nz

The FTR manager has been able to increase the volume of FTRs available, measured in terms of GWh. This has mainly been because initial success of this market has meant the Authority increased the number of FTR hubs from two in 2013 to five in 2014 and eight now.

Another measure of success is the participants have broadened from generators, large industrial users and retailers, to increasingly also proprietary traders who use this product to be more active and support liquidity in the ASX futures and options market. Also, as a result of this increasing competition, the auction prices for FTRs have moved closer to a more cost-efficient level, that is, better reflecting the network costs involved.

The Authority continually monitors the wholesale electricity market and identifies areas for development. This market development work wouldn’t be possible without a team of expert data analysts working behind the scenes.

Senior Analyst, Tuong Nguyen is one of these experts. Tuong works in the Market Analytics team – who are responsible for managing the provision of modelling and data analysis to support the Authority’s wider work.

For Tuong this means wading through large sets of complex data and finding ways to make it meaningful and helpful for other teams.     

“We have a lot of data to work with in our data warehouse and great tools to analyse it,” says Tuong. “This makes it much easier for the Authority to see what goes on in the market and check the market works as expected.”

A lot of this data is then made publicly available through the EMI website in the form of graphs and tables.  

The team receives data from a number of sources on a daily basis and it’s important that this information is up-to-date and correct.

Like any good data analyst, Tuong uses his eye for detail to spot when something isn’t quite right. 

“I’m always busy looking through data. If I notice something doesn’t look right I’ll investigate it further and dig up more data,” says Tuong. He’ll then raise this with the appropriate team in the organisation.

Next year, Tuong will celebrate ten years with the Market Analytics team – he joined shortly after the Electricity Authority was established. Tuong has built up an extensive knowledge and interest in the wholesale electricity market while at the Authority, as well as during previous roles at Transpower and Contact.

Tuong was based in Singapore working for the Energy Market Company when a friend told him of a job opening at Transpower. He jumped at the chance to move to New Zealand to join the electricity industry here.

Since joining the Authority Tuong has helped on many of the Authority’s wholesale market development projects. At the moment he is busy supporting the Real-time pricing project team with data analysis and modelling to check the impact of their proposed changes. 

“I enjoy working with the different teams across the organisation – there are some very intelligent people here,” he says. “In their roles they may not have the data or tools so that’s where I can help.”

The main challenge to security of supply in New Zealand is a dry year because of our significant reliance on hydro generation. If there is low rainfall it means the lakes that provide the water for this generation can also be low.

To manage the risk posed by low lake levels we have a number of tools in place, including the ability to call an official conservation campaign (OCC). If an OCC is called, the system operator (Transpower) will ask New Zealanders to voluntarily reduce their electricity usage. Residential customers and other small consumers are then paid $10.50 a week compensation by their retailers.

Since the OCC scheme was introduced on 1 April 2011, the starting point of an OCC has been defined by the 10 per cent hydro risk curve (the red line on the below chart). If hydro storage (the blue line) drops to this level there would be a 10 per cent chance of running out of remaining hydro storage if no efforts were made to reduce electricity usage.

Hydro risk curves

Alongside Transpower, we monitor and assess security of supply to ensure participants have the information and incentives needed for the electricity system to operate efficiently. We also regularly assess whether the tools to manage security of supply, such as OCCs, are working as they should be. 

Recently, Transpower has proposed amendments to the calculation of the hydro risk curves. They propose that these would be improved if contingent storage was included in the assessment.

Contingent storage is hydro storage not ordinarily available for generating electricity, but which becomes available when hydro lake levels are low. Three of the major hydro lakes in New Zealand have some storage classified in this way: Tekapo, Pukaki and Hāwea.

As Transpower’s proposed changes could have an effect on how OCCs start and end, we are proposing some complementary changes to OCCs. We are interested to hear if participants agree whether the 10 per cent hydro risk curve (calculated inclusive of contingent storage) should be used to trigger the start of an OCC, and whether our suggestions on ending an OCC should be introduced.

We would also like to get your view on other aspects of the OCCs, including the current geographical extent of OCCs. Currently there are two forms of OCC: South Island-only and New Zealand-wide. We are considering the possible removal of the South Island-only OCC for several reasons, including the possible confusion this could cause among consumers when they are asked to conserve electricity.

Together, the changes proposed by the Authority and the system operator are likely to affect when OCCs are triggered and hence how dry year risk will be managed in the future. We expect the change would promote reliability of electricity supply and the efficient operation of the electricity industry.

We’re interested to hear your opinions on what we’re proposing. The consultation is open until 5pm on 11 February 2019.

Consultation paper: Review of regulatory settings for official conservation campaigns (OCCs)

Transpower consultation paper (closing 4 February 2019): Review of the security of supply forecasting and information policy (SOSFIP)

Learn more about:

• Security of supply
• Hydro risk curves

Update - 15 November

The situation has eased in the past two weeks, due to reducing demand with warmer weather, rainfall flowing into hydro lakes and strong wind generation. Gas production remains constrained, and we are working with the industry to monitor this.

Strong inflows have increased storage rapidly—national controlled storage

Prices have fallen—average daily spot prices at Benmore and Otahuhu

Forward prices have come down: quarterly forward curve at Benmore and Otahuhu compared with one week prior

In the meantime, on Thursday, 8 November 2018 we received a claim of an undesirable trading situation (UTS). The claim has been made by five parties – Electric Kiwi Limited, Flick Energy Limited, Pulse Energy, Switch Utilities Limited and Vector Limited. The claim relates to the period from 15 September 2018 onwards. The Authority is investigating this.

Our view on the current situation - 30 October

The wholesale electricity market is in a period of high spot prices, which started at the beginning of October. The industry can manage through this, as it has in the past.

Spot prices are high due to a double whammy of lower than normal lake levels and reduced gas production. These high prices are a signal to the market that fuel is constrained. 

This level of pricing is not unprecedented but is unusual given the timing. The average wholesale price for most of October was $300 per MWh compared to the previous highest October monthly average¹ price of $102. Prices around current levels are more common during winter months in unusually dry years.

Lake levels have been below average for this time of year since late winter. They are often reasonably low this time of year, but storage has been falling for some months due to low inflows - so they are now in the lowest 10 percent of historic storage levels. Usually when lake storage is low generators look to run thermal plant.

At the same time there have been restrictions on gas production due to equipment problems in the Pohokura gas field since late September. We understand these could persist until late November. Kupe, another gas field, is due for inspection next month and this will reduce gas output from this source. 

As a result of these constrained supply conditions thermal generators are running far less than we would expect given the price. Currently thermal is only running at 40 percent of its potential, compared to last winter when we saw similar prices but with thermal running at 80 percent.

From a demand perspective, we see that consumption of electricity is trending down as we move towards summer, as it usually does this time of year.

Chart showing the seasonal demand pattern

The situation has also meant more price volatility and large increases in near-term hedge prices. This has led to spreads in the ASX futures market widening in the same way as they did in winter 2017. As a consequence trading volumes are down. However, we found in our review of the winter 2017 that purchasers exposed to the spot price bought hedges (a type of insurance) well in advance. While we are concerned at the performance of the current spreads on the ASX, the impacts are likely to have been mitigated, to varying degrees, by purchasers buying hedge cover in advance.

We understand spreads can go beyond the five percent threshold in times of stress and that their agreements allow for this. But we believe more can be done to develop the hedge market and are committed to working with industry and the ASX to improve its usefulness as a risk management tool.

Chart showing the average daily spot price trend since late July

Chart showing the bid-ask spread from 3 September to 29 October 2018

What we’re doing in response

The Authority is monitoring the situation closely and our view is the market is responding as we would expect, given the fuel constraints.

As with any significant market event, we're reviewing the situation and are asking questions of industry. Some of the things we look at daily include the spot market offers, thermal generation patterns, outages, behaviour in the hedge market and hydro inflows. We’re also noting and responding to claims in the media where we find they are misleading consumers and the public.

We’re aware of concerns being raised by some industry participants about market behaviour. We take these seriously and look into them. At this point we have not detected evidence of suspicious behaviour.

We’re well prepared for situations like this and have long had regulations in place to ensure companies understand, plan for and manage risk.

We have a mandatory stress testing regime in place. This requires companies trading on the wholesale market to model their financial resilience under two scenarios. This means undertake quarterly tests to help them understand the impact high prices can have on their business. The scenarios cover off a one-off daily spike as well as sustained high prices and the results provide these companies with good information to take appropriate action. They must assure us their board has considered the results of the tests. Large businesses buying directly from the wholesale market also do stress testing to ensure they are aware of the spot market risk they are taking.

As a result of sustained high prices at an unexpected time of year, there may be companies who experience stress. Again, the Authority has a process to minimize any disruption to consumers if a retailer defaults.

Both our work on developing the hedge market and the stress testing regime are based on the belief that the industry are best placed to manage their own risk. To facilitate this we develop the tools and provide transparent information to assist companies to assess the risk and undertake appropriate actions for their business.

In spot markets, consumers benefit from low prices but are similarly exposed to the risk of higher prices – it’s up to them to choose what kind of plan is best for them.

We are focused on ensuring spot price retailers are effective in informing their customers about the benefits and risks of being exposed to fluctuating prices. As part of this, we provide and promote guidance on our website  to help current and potential customers understand more about spot pricing.

Only around 1 per cent of New Zealand households are on spot-price electricity contracts.

--END--

¹Compared to the previous highest monthly average for October (since 2010) of $102, which was in 2011. (The previous highest month was March 2013 at $162 average across the month.) Note that the 2018 figure is only for part of the month and it could still change

On weekends you’ll find Julia Hall hurtling through the hills of Wellington on her mountain bike or exploring trails around the country. But come Monday to Friday, you’ll find her knee-deep in data, keeping an eye on the electricity market. 

As a Senior Economist, Julia  is part of the Market Monitoring team who are responsible for carrying out post implementation reviews − evaluating an initiative the Authority has implemented against its expected outcomes. From the Authority’s perspective, this enables learning about how regulatory decisions are affecting the sector and whether further policy action is required.

A typical day for Julia can involve everything from writing code to analysing data, reading background material (such as consultation papers and submissions) or reading about what other countries have done.  She might also get the opportunity to speak to industry players about how certain changes have affected them – an aspect of the job she thoroughly enjoys.

“It’s really interesting talking to different people in the industry, getting their thoughts on how it’s working for them,” she says. “I’ve also been reading a lot about what other countries have done − or have tried to do − in the space.”

The most rewarding part of the job for Julia is seeing all the hard work pay off when a review is published. Recently she worked on the Post implementation review of dispatchable demand − a project that went live in 2014.

When asked what led her to the role at the Authority, Julia says it was all down to “a bit of luck”.

“A friend of mine actually had this role before me so when they left they encouraged me to apply,” she says. “I was drawn to the problem-solving aspects − figuring out how something is working in practice − and of course learning new stuff. I also liked the idea of working in a smaller organisation.”

Previously Julia has worked at larger organisations such as The Treasury and Statistics NZ. She joined The Treasury as a researcher when she was fresh out of university. Just over two years later she moved to London for her OE, but not before a quick stop in Hong Kong to play in the Oceania Korfball Champs.

Korfball (a ball sport similar to basketball and netball) was a big part of Julia’s life while she lived overseas for 6 ½ years. Work-wise, she spent time at a marketing consultancy firm and then moved to a role at the National Centre for Social Research. There she helped with the sample design and weighting for large-scale social surveys. 

Back in New Zealand Julia spent 4 ½ years in the methodology team at Statistics NZ and then joined the Authority just over a year ago. She admits it’s been challenging getting her head around some complex issues in the electricity industry. But knowing her work can make a difference to everyone in some way − because everyone uses electricity − is gratifying.

Outside work, Julia enjoys mountain biking, an interest shared by many across the Authority.

“When I moved back to New Zealand I took up mountain biking − my dad got me into it − and now that’s about all I do. I also volunteer as a ride guide for the Wellington women’s mountain bike club Revolve.”

It was another record breaking year for consumer choice in 2017/18 as New Zealanders continue to benefit from a competitive electricity market.

• As at June 2018, there were 52 retail brands supplying New Zealand households (compared to 40 the year prior). The more brands that consumers can choose from, the harder those brands have to compete with each other.
• We closed out 2017 with 439,689 New Zealanders switching electricity companies, beating the previous record of 417,639 set in 2015 by more than five per cent.

We have seen improved efficiency and reliability in the market as New Zealand’s electricity industry effectively managed another dry winter.

• This last winter was one of the driest on record for the Southern hydro lakes, and the industry managed the challenge without it impacting significantly on household consumers. Our Winter 2017 review (published in June 2018) showed regulatory and market mechanisms successfully maintained security of supply. The biggest contribution to the effective management of dry winters has come from clear rules about when an official conservation campaign would be run and a stress-testing regime that ensure major retailers and users of electricity are aware of the risks they face. 

We continued on our work to promote greater innovation and participation in the electricity sector.

• We consulted with stakeholders on what may prevent ‘mass participation’ in the electricity market. Submissions indicated that equal access to monopoly distribution networks – that is, allowing more parties to use electricity networks to exchange products and services – is a key concern for parties using or wanting to use the distribution network, particularly those interested in innovation and evolving technologies.
• We consulted on a project about barriers to consumers entering into multiple trading relationships. At present, the market rules and industry practices limit consumers’ ability to establish relationships with more than one electricity services provider. But the electricity world is changing and, as an example, we’re seeing more consumers choosing to generate their own electricity and exploring the potential for battery storage. We have signalled we may look to change the rules over the coming year.
• We collaborated with NZ power provider Mercury to assess whether there were any barriers in the Code (the electricity rulebook) that would prevent them using a battery storage facility in the wholesale market. Storing electricity directly from the national grid in a battery is a first for New Zealand. 

We launched the Electricity Education Portal, the first of its kind, as part of our work to improve information availability for new entrants and participants.

• The new tool saves time for anyone wanting to find our guidelines by putting the information they need at their fingertips. Initial feedback from our stakeholders has been extremely positive and since it was launched in June 2018 there have been almost 900 users of the new tool. 

As part of our work to improve the hedge market we expanded the financial transmission right (FTR) products to include three additional hubs in Kikawa, Redclyffe and Whakamaru.

• The addition of the new FTR hubs has the potential to increase competition in the retail market by allowing more small and medium retailers to enter the market in areas outside where they buy their hedge products. 

Click on our ‘Year in review’ below for more highlights from 2017/2018.

A PDF version of the Annual Report is available on our website. Alternatively, you can request a hard copy of the Annual Report by emailing your name and postal address to communications@ea.govt.nz

The Electricity Authority says results for the first six months of 2018 show New Zealand households are continuing to get more choice of power supplier.

The Authority’s Market Performance team keep an eye on several measures that show what is happening for consumers and enable the Authority to see what is working well and where things can be improved. 

Our six-monthly health check of the market shows consumers are benefitting from a market that is open to new power companies or brands. Our analysts look particularly at the structure, conduct and performance of the market, using a range of measures.

There were 34 power companies servicing residential consumers at the end of June 2018.

A key measure of market structure is the Herfindahl-Hirschman Index (or HHI), which is based on retailers’ share of consumer accounts. A reducing number indicates more companies taking market share, which improves the competitive environment for all consumers. The HHI for the New Zealand residential retail electricity market has continued a significant downward trend during the first half of 2018. It has been going downward since at least 2008, and in a decade it more than halved, from 5509 on 30 June 2008 to 2463 on 30 June 2017. (See the graph below.)

The number of customers changing suppliers tends to be higher in winter months, and more than 40,000 consumers switched in June 2018. New, smaller retailers have been gaining market share while long-standing, larger companies have tended to drop slightly.

The Authority also monitors power company conduct to see if they are competing strongly, and one key measure is surveying consumers to find out how often they have been approached by retailers. The latest consumer survey, done in August 2018, shows more than half of households (57 per cent) have been approached about switching in the previous two years. This is very close to the 2016 survey result (56 per cent).

The team assesses how well the market is performing in delivering value for consumers. The most useful overall measure of electricity prices actually paid by households is the sales-based residential electricity cost data from the Ministry of Business, Innovation and Employment (MBIE). MBIE figures show the energy component of the cost of power to households (the part that the Authority regulates) fell by an average of 0.7 per cent during the year to March 2018. That now makes it two out of the last three years that the nominal energy costs (that is, excluding distribution costs) to residential consumers have fallen. However, due to an increase in average distribution costs (up 2.9 per cent) in the year to March 2018, the average combined cost for delivered energy increased 0.8 per cent.

Also, our statistics show demand for electricity was slightly up in most months of the past half-year compared to the past 10-year average. But overall, the level of demand is still relatively static.

A key part of our function is to monitor, inform and educate; this includes making information available and accessible. Improving awareness and understanding of how electricity markets work is vital to help consumers understand how to participate in markets and the choices they have available to them.

Our What’s My Number campaign has proven to be an excellent way of raising awareness about competition in the retail sector, and motivating consumers to take action to check they are on the best deal for their situation.

In addition to running the campaign, we regularly publish Plain English articles in our Market Commentary newsletter, through the media and on the consumer pages of our website. These articles, publications and stories try to simplify key rules and concepts about the electricity systems, markets and rules and make them relevant to everyday consumers in New Zealand.

As more people begin to interact and engage with electricity systems and markets in more complex ways, it’s only natural that we are seeing more people taking an interest in our work. In fact, the amount of visitors to the consumer pages of our website increased by 200 per cent over the last financial year. And we know more people want to be communicated with through different mediums outside traditional text. By combining text, visual aids and good design, we can reach and improve understanding of complex information with a wider range of people.

In 2017 we created a video animation alongside the release of our Statement of Intent 2017–2021 to help inform a broader, non-sector audience about what we do and where we’re going. We tested the video with a group of non-expert consumers and 89 per cent agreed that video was a good way for us to communicate with them. This animation continues to be the most watched video on the Authority’s YouTube channel.

Since receiving this feedback, we have been working on creating a short series of videos to explain key areas of the electricity industry and topics where we receive the most enquiries and see the most misunderstanding. This first video aims to explain how electricity flows and the key parts that make up electricity pricing in New Zealand, including the average proportion that relates to generation, transmission, distribution and retail.

Electricity in New Zealand 2018

We have updated our flagship publication, Electricity in New Zealand. This popular resource is used to increase public and consumer awareness, and understanding of key concepts in the electricity industry.

Schools, new entrants to the electricity sector, customer service staff and consumers, find this resource very valuable. It explains what distribution, transmission, and generation companies do, and the marketplaces where electricity is traded. It also includes some great facts about electricity history as well as graphs, examples and infographics to bring the information to life.

If you know others who would be interested in finding out more, please encourage them to subscribe to our Market Commentary newsletter, visit our consumer web pages and follow our Twitter, YouTube and LinkedIn accounts. 

If you’d like to receive hard copies of Electricity in New Zealand or want to know more about our consumer materials, email us at: communications@ea.govt.nz.

The Authority has also considered a specific proposal by Mercury for the integration of the first battery directly connected to the high voltage national transmission grid. The Authority was satisfied that there were no barriers in the Electricity Industry Participation Code 2010 (Code) that prevented Mercury from implementing its proposal.

Storing electricity directly from the national grid in a battery is a first for New Zealand. The electricity stored in the battery will then be traded on both the wholesale energy and instantaneous reserve markets.

The benefits of any future batteries could also be achieved by connecting to a local network rather than the national grid.

Electricity Authority Senior Advisor Wholesale Markets Mike Collis says, “We are striving to develop regulatory systems able to be flexible and innovate quickly to ensure consumers’ benefit from the efficient operation of new storage technologies in the wholesale market.

Source: Mercury

“The Authority encourages Transpower and distributors to adopt approaches that allow those providing innovative services from devices such as batteries, to access their networks on a non-discriminatory basis.”

In the future, consumers will have greater opportunities and choices to enjoy the benefits of the new technologies becoming available.

Removing barriers to different forms of generating technologies in the wholesale market will improve supply side competition, contribute to reliability and potentially improve the operational efficiency of the electricity industry.

Mr Collis says, “The Electricity Authority wants to see households, and commercial and industrial consumers, enjoy the benefits of greater choice.

“The battery will also have benefits for the consumer by helping meeting peak demand, and will complement New Zealand’s existing storage in hydro lakes as well as enhancing security of supply to Auckland.”

The battery, at Southdown in Auckland, provides an opportunity to research the integration of battery technology into New Zealand’s electricity system.

The battery is modular and fully scalable. The Southdown site and grid connection has the capability to ultimately deliver 100+ MW of battery-stored power into the national grid, supporting national security of supply.

Mercury will be holding a battery launch event at Southdown on Wednesday, 22 August and the Minister of Energy and Resources, Hon Dr Megan Woods has confirmed her attendance along with key electricity industry participants.