Stage: 2 (Review) Status: Complete

The Authority announced in June 2016 that it was commencing a Market Performance Review into the high spot prices that occurred during two trading periods on 2 June 2016.

The review answers the following questions:

  • Did the high South Island prices result from trading behaviour that was inconsistent with the Authority’s statutory objective to promote competition in, reliable supply by, and the efficient operation of, the electricity industry for the long-term benefit of consumers?
  • Are available risk management products sufficient in their range and scope?

The review assesses the above questions against the Authority’s expectations of a workably competitive market, and discusses the implications for the competitive, reliable and efficient operation of the electricity industry.

The review undertakes a qualitative assessment which finds that using offers to link prices across a transmission constraint and thereby raise prices in a region with abundant supply could harm the market in various ways. On 2 June 2016, this offer approach contributed to high spot prices in the South Island that:

  • did not signal scarcity
  • were not the result of innovation
  • created no useful signal for potential entrants. 

If participants are able to use a pivotal position to manage a risk position, then this is likely to suppress demand for hedge products. This has implications for other parties’ ability to efficiently manage their risk position and for security of supply, given the impact that lower demand (and forgone revenue streams) will have on providers of hedge products.

While the review primarily focuses on the use of offers to link prices across a transmission constraint and thereby raise prices in a region with abundant supply—in this case the South Island—the review also notes other factors that contributed to the high electricity spot prices.