Review of fixed price variable volume commercial offers
We have completed a review into the relative prices of fixed price variable volume commercial offers and the ASX hedge price.
|Stage: 1 (Enquiry)||Status: Complete|
The Electricity Authority (Authority) has recently reviewed pricing of Fixed Priced Variable Volume (FPVV) contracts. The Authority initiated this review following claims that there are inefficient barriers to entry in the commercial segment of the retail electricity market because large retailers systematically discount FPVV contracts below the bid price of Australian Securities Exchange (ASX) New Zealand energy futures contracts. The review tested whether this systematic discounting is occurring. We have published this summary due to the likely interest in the review outcome.
FPVV is the widely-used name given to a pricing option many retailers offer to commercial and industrial consumers. They generally take the form of a contract based on a schedule of unit-based energy prices (ie, cents/kWh). Prices in the schedules usually relate to only the energy component of the customer’s total bill. Any non-energy costs such as distribution and transmission charges, which are sometimes referred to as ‘pass-through’ costs, are usually separated out from the energy charges.
The prices typically vary depending on the time of day, week-day/non week-day, and month. Because each day is often broken into 4-hourly time blocks by the retailers, the contracts are sometimes known as ‘144’ contracts (because there are 144 individual prices for each 12-month period). The duration of the contracts can range from a single month to several years.
This review took a sample-based approach. We asked six large retailers for FPVV contract data for customers in Auckland and Christchurch. We received the last of the required data in April 2017. Approximately 1850 individual sets of FPVV contract prices covering January 2013 to December 2019 were used in this analysis.
We compared the average energy price specified in each FPVV contract to settlement prices for base-load quarterly contracts on the ASX at the time that the contract was quoted to the customer—this is when an obligation (in terms of maintaining a retailer’s reputation and standing in the market) was effectively created. Otahuhu and Benmore ASX contracts were used to assess the respective Auckland and Christchurch markets.
Adjustments for prompt payment discounts and other FPVV contract terms were made to enable us to carry out a like-for-like comparison between FPVV prices and ASX prices. In addition to these adjustments, we made an additional allowance as there may be different administration costs associated with FPVV and ASX contracts. This was achieved by using settlement prices (instead of bid prices as stated in the claims) in the analysis. This has the effect of further reducing the FPVV prices used in this analysis by approximately 0.15 cents/kWh ($1.50/MWh). Where necessary, adjustments were also made to the ASX contract prices to account for volume and price differences arising from transmission and local distribution lines losses. The Authority considers that systemic discounting, if it were occurring, would be revealed in this analysis.
The Authority found that retailers generally priced FPVV contracts higher than ASX settlement prices. Of the FPVV contracts that the Authority had data for, twelve per cent were priced under the ASX settlement price and eighty-eight per cent were priced over the ASX settlement price. The mean difference between the average FPVV contract price over the average ASX settlement price was 0.6 cents/kWh ($6/MWh).
Figure 1 below shows the estimated difference in cents/kWh between FPVV contract prices and the ASX settlement prices (referred to in the charts below as the ‘margin’), by the contract quote date. A positive margin indicates that the ASX settlement price is lower than the FPVV contract price.
Figure 1: Estimated contract margin by contract quote date
Figure 2 shows the estimated difference between the FPVV contract prices and ASX settlement prices by the annualised volume of each contract.
Figure 2: Estimated contract margin by annualised contract volume
The Authority has not found evidence to substantiate the claim that there is systemic discounting in the FPVV market relative to the ASX.
The Authority considers the data in this review to be commercially sensitive and will not be publishing any detailed results of the analysis, or the contract data that was provided.