Authority seeks views on preliminary UTS decision

The Electricity Authority Te Mana Hiko is seeking feedback on its preliminary decision that an undesirable trading situation (UTS) arose following a recent High Court decision. The High Court considered appeals of the Authority’s decisions on a pricing error claim and UTS investigation.

The appeal decisions related to the events of 9 August 2021. On that day, New Zealand faced the largest demand peak on record because of one of the coldest nights of the year. The situation on 9 August rapidly escalated with a decline in generation, high demand, and real time data evidencing a risk of cascade failure of the national power system.

In response to the risk of cascade failure, the system operator issued notices to reduce demand, resulting in over 34,000 consumers being disconnected.

The High Court upheld an appeal on a pricing error claim because “scarcity pricing" was incorrectly applied by the pricing manager, as notices to reduce demand issued by the system operator did not follow the requirements in the Electricity Industry Participation Code (Code) for scarcity pricing.

As a result of the High Court decision, prices on 9 August 2021 have been determined by offers and demand management by the system operator. The Authority carried out an investigation into a possible UTS as a result. The Authority’s analysis in its investigation determined that prices were artificially depressed as a result of the demand reductions requested by the system operator.

“Our preliminary view is that if prices are artificially depressed, incentives for the operation of, and investment in, last resort generation may be undermined,” says Airihi Mahuika, General Manager, Legal, Monitoring and Compliance.

“This in turn can undermine security of supply as the power system may increasingly rely on demand reductions, such as occurred on 9 August, which may lead to some consumers being disconnected.

“Our preliminary finding that a failure to intervene in the present circumstances, where prices do not reflect the underlying conditions of unprecedented high demand and scarce generation, threatens, or may threaten, confidence in, or the integrity of, the wholesale market.

“It is important to stress that this is a preliminary finding and we encourage submissions to inform our final decision,” says Mahuika.

The Authority has calculated that prices are approximately $10 million lower in trading periods 38 and 39 than they would have been had there been no electrical disconnections.

The Authority directed the clearing manager to finalise prices for trading periods 37-42 on 9 August 2021. However, the Authority’s service providers’ estimated costs to settle these trading periods are significant. As the UTS investigation is ongoing, the final decision may be that a UTS has developed, which could result in changes to final prices. As a result, and to avoid additional high costs for consumers, the Authority has decided to delay settlement of those trading periods pending a final decision on the UTS.

Consultation of the preliminary decision paper runs for four weeks until 5 June 2024.