Wholesale market competition review

In March 2021 the Electricity Authority announced it would conduct a review into competition in the wholesale electricity market.

The period of the review covers the sustained elevated electricity prices since an unplanned outage at the Pohokura gas facility in Spring 2018 and the announcement in January 2021 of the arrangements to extend operation of the New Zealand Aluminium Smelter (NZAS) at Tiwai by four more years. 

Monitoring Review of structure, conduct and performance in the wholesale electricity market is a detailed review paper that sets out the methodology used for the review, as well as a set of observations about the competitiveness of the wholesale market.

The main observations from the review are: 

• Some prices offered by electricity generators do not reflect underlying supply and demand conditions;
• There is some evidence of an increased incentive and ability for electricity generators to structure their offers into the market in a way that keeps prices high (economic withholding);
• Interviews with investors indicated investment has been impacted by the uncertainty surrounding the Tiwai smelter and other factors such as the need to update resource consents for new technology;
• The New Zealand Aluminium Smelter (NZAS) was offered a low electricity price to encourage it to stay and this may have resulted in other consumers having to pay more.

The second paper, Inefficient price discrimination in the wholesale electricity market – Issues and options is the first step in responding to the Review. It addresses an observation made in the Review that extended operation of the NZAS smelter at Tiwai Point – just prior to the Authority launching its review.

The Tiwai smelter staying results in greater demand, more thermal generation and higher prices for other consumers.

The Authority is concerned that generators are in effect subsidising the smelter by up to $500m, resulting in higher prices for other consumers. The Authority estimates that this could add up to $200 to household electricity bills each year.

The Authority’s focus is to protect the long-term interests of New Zealand electricity consumers. The paper explores possible options that could be advanced to ensure that similar, future contracts between electricity generators and large consumers are efficient.

Addressing the potential issues the Tiwai situation raises is the first step in responding to the Review and we are consulting on all options. The wider review of wholesale market competition signals the continuation of the Authority’s focused programme of work on the wholesale market. The Authority welcomes the input from all stakeholders on the review and their views on the actions that should stem from it.

Both papers are out for consultation. The deadline for feedback is 5pm Wednesday, 22 December. Find out more about the consultation and how to submit feedback here.