Energy

Electricity companies feud over hydro-spilling claims

As the Electricity Authority prepares to make a final call on Meridian's December 2019 hydro-spilling, electricity companies are battling it out with dueling claims on how much should be paid out if the interim decision is upheld

Electric Kiwi CEO Luke Blincoe has accused Meridian Energy of taking a "self-serving" position on how much money it should pay if the Electricity Authority (EA) upholds its July determination that the company was responsible for "unnecessary spill" of water through its hydroelectric plants in December and reaped around $80 million in undue profit.

Meridian has fired back, with a spokesperson defending the company's position and telling Newsroom, "Electric Kiwi’s CEO has never been slow to insist that regulators and other market participants have broader responsibilities to assist him and his shareholders".

At issue is whether, during a period of record-high water inflows at its hydroelectric stations, Meridian allowed too much water to spill through and didn't lower prices enough to reflect the cheap cost of generation, leading to an undesirable trading situation (UTS). In its interim decision in July, the EA cleared fellow hydroelectric companies Genesis and Contact of any wrongdoing, but found Meridian was responsible for "unnecessary spill".

"What we didn’t see and would have expected was lower electricity spot prices driven by lower offers from those generators spilling excess water," the regulator's chief executive James Stevenson-Wallace said at the time.

"The prices remained relatively high despite an abundant supply of water and no increased demand during the period."

Although smaller electric companies which purchase electricity off of the wholesale market complained that the wrongful behaviour occurred from November through to January, the EA determined it only saw issue with conduct during a narrow stretch of time, from December 3 to 18. During that period, however, inflated wholesale prices had "an $80m impact on the spot market", the regulator found.

It is unclear when the EA will make a final call - companies are still able to submit cross-submissions until September 9 - but the deadline for initial submissions has now passed. With these now published on the regulator's website, Blincoe has taken issue with the arguments in Meridian's presentation.

'Economically rational'

Meridian defended its offer strategy - what it uses to determine the price at which it will sell power on the wholesale market - as "economically rational". But Blincoe said he expected better of a state-owned enterprise.

"From a state-owned enterprise, we expect a higher standard than simply doing what's economically rational. It sort of hints at a perception that they've got unfettered rights to use and abuse market power," he said.

"Meridian is conscious of its responsibilities as a mixed ownership model company that is 51 percent owned by the New Zealand Government. The majority owners of Electric Kiwi’s parent company hail from the UK," Meridian's spokesperson responded.

"The fact overseas parties choose to invest in the New Zealand electricity market, the growth they have enjoyed here and the fact that New Zealand now has one electricity retailer for every 50,000 households —five times the rate in Australia and seven times that of the UK – are all evidence of the solid regulatory framework, a level playing field for all, and strong competition that exists in our sector for consumers."

Blincoe also took issue with the environmental impact of the hydro-spilling. The EA found some 41 GWh of water was unnecessarily spilled (Meridian contests this and argues the figure is more like 12 GWh), requiring increased usage of North Island fossil fuel-powered generation to make up the difference. Blincoe estimated the likely added emissions at 6,000 tonnes of carbon dioxide - or the equivalent of driving a diesel car from Cape Reinga to Bluff 18,000 times.

"Just because it's economically rational doesn't mean you should ignore the carbon and environmental impacts of your behaviour, especially if you're going to campaign heavily on your environmental credentials," he said.

In its submission, Meridian pays little heed to the emissions impact, noting simply, "For completeness, the assertion by Haast Energy Trading and other claimants that Meridian's 'unnecessary' spilling caused an increase in greenhouse gas emissions is also too remote a consequence to be properly considered as part of the Authority's UTS decision. The Authority appears, rightly, not to have placed any weight on that aspect of the complaint in its preliminary decision.

"The New Zealand emissions trading scheme has more to do with greenhouse gas emissions than Meridian's offer prices."

Will consumers feel the pinch?

Blincoe and Meridian also clashed over whether consumers will experience losses as a result of the hydro-spilling and high wholesale prices.

The EA determined "there was no immediate effect on consumers due to most consumers being on fixed price contracts. However, in the long run if retailers expect there to be high spot prices during times of abundant hydro storage, then retail prices will increase for consumers."

Meridian disagreed, with its spokesperson telling Newsroom the company, "disagrees strongly with this for three reasons.  First, because wholesale prices weren’t particularly high in December last year. They were below the long-term average and significantly below the average for the year to that point."

According to the company, the wholesale price in the South Island during the relevant period was $73 per MWh - below the $125/MWh average wholesale price in the 2019 financial year and the $100/MWh average wholesale price in the 2020 financial year.

"Secondly, the rainfall events of December last year were exceptional. Suggestions that retailers would change their price offerings off the back of wholesale prices seen during one of the wettest two-week periods in the last 90 years are not sensible.  Thirdly, there’s been zero evidence of price changes driven by the events of late last year in the 9 months since the alleged UTS," the spokesperson said.

Blincoe said this argument didn't stack up.

"This is a minimisation strategy they've used to say that it didn't really matter because retailers are hedged, so consumers didn't feel the pain straight away. It's actually mind-blowing to think such a sophisticated organisation could use such a flawed and simplistic logic. It's like a thief saying it's okay to steal if someone's insured - insurance costs money and the cost of insurance is based on the underlying cost of events."

How much to pay up?

Then there's the issue of how much Meridian should pay if the EA does find it in the wrong. The last time the regulator determined there had been a UTS was in 2011, when Genesis Energy charged high wholesale prices in Hamilton after parts of the national grid were shut down on March 26 for upgrades.

In that scenario, the EA reset prices to what it considered would be a reasonable rate, based on demand-side response in which those purchasing from Genesis would have hedged, dialling back peak demand and/or seeking alternative generation. That meant prices were retroactively set to $3,000 per MWh, from a peak of $20,000 per MWh.

Blincoe and the other independent retailers that complained to the EA want to see the wholesale price from Meridian for the relevant period set to near zero, based on the short-run marginal cost (SRMC) of generation. They've argued the massive amount of spilling meant Meridian could have produced more power at no added cost.

This way of calculating the "right" price is something Meridian argued for during the 2011 UTS claim, but which it has now backed away from, Blincoe said. He called this change in position "self-serving".

Meridian's spokesperson said the company wanted to see prices in 2011 reset to the long-term average wholesale price. If the same were applied here, the price would actually increase because the wholesale price for the relevant period was lower than the average wholesale price in the preceding and following months.

If the EA does go ahead and determine a UTS has taken place, it is unclear what price reset Meridian might argue for.

At the moment, at least, the figure the EA has in mind is much lower than the gentailer might like. In its preliminary decision, the regulator produced a figure above the preferences of the independent retailers (who have also offered to compromise at $5/MWh) but likely well below that of Meridian: $6.35 per MWh.

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