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Power company shares rally on electricity review panel report

Tuesday 11th September 2018

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Shares in some of the country’s biggest generators jumped today after an independent review of the electricity sector found no evidence that they, or distributors, were making excessive profits.

Shares in Meridian Energy, the country’s biggest generator, rose 2.9 percent. Those of Contact Energy, the country’s second-largest power and gas retailer by accounts, jumped 3.6 percent.

"Nothing too draconian has come out of that report," said Mark Lister, head of private wealth research at Craigs Investment Partners. "It's a bit of a relief reaction in the sense that there's nothing in that report that's going to be a major issue for any of those companies."

The eight-strong panel, comprising industry experts and consumer representatives, was appointed in April as part of the coalition and support agreements between the Labour, NZ First and Green parties.

They say that while retail competition is strong, a two-tier market is emerging - as has also been seen in the UK and Australia – in which many customers who don’t switch supplier in search of the best deals have ended up paying more.

The panel said more needs to be done by industry and government to address genuine energy hardship. The government’s low fixed-charge regime is poorly targeted, possibly exacerbating hardship for some low-income families and could be more usefully replaced with an energy concession scheme for low-income groups.

But there seems to be little appetite for the price caps recently imposed in the UK, and recommended in Australia.

Panel chair Miriam Dean told journalists the group had drawn on the work of those reviews in the UK and Australia, but she noted that the drivers of those reviews, and the markets themselves, are different from the experience in New Zealand.

The panel’s 88-page report covers all aspects of the electricity market. Submissions are due by Oct. 23 after which the panel will develop recommendations and report those back to the government by May.

Its terms of reference require it to consider whether the electricity market is delivering efficient prices that are fair for end-consumers and whether the existing structures will aid the take-up of new technologies such as solar, batteries and electric vehicles.

Other specific issues included reviewing the impact of the low-fixed charge regime, whether suppliers have been able to extract excessive profits over time and whether customers in particular regions or industry segments are being fairly treated.

There were no surprises in the panel’s discussion paper. After the need for action on energy hardship, its firmest comments were focused on the need to improve the performance of the electricity futures market and the distribution sector.

Rules requiring the country’s major generators to offer volume through the futures market are “fragile” and need to be improved as a “high priority”, the group said.

An effective wholesale contract market is important in enabling competition from non-generating retailers and for mitigating the potential market power of vertically integrated generator-retailers.

While the Electricity Authority has done well to increase liquidity in the ASX-operated futures market in recent years, the panel said pricing during last year’s dry winter showed how fragile the current arrangements are. Price spreads for much of winter exceeded 5 percent and there were no quoted prices on some contracts.

Contact, Meridian, Mercury NZ and Genesis Energy have a voluntary market-making agreement with the ASX for New Zealand electricity futures.

Shares of all the major generators rose from recent lows. Contact shares climbed 20 cents to $5.74, Meridian stock climbed 9 cents to $3.25, and Genesis rose 2.7 percent to $2.505. Mercury rose 0.5 percent to $3.37 and Trustpower was unchanged at $6.

Last week UK power and gas regulator Ofgem set a cap on the most common tariffs charged by the major power retailers in order to lower power costs for consumers who don’t switch suppliers to get the best prices. The cap, in place until 2020, will save users on those dual-fuel plans about 75 British pounds a year on average and up to 120 pounds for those on the most expensive plans.

The Australian Competition and Consumer Commission has also recommended the imposition of a “default” retail price to ensure customers who are not switching supplier also pay a price closer to the actual cost of their power.

Energy and Resources Minister Megan Woods said today’s report showed the electricity market is not working for all consumers.

She would not be drawn on whether the low fixed charge rules should be scrapped, saying it would be wrong to “cherry-pick” options before the review comes back with recommendations next year.

The government this year put in place a winter energy payment and has also increased funding for insulating homes. Anecdotally the winter payments have reduced the number of people seeking help meeting their power bills, she said.

The panel also believes there needs to be more work on distribution pricing, that the small size of some networks may be hampering efficiency and that access to distribution assets needs to be improved. Some networks may also need to rebalance the way they charge some common costs across business and residential customers, Dean said.

Shares in Vector, the country’s biggest power distributor, fell 2 cents to $3.43.

Chief executive Simon Mackenzie said rising retail prices and the emergence of a two-tier market are legitimate concerns for the panel and policy makers.

But he said it was not clear what problem the panel was seeing on access to networks. Vector had thousands of independently-owned assets – ranging from traditional generation to solar, EVs and batteries – connected to its network.

“We believe technology will continue to play an increasing role in promoting efficiency, choice and fairness for consumers,” he said in an emailed statement.

“One of the reasons Vector has taken the lead on new energy technologies is because we want to ensure all consumers benefit and those benefits are as evenly distributed as can be.”


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