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Regulator sees little reason for power prices to rise

Thursday 7th February 2013

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The Electricity Authority sees few reasons for residential electricity tariffs to rise in the next 12 to 18 months, as increased transmission and distribution costs are offset by a glut of electricity generation capacity and far better information about the future path of wholesale prices.

At a breakfast briefing in Wellington, the authority's chairman Brent Layton and chief executive Carl Hansen ran through a string of new measures the EA uses to measure both the extent of retail competition and the impact of recent initiatives such as electricity futures trading to moderate prices.

"The futures market is giving a clear view of prices into the future," said Hansen. "It's a very stable wholesale price outlook."

There was "no way" retail tariffs could be pushed up in that environment, especially as there had been a "big fall" in expectations for spot prices in the futures market, which showed contract prices for energy in 2015 dropping an average 26 percent in recent months from $120 per Megawatt hour to $90 per MWh.

"There have been massive changes in view about weakness of demand," said Hansen, reflecting the closure of major plant in Kawerau by paper-maker Norske Skog and uncertainty over future demand from the Bluff aluminium smelter.

The smelter's majority owners, Rio Tinto, are seeking to renegotiate long term contracts covering around one-seventh of total New Zealand electricity consumption to reflect weakness in the global aluminium market.

"The market's perception is that the future shows the supply/demand risk is receiving," he said. "How will that affect retail prices? There's a lot of competition that's possible to come out of that."

That pressure came on top of the increasing public understanding that switching power companies is relatively simple, driven by the EA's "What's My Number?" campaign, and evidence that concentration of market power in regional markets had reduced substantially in the last few years.

"The Electricity Authority will be watching this in next six to 12 months to see how competitive the market is," said Hansen.

He also warned major electricity users who chose not to hedge against spikes in wholesale electricity market spot prices that they shouldn't expect sympathy if such spikes cost them money.

The EA had conducted stress testing last year which found four major industry players were not hedged against adverse wholesale market events.

"That's fine, but what we don't want is people coming back to us complaining when spot prices rise," Hansen said. "You've provided the information, so you know (the risks).

"Don't expect Ministers, the Authority, officials or indeed the media to be sympathetic," he said. "WE know that it rankles with some parties, but we think it's very important to the market."

 

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