This figure also applied to the tens of thousands of small businesses using small amounts of electricity. What followed was a studied silence from the industry.
There has subsequently been a great deal of debate and finger-pointing as to just who is responsible for an electricity market that delivers average monthly bills of around $300 to Kiwi households, while our Melbourne, Australia, cousins are charged roughly the same price per quarter!
All this while Aussie generators are burning expensive and polluting coal, gas and oil to meet demand, and we mainly use sustainable hydro generation that has paid for itself many times over.
Business Impacts
As business people, we are not immune from this unresponsive market. Our staff are consumers too and their budget pressures impact wage demands. We are also just the last cab off the rank when it comes to increased electricity price charges.
If you signed a new, fixed price, 24-month electricity contract last September you will now be paying around 20 per cent less for electricity than if you signed a similar contract today. Everything indicates that this trend in the commercial market will continue as the industry continues to “adjust” prices skywards.
The Power Players
There are several players that influence our electricity market. Let’s start with the retailers. Most of us are aware of so-called “prompt payment discounts” that offer between 10 and 20 per cent lower pricing if we pay on time. For individuals or businesses under financial pressure these discounts can often be unattainable as the need to pay staff, taxes or put food on the table trumps their ability to pay by a given date.
What many of us don’t realise is that these discounts are often not discounts at all. The retailer has just loaded the “discount” onto their usual rate, leaving the late payer under even more cost pressure.
To their credit Meridian announced an end to this practice last September. The price review panel chimed in last month and called for an end to this practice altogether.
To Switch or Not to Switch?
There are also the much advertised switching campaigns that try to persuade consumers and small businesses to switch suppliers in the hope of getting a better deal. This is a complete fallacy for small businesses and households under financial pressure. While retailers are only too happy to accept businesses or individuals with good credit records, they simply decline switch applications from distressed payers.
It could be said that’s the outcome of paying bills late but in many cases credit checks will, at a time when they need to watch every dollar, exclude people or businesses from beneficial pricing.
Many retailers have also, until recently, offered significant incentives to stop customers from switching. Fair enough, you might think, except that businesses that pay their bills on time and loyally stick with their preferred supplier are not offered these incentives, and so end up paying more despite being great customers.
This, along with many other structural impediments, is exactly why Ms Dean QC and her team are finally taking a long, hard look at how our electricity market functions. This year’s energy price review should prove interesting!
[Electricity] Demand has, year on year, been steadily rising. This trend is likely to continue, so don’t look for much relief from higher electricity prices in the near term.
I recently talked to a businessperson who had signed up to an electricity contract that had his company effectively speculating on the spot market.
What the company didn’t realise (and wasn’t told) was that playing the electricity spot market was fraught with upside cost risk. In their case they are now paying more than three times the standard retail electricity rate for business, and facing significant fees if they attempt to get out of the contract.
What disappointed me in this case was that the consultant they paid for advice also took a trailing commission from the electricity service provider. In other words, no-one was representing the client’s best interests in a transaction that was fraught with risk.
Let’s talk about the situation our businessman faces and how it came about that the company is locked into a contract that will potentially cost it tens of thousands of dollars more than a simple retail contract offered.
It comes down to supply, demand and price uncertainty.
How the electricity spot market works
Most of our electricity is provided via South Island lakes. Lake water has remained at average levels for the time of year right through the summer period thus far. What has driven the price escalations is thermal outages. A large chunk of North Island thermal generation plant has been unavailable due to maintenance.
What was scheduled as a short-term outage has turned into longer ones as issues have been found that are taking time to remediate.
Even when it is running at full capacity, thermal generation is more expensive than hydro. The wholesale price of gas is escalating, and the price of coal has effectively doubled since 2016. The impact of this means that generators are less likely to offer thermal generation to the market if prices are low. Hydro has, therefore, been used through the year, reducing the ability for hydro generators to conserve water when the pressure went on summer lake levels.
National demand has also increased significantly. This summer so far, demand is the highest it has been in the past four years. Demand has, year on year, been steadily rising. This trend is likely to continue, so don’t look for much relief from higher electricity prices in the near term.
It’s not entirely bad news though. Even in a time of escalation, fixed prices have remained below where we were at this time in 2012. There was a significant market correction towards the end of that year and businesses have benefitted from attractive electricity pricing since.
Should we enter the spot market?
What does this mean for those businesses whose contracts have expired or will expire soon?
Unless they have an energy expert on staff, they need to think very hard before entering contracts that lock them into variable pricing based on the electricity spot market.
Negotiating an electricity contract can be complex. Good advice can save a business thousands, if not tens or even hundreds of thousands of dollars, depending on the size of the business and its energy use profile. Business should use a reputable advisor but be certain that he/she only represents the business’ interests.
Right now, and for the rest of 2019 at least, I suggest a fixed term, fixed price contract wherever possible. Yes, business may pay a small premium in some cases but there are numerous, reputable electricity retail firms that offer good pricing and carry the upside risk for their clients.
The following post was written by Bryan Leyland for KiwiBlog. Bryan is an engineer with over 60 years experience in the energy sector and regularly comments on various topics. He is a strong believer in a single payer market and Carl Hanson, former head of the Electricity Authority argues against this here.
At Total Utilities, we track the competitiveness of contestable costs and been doing so for nearly 20 years. While this data is representative of our customer base (which is made up of small and large commercial and industrial customers and does not include residential customers) we have not seen large “energy” price rises over time. In fact, over-the-counter retail pricing has been relatively flat since the end of 2012 and akin to pricing in 2006. Much of this has been due to increased retail competition in the market providing customers with more alternatives than the traditional “big 4” generator/retailers.
Non-contestable costs, primarily those that relate to the transmission and distribution of energy around the national grid and local grid infrastructure on the other hand, have continued to rise. These monopoly-based costs vary considerably around the country, for example, a typical split nationally between contestable energy and non-contestable pass-through charges is around 60/40. In Top Energy in the far north, it can be the reverse of this. Conversely, Auckland and Wellington the cost split can be 70/30 and in Christchurch 50/50. Regional networks, in the North Island particularly, due to its geographic shape and population imbalance suffer from covering large areas with lower customer density compared to main centers. As such maintaining the network over what can be very rugged and mountainous terrain is expensive.
So where does this leave us, the fundamental issues of the system still remain.
In a normal year, we have enough generation to meet current demand, however dry year future proofing remains an issue given current Government policy.
Natural Gas which is seen overseas as an answer to coal-fired electricity generation will continue to increase in price in NZ as we exhaust current drilling permits and fields come offline.
The Government is looking to try to accelerate the uptake of Electric Vehicles but not talking about the cost of the required upgrades to network infrastructure to support rapid charging. As most rapid charging will be done outside of main centers, this will put increased pressure on more remote areas of the Government-owned Transpower network and local network operators.
The cost of building and consenting new large-scale generation infrastructure well exceeds current wholesale prices that generators can charge. Gas-fired thermal generation or Geothermal generation is far easier to build than a new hydro scheme or wind farm due to the size of its footprint and lower impact on the visual landscape.
Distributed generation such as Solar remains unsuitable for many parts of the country due to a lack of sunshine hours. Businesses would only realise a payback on outlaid capital after 15-20 years in most areas. Batteries are still carbon intensive to manufacture and costly to buy.
There is no magic bullet to ensure long-term security of supply at competitive pricing
The Electricity Price Review has revealed that residential electricity prices have increased by about 80% above inflation since 1990. Why did this happen? We were promised that privatisation and the electricity market would reduce power prices.
An objective examination of the whole electricity industry and the effect of the reforms leads to some interesting conclusions.
Cross subsidies
Before the reforms many power boards cross subsidised residential consumers by overcharging commercial and industrial consumers. The removal of these subsidies is a factor in the increased residential prices.
The market
The Wholesale Market Electricity Development Group made a mistake when they rejected the recommended market model and chose a market that pays all generators the price bid by the most expensive generator selected to run. This would have been a good choice if New Zealand relied entirely on fossil fuel generation. New fossil fuel power stations produce cheaper power than older ones so such a market encourages the construction of new and better stations.
In New Zealand, the cheapest generation comes from old, low cost, depreciated hydro stations. The choice of a fossil fuel market structure pays these stations the much higher price needed by the most expensive fossil fuel station. Hydro stations then rack up their asset values to camouflage the fact that they are making windfall profits
The recommended market model would have ensured that consumers would have continued to get low-cost electricity from the hydro stations that they had already paid for and built new stations that would give the lowest system costs in the long run.
The chosen market structure has led to wholesale prices increasing when they should have decreased to reflect the major reductions in operation and maintenance cost that followed on from privatisation.
Control of peak demand
Before the electricity reforms all electric water heaters in New Zealand were remotely controlled by the lines companies to reduce system peak demand by more than 10%. The reforms destroyed this world leading system. Most lines companies abandoned water heater control because the reforms did not allow them to fully recover of the costs of operating, maintaining and expanding the hot water control system.
As a result of abandoning hot water control, new power stations and a $960 million 400 kV line into Auckland were needed and millions more were spent on reinforcing transmission lines and distribution systems. All this to meet a peak demand that would not have existed with the recommended market.
Assets revalued
The reforms also allowed Transpower and lines companies to massively revalue their assets and use this increased value to justify charging consumers millions of dollars more for assets that consumers had largely paid for already. This is a major factor in the increased cost of electricity.
Traders and retailers
The electricity market also brought us traders and retailers who, it can be argued, serve no useful purpose whatsoever. The recommended market model did not need them.
In our market, traders often compete to get selected to generate. But when generation is in short supply competition is virtually non-existent and the price that they bid is “a trade-off between greed and guilt”. (On several occasions in the last few weeks wholesale prices have spiked to more than 10 times the normal price for no apparent reason.) As two retiring CEOs pointed out, the way to make money in the New Zealand market is to keep the system on the edge of a shortage. With the recommended market the system operator would have ensured that sufficient generating capacity was available and selected the generators that would give a reliable supply at the lowest cost.
Retailers increase consumer costs by spending millions of dollars trying to steal consumers from each other and pretending to compete in selling a commodity that is identical for everyone.
Conclusion
So what of the future? It does not look good. Transpower has warned that the risk of serious shortages and high prices in a dry year is rapidly increasing and no one has plans for new power stations that would mitigate this risk.
The government ignores dry year risk because it is hellbent on shutting Huntly down and limiting gas supplies and believes that exploiting wind and solar power will solve all the problems. Never mind that they are much more expensive, require backup when the wind doesn’t blow or the sun doesn’t shine and don’t make any useful contribution to meeting peak demand.
The best and cheapest way of mitigating the risk of blackouts in dry years is to ensure that Huntly continues to provide dry year reserve with two or three generating sets and 1 million tons of coal available.
The government should be taking steps to make sure that we have an economical and reliable supply into the future. If it wants to reduce CO2 – a gas that promotes plant growth and benefits our agricultural industries – it should contemplate the construction of a major and very expensive hydro pumped storage power station in the hills above Roxburgh that would solve the dry year problem. Only then can it ditch Huntly.
The New Zealand electricity market is a classic example of what happens when the politicians and the decision-makers do not understand power systems and how difficult it is to provide a reliable and economic supply. Choosing the wrong market model has cost the customer dearly.
During the recent two-day EMANZ Conference that I attended in Auckland with our Energy Manager, Tânia Coelho, I was struck by the surge of genuine enthusiasm for and commitment to renewable energy from the diverse group of Energy Managers and others who attended.
In this regard, our country is in the fortunate position that 85% of our electricity supply already comes from renewable energy, mainly hydro-electricity, geothermal and wind-generation based.
Successive National and Labour Coalition Governments have made a strong and binding commitment to New Zealand meeting its global carbon emission reduction obligations.
To achieve these commitments in practice, New Zealand will need a sustained and integrated programme, to utilise rapidly evolving technology in this area.
The following guest post by James Flexman, Wholesale Markets Manager, Mercury highlights some of the excellent work in the inter-related areas of solar power and battery storage, that their company is championing.
Innovative Battery Technology Has Potential to Disrupt Fundamental Aspect of Electricity Market
The crazy thing about the electricity market, the thing that sets it apart from almost all other markets, is its immediacy. Electrons are the ultimate NOW product. They’re right here, right now, turn on the switch, see the light.
New Zealand’s sophisticated spot market and all its intricacies have been developed to work with electricity’s time-bound quirk of physics and deliver reliable, affordable and mostly renewable electricity to Kiwi homes and businesses.
But now this non-negotiable is being challenged. There’s a ‘disruptive technology’ on the scene that, like a kind of Timelord, has the potential to substantially diminish the impact of time and timing on the generation, dispatch and ultimate use of electricity. We’re talking about the exciting new opportunity created by super-batteries that can charge up with electricity from the grid and store it, before being re-dispatched into the electricity market.
Grid-Connected Battery Research & Development
Last week Mercury launched its own 1MW/2MWh battery storage facility at our R&D centre in South Auckland. For context 2MWh of electricity could power 400 homes for a winter evening peak for 2 hours. On its own, it’s not going to change the world and it’s also definitely not for the short-term gain. The rate of return based on trading 2MWh of electricity in and out of the national grid means it would take many years to break even on the $3 million investment.
Being directly connected to the grid, and able to send energy into the market like a little 1MW power station makes this battery a Kiwi first. And there’s potential for much more.
So what are we expecting in the medium to long-term from this pilot?
The clue is in where the battery has been installed – in Mercury’s R&D Centre in South Auckland. For us, it’s all about the ‘R’ part of ‘R&D centre’: Research. And at a time when the Government is calling for greater investment in R&D in this country, I’d like to do a quick shout-out celebrating the constant ongoing investment in R&D undertaken by Kiwi businesses every day of the week.
The battery is a pilot, a toe in the water, part of the New Zealand electricity market’s ongoing exploration of battery storage as the technology evolves, to work out what part batteries will play in the energy generation eco-system of this country. We believe there’s potential here. Reflecting on the first generation in New Zealand (for power, not gold processing) at Reefton, it was a 20kW generator – and look what hydro generation has grown to and its role in our economy now.
Battery Pilot a Milestone for Innovation
And it’s a true innovation. Mercury is the first company in New Zealand to install a battery system that is directly connected to Transpower’s high voltage national grid and to use the battery to participate in both the energy and reserves markets. Others have explored other ways that battery storage could interact with our current energy landscape – Counties Power together with Genesis, Vector and Alpine Energy have all commissioned batteries that can participate in the energy market, but these are also used to manage local networks better.
Being directly connected to the grid, and able to send energy into the market like a little 1MW power station makes this battery a Kiwi first. And there’s potential for much more. The storage facility is on the site of Mercury’s mothballed thermal power station next door to Transpower’s Southdown switchyard which is capable of moving over 100MW in and out of the grid.
However, despite the facility being able to accommodate battery storage of this size (similar to the much publicised South Australian battery project that Tesla committed to (and did) build within 100 days), trading at this scale will only start once the R (Research) has turned to D (Development). But once this happens, (when battery technologies develop further and costs of large-scale batteries drop), the lessons we have learnt from our investment in 2018 will give us a fast start to capitalise on this exciting opportunity.
Grid-Connected Battery Research May Lead to Paradigm Shift
There is also some other work that Mercury has been doing that will benefit us as well as all future battery traders. This work (which also involves Transpower and the Electricity Authority) is addressing current regulations that need to be adjusted to accommodate the participation of battery stored electricity in all aspects of the NZ reserves market.
The use of large-scale batteries to store energy from times of lower usage and make it available when it’s most needed could make a real difference to the way power is supplied to homes and businesses over the coming decades, particularly as populations grow. At scale, the lowest parts of the demand curve will be raised as electricity will be generated and stored in batteries and the highest peaks of demand will be offset by electricity being re-dispatched from the batteries back into the market.
In a future world, when the investment that companies like Mercury are making in R&D has led to large-scale battery storage in New Zealand, this flattening of the supply-demand curve should lead to more efficient use of current generation capacity.
We see all these future developments as great reasons for our research investment now. And we’re proud to be pioneers in this field that has so much potential to change the New Zealand energy market to everyone’s benefit.
See how the direct grid-connected battery will work in New Zealand’s energy eco-system
In this Part III examining whether electric vehicles (EVs) are a fad or really are the future, we consider the implications for the supply of electricity and more.
What happens when New Zealand stops importing oil and substitutes it with hydro, geothermal, solar and wind energy to make our cars and trucks work?
To start with, New Zealand would move from a current account deficit to a budget surplus. That’s good news all round. Save money on oil, save the planet, sleep easy at night.
Except…
There are 3.9 million registered cars and trucks in New Zealand. They consume $11.8 billion worth of fuel each year and employ tens of thousands of workers selling, servicing and repairing these vehicles.
Electric vehicles on the other hand number just over 24,000. They require much less service and support and the margins for new car sales are so low that most dealers won’t want to be involved with them.
So, the move to EVs will place a whole lot of jobs at risk while at the same time requiring a whole new set of skills that may or may not be available in the market.
Oil companies, in the meantime, won’t be just sitting around the campfire singing love songs while awaiting the new dawn. Don’t expect too many electric car chargers at your local petrol station. Do expect the price of petrol to fall though.
Electricity supply
Just how our electricity network will cope, is a key question. Concerned at the vision of transformers exploding, fuses blowing and power cuts making candlelit dinners a less-than romantic interlude, I went to the oracle: Andrew Toop, GM Commercial at Counties Power. I hoped he might ease my fears.
He said it’s not as bad as people might think.
Andrew said, “Our country’s generation capability is already very substantial and the recent investments by Transpower in new transmission infrastructure gives us a great platform to work off.
“Also, efficiency gains from better housing, lighting and insulation choices mean national demand
for electricity isn’t growing all that quickly in many regions outside Auckland.
“So EVs could make a lot of sense, subject to us paying attention to the basics, like smart local networks, suitable transformers and ensuring the wiring we put in place in our new and existing buildings is up to spec.”
Let’s pay attention to some of that underpinning technology.
Taking care of the basics
New Zealand is a world leader in “ripple switching”, the system lines companies (energy distributors) use to switch hot water heaters on and off when electricity demand peaks around dinner time. This same approach could well be used to balance the load generated by cars being charged when people get home from work.
There is also a mechanism called “Time of Use Billing”. Commonly used in commercial settings, we are also likely to see smart retailers automating the management of householders’ electricity usage to ensure that peak loads are managed and that users are getting the cheapest price all the time.
Let’s not forget the EV itself. Onboard artificial intelligence already supports safe driverless cars (well, almost). The same smarts could be used to ensure the car charges itself when the price is low, and the power is most available.
Speaking of peak demand. You may be surprised to know that our current electricity system only hits peak load a few times each year, in fact, only 0.6 percent of the time. For the remaining 99.4 percent of the time, the system is working well within its capacity. Adding to that, I believe that the Government is subsidising the Australian owners of Tiwai Point to consume nearly 15 percent of our total electricity production, so it appears there is a fair bit of potential headroom to support the emergence of electric cars. New Zealand is, after all, the Saudi Arabia of the wind and hydro world. Why not take advantage of all that cheap, renewable power?
Most of our electricity is provided via South Island lakes. Lake water has remained at average levels for the time of year right through the summer period thus far. What has driven the price escalations is thermal outages. A large chunk of North Island thermal generation plant has been unavailable due to maintenance.
