Mighty River, Meridian's NZ$40m bill shock

SOE Mighty River Power seeking answers for huge six hour wholesale electricity price hike

28th Mar 11, 1:58pm by Gareth Vaughan

<p> Wholesale power prices spiked to NZ$20,000/MWh from NZ$100/MWh after maintenance outages skewed the market.</p>

State owned electricity generators and retailers Mighty River Power and Meridian Energy say a spike in wholesale electricity prices on Saturday, which saw prices jump to more than 200 times normal levels, could hit their combined earnings by up to NZ$40 million.

Electricity market regulator the Electricity Authority has responded by saying it's launching a full investigation after provisional wholesale prices reached historically high levels on Saturday of around NZ$20,000/MWh (megawatt per hour) at several market nodes north of Huntly. It has also deferred the publication of final prices while it considers whether an Undesirable Trading Situation occurred.

The Electricity Authority's action follow's Mighty River Power, a state owned enterprise with about 400,000 retail customers through Mercury Energy, Bosco and Tiny Mighty Power, saying it had lodged a notice of Undesirable Trading Situation with the Electricity Authority after events on Saturday, when during maintenance outages on Transpower's national transmission grid in the upper North Island, market prices increased "significantly."

Mighty River Power chief executive, Doug Heffernan, says the firm was exposed for about six hours to buying at wholesale prices, of about NZ$20,000 MWh, more than 200 times higher than normal prevailing prices of less than NZ$100/MWh, with a consequent potential financial impact of up to NZ$25 million on earnings before interest, tax, depreciation, amortisation, realisations and impairments, and fair value movements of financial instruments (ebitdaf) unless the prices are corrected.

Heffernan said the SOE would be "pursuing a correction" of the prices under electricity market rules, which if successful will eliminate any material impact on Mighty River Power's earnings.

For the six months to December 2010, Mighty River Power's ebitdaf was NZ$233.6 million, meaning the NZ$25 million six hour hit is the equivalent of about 10.7% of half-year ebitdaf.

Meanwhile, Meridian says it also lodged Undesirable Trading Situation notice with the Electricity Authority, after being exposed to buying electricity at wholesale prices of between NZ$19,000 and NZ$20,000 MWh, significantly higher than average market prices, which are typically less than NZ$100/MWh, between 10.30am and 5.30pm on Saturday.

“This happened during maintenance outages on the national transmission grid in the North Island, which significantly reduced transmission capacity from the Waikato to Auckland,” Meridian CEO Tim Lusk says.

“Meridian was forced to buy electricity off the wholesale market for supply to its upper North Island customers with a potential financial impact estimated to be between NZ$10 million to $NZ15 million (ebitdaf)."

Meridian's ebitdaf for the six months to December was NZ$353.3 million.

Who were the sellers?

None of the Electricity Authority, Mighty River or Meridian would comment on who the main seller(s) of wholesale electricity was during Saturday's price spike. However, Meridian's complaint reportedly names fellow SOE Genesis Energy as the culprit.

A Genesis spokesman said given the Electricity Authority has announced a formal investigation, the company was unable to comment.

"We will fully co-operate with the regulator and look forward to the outcome of the investigation," the Genesis spokesman added.

Meanwhile, Vince Hawksworth, CEO of Tauranga-based TrustPower, told interest.co.nz his firm had been both buying and selling electricity on Saturday. For this reason Hawksworth said the price spike was likely to have a neutral financial impact on TrustPower.

"We haven't considered whether we think there's a complaint warranted or an investigation, but we are relatively neutral from a financial perspective," said Hawksworth.

"Ultimately what the market needs is some reasonable predictability because people have got to be able to manage these risks and they are obviously very big risks when these things happen," Hawksworth added.

See the Electricity Authority's statement below:

The Electricity Authority is launching a full investigation into high wholesale electricity market prices on Saturday 26 March 2011. Provisional wholesale prices reached historically high levels on Saturday – around $20,000/MWh at several market nodes north of Huntly.

The high prices persisted for several hours. The Authority is undertaking the investigation in accordance with s16 (g) of the Electricity Industry Act 2010, and will accord it top priority for the Authority’s Market Performance team. The focus of this investigation is on whether Code amendments can be undertaken to address these matters on an ongoing basis.

UTS Investigation

The Authority has also received a notice of an Undesirable Trading Situation (UTS) relating to Saturday’s high prices, and it has been informed that other notices may be lodged regarding this event. The Authority has therefore deferred the publication of final prices while it considers whether a UTS has occurred.

And see Mighty River Power's statement below:

Mighty River Power announced today that the company would be lodging a notice of Undesirable Trading Situation with the New Zealand electricity market regulator, Electricity Authority, following an extended period of exceptionally high wholesale market prices on Saturday (26 March).

Mighty River Power Chief Executive, Doug Heffernan, said the Undesirable Trading Situation process was an established mechanism for addressing abnormal market conditions, such as those that occurred on Saturday. During maintenance outages on the national transmission grid in the upper North Island, market prices increased significantly.

He said Mighty River Power was exposed for an extended period of about six hours to buying at wholesale prices (of about $20,000MWh) more than 200 times higher than normal prevailing prices (of less than $100/MWh), with a consequent potential financial impact of up to $25 million on earnings (EBITDAF) unless the prices are corrected.

Dr Heffernan said the company would be pursuing a correction of the prices as provided for under the existing electricity market rules, which if successful would eliminate any material impact on the company’s earnings for the current period.

And here's Meridian's statement:

Meridian Energy has lodged an Undesirable Trading Situation notice with the Electricity Authority, following an extended period of exceptionally high wholesale market prices on Saturday 26 March.

Meridian Chief Executive Tim Lusk says between 10.30am and 5.30pm on Saturday, Meridian was exposed to buying electricity at wholesale prices of between $19,000 and $20,000 MWh, significantly higher than average market prices, which are typically less than $100/MWh.

“This happened during maintenance outages on the national transmission grid in the North Island, which significantly reduced transmission capacity from the Waikato to Auckland,” he says.

“Meridian was forced to buy electricity off the wholesale market for supply to its upper North Island customers with a potential financial impact estimated to be between $10 million to $15 million (EBITDAF).

“We are seeking a correction of the prices from the Electricity Authority via the Undesirable Trading Situation process, which is the established mechanism under the existing electricity market rules for addressing abnormal market conditions such as this.”

Wholesale electricity

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Source: MCo

(Updates add comments from the Electricity Authority, Meridian Energy, Genesis Energy and TrustPower CEO Vince Hawksworth).

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20 Comments

by JB | 28th Mar 11, 5:57pm 1301288268

Who was on the other side of these trades ie $ 35 m up ?

by Gareth Vaughan | 28th Mar 11, 7:45pm 1301294706

None of the Electricity Authority, Mighty River Power or Meridian would say. But we haven't had any complaints from Contact or Genesis...

by Bernard Hickey | 29th Mar 11, 7:54am 1301338446

Looks like Genesis Energy was the culprit/cheeky bugger. One SOE takes money off another...

http://www.stuff.co.nz/business/industries/4819166/Mega-price-hike-rock…

cheers

Bernard

by PSE | 28th Mar 11, 7:53pm 1301295238

Not sure JB, but I reckon that Otahuhu C and Huntly were running so I think the beneficiaries were mainly Contact and Genesis respectively. Maybe there were some issues with Huntly though - not sure..... If that was the case then Contact must have done well out of it.
Beats having a blackout though......

by the_dc | 28th Mar 11, 9:35pm 1301301320

Interesting. Unlike the NYSE "flash crash" this should be relatively easy to investigate because they should have all the generator's "offer stacks" and they will know who was dispatched at what price. The interesting thing to see will be whether these offers from Contact and Genesis (for example) were vastly different from what they would normally submit at those times and locations. In other words, were they unwitting beneficiaries or did they deliberately game this maintenance outage.

Not saying this hapenned, but this is kind of thing that CAN happen...

http://www.youtube.com/watch?v=dvLZBv8HsO4

Still want to sell off the SOEs?

by Tut Tut | 28th Mar 11, 10:14pm 1301303684

Let's hope that if there was an undesirable trading situation (UTS) that the perpetrators are adequately punished as was the case with Enron! http://www.youtube.com/watch?v=OnXtMksBgZI&feature=related

by iconoclast | 28th Mar 11, 10:31pm 1301304689

Really?

The Wholesale Market is operated by "Electricity Market Company" (now M-co)

They will have transaction records.

Not the electricity commission.

Not the electricity authority.

The "flash crash" occurred in US markets governed by 10% limit down limit up controls

The electricity spike spot price jumped from $100 to $20000 or 20,000%

What? No limit up controls? Are they that dumb?

A trading platform without such controls will explode or blow up some time.

Where can I get a slice of that action? GTC Limit orders. Sitting high. Nice.

by the_dc | 28th Mar 11, 10:45pm 1301305523

I would assume (perhaps interest.co.nz can find out) that the authorities would have the right to obatin all the trade data to investigate a UTS.

With the flash crash, you had millions (billions?) of orders coming through on multiple exchanges, so it was virtually impossible to untangle, which is why the official explanation of what happened is so weak.

In order to receive the price on the electricity spot market, you would have to actually be dispatched to generate electricity into it, so you would have a very high upfront cost to get a slice of that action.

by MoaningMoa | 29th Mar 11, 4:52pm 1301370767

M-Co was swallowed by the NZX, who now operates that function, as the clearning manager, reconcilliation manager, as well as the Wholesale Information Trading system.

The market solver (i.e. the system that actually takes all the offers and bids from the various retailers, and generators, and runs them against the current grid scenario) is actually operated by Transpower in it's role as the system operator (seperate to it's role as the Grid Operator).

MSP (as the solver is known) is actually a product produced by Areva in the states... and was only installed to replace it's predecessor system in 2009.

by Ms de Meanour | 29th Mar 11, 9:10am 1301343050

What exactly would you expect to happen in a properly functioning market when supply is constrained?

by AndyC | 29th Mar 11, 12:33pm 1301355199

That's a very good question Ms de Meanour. The high price certainly provides a $40million signal that more transmission would be nice.

However transmission is not something the generators themselves can provide, its a Transpower monopoly. So I can see how the market participants might feel they should be protected from losses caused by transmission issues outside of their control, perhaps if they had a free hand they would have personally funded and/or arranged more transmission lines.

Given it was a SCHEDULED outage however, you would think MRPower and Meridian would have had time to have arranged some sort of bilateral contract with generators north of the constraint (Huntly / Otahuhu). But perhaps this simply doesn't happen, they are competitors after all. So again, maybe it is simply not reasonable to expect utilities to bear the full brunt of a transmission outage if the reality is that the regulator knows certain utilities will never ever be able to hedge transmission risk.

Thoughts from someone with industry knowledge on Ms de Meanours original question would be very interesting.

Cheers

AndyC

by John | 29th Mar 11, 9:53am 1301345611

We continue to learn nothing; it is egos and traders not rational long term behaviour; in short ENRON

by Interesting | 29th Mar 11, 9:55am 1301345742

Genesis had heaps of capacity but was the only one generating north of the transmission outage..... so they gouged! their generation was offered in at close to $20,000..... this was blatent but seems to have been missed by the journos.... might be interesting to ask Genesis why they did it.

by martinv | 29th Mar 11, 10:02am 1301346129

Prices spike to more than 200 times normal...

This is what can happen when you let automated systems buy and sell on your behalf. Had real, squishy, humans been involved in the transactions they would likely have noticed the anomoly.

Very clever if you can pull this sort of thing off in your favour!

by AndyC | 29th Mar 11, 12:41pm 1301355677

What?

MRP and MEL have no choice but to purchase power for their customers, if you turned your kettle on its going to suck power into your house, and your utility is going to have to pay for it.

I fail to see how MRP/MEL (a) didn't have traders seeing the price, I dont think their trading desks are nothing more than some unmanned algorithm sitting on a PC somewhere, or (b) could do anything about it even when they knew, regardless of whether they were squishy or silicone.

The ENRON trading debacle didnt happen because buying/selling is via a computer system, the bloodbath was witnessed by tons of real live people - there was simply nothing anyone could do about it.

by MoaningMoa | 29th Mar 11, 4:48pm 1301370524

Correct, the companies all maintain trading desks that are operated 24/7 by a trader, (Meridian's being based in their Wellington building).

by martinv | 29th Mar 11, 6:09pm 1301375389

I stand corrected.

Boy, whoever was trading during the period in question sure would have been sweating then!

by MoaningMoa | 29th Mar 11, 8:59pm 1301385550

I bet he or she was on the phone to their manager....

by Gareth Vaughan | 29th Mar 11, 10:37am 1301348268

FYI, I have added this from Genesis to the story:

"As the Electricity Authority has announced a formal investigation into this wholesale market event, Genesis Energy is unable to comment. We will fully co-operate with the regulator and look forward to the outcome of the investigation."

by martinv | 29th Mar 11, 6:09pm 1301375363