Genesis will recover costs 'when opportunity arises'

Genesis hits back at fellow SOEs over huge wholesale electricity price spike, says they should have hedged

30th Mar 11, 4:26pm by Gareth Vaughan

Genesis Energy has hit back at fellow state owned electricity generators and retailers Mighty River Power and Meridian Energy who blame Genesis, as the primary seller, for a spike in wholesale electricity prices to more than 200 times normal levels they say could hit their combined earnings by up to NZ$40 million. Genesis says they should have hedged their risk through deals it has been offering.

In a statement released today Genesis rejected criticism it had acted unreasonably during a "well-signalled" transmission outage last Saturday. The outage resulted in provisional wholesale electricity prices reaching historically high levels on Saturday of around NZ$20,000/MWh (megawatts per hour). Regulator the Electricity Authority has launched a full investigation after both Mighty River Power and Meridian, who were buyers during the price spike, lodged notices of an Undesirable Trading Situation.

Mighty River says the price spike, which saw prices rise more than 200 times higher than normal prevailing prices of less than NZ$100/MWh, has a potential financial impact of up to NZ$25 million on its earnings before interest, tax, depreciation, amortisation, realisations and impairments, and fair value movements of financial instruments (ebitdaf). Meridian expects an ebitdaf impact of between NZ$10 million and $NZ15 million.

Genesis' general manager for corporate affairs, Malcolm Alexander, said the company had been very clear to the market that it wasn't Genesis Energy’s role to cover and pay for the spot market risk some market participants choose to take. Genesis has high operating costs and "will recover those costs when the opportunity arises," he said.

Alexander said Genesis offered hedges to cover the potential trading risk market participants faced from the outage as late as Friday afternoon and during the constraint itself.

"Prices offered into the wholesale market by Genesis Energy are designed to recover the costs of operating expensive thermal power stations with high operating costs in circumstances where they have declining utilisation," said Alexander. "The prices obtained when its thermal units do run must cover the many trading periods when the units do not run."

"Genesis Energy has for many months been offering hedges and other forward products to the market in order for participants to prudently manage their risks. It will continue to do so and is prepared to consider any type of commercial hedge product that best meets the needs of an individual market participant."

“Our door is always open to those who wish to enter into commercial arrangements with us,” Alexander added.

Read Genesis' statement below:

Genesis Energy rejects criticism by some market participants that it acted unreasonably during a well-signalled transmission outage on Saturday 26 March 2011.

A constraint on the National Grid in the Upper North Island on Saturday 26 March resulted in very high spot prices in the wholesale electricity market. The transmission constraint arose from planned outage work by Transpower which it had signalled to the market well in advance and was common knowledge in the industry.

Genesis Energy offered hedges to cover the potential trading risk market participants faced from the outage as late as Friday afternoon. Hedges were also offered during the constraint itself. Prices offered into the wholesale market by Genesis Energy are designed to recover the costs of operating expensive thermal power stations with high operating costs in circumstances where they have declining utilisation.

The prices obtained when its thermal units do run must cover the many trading periods when the units do not run.

Genesis Energy has for many months been offering hedges and other forward products to the market in order for participants to prudently manage their risks. It will continue to do so and is prepared to consider any type of commercial hedge product that best meets the needs of an individual market participant.

No (residential or commercial) retail customer was exposed to the high prices in the spot market (although some industrial customers where) and customers are at liberty to choose their electricity provider in what is a highly competitive market.

Genesis Energy General Manager Corporate Affairs Malcolm Alexander said that “we have been very clear to the market that it is not Genesis Energy’s role to cover and pay for the spot market risk that some market participants choose to take. We have high costs to operate our plant and we will recover those costs when the opportunity arises.”

“Our door is always open to those who wish to enter into commercial arrangements with us,” he concluded.

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11 Comments

by the_dc | 30th Mar 11, 9:08pm 1301472530

It's fair enough that they should try to pay for the cost of running a plant that mostly sits idle in the brief opportunities when it does run, but 200x spot might be considered taking the p!ss.

Ok they offered hedge contracts prior to this, but how do we know that the hedges weren't ridiculously expensive as well?

You can't really have a situation where there are people who have to buy and only one place to buy from. Perhaps the contingency generation assets should be run by some neutral third party, like Transpower itself, to avoid price gouging in these situations.

Will be interesting to see what the Electricity Authority decides.

by AndyC | 31st Mar 11, 12:58pm 1301529526

200x spot might be considered taking the p!ss.

Without a doubt it is. Genesis has not done bidding like this before at Huntly, so clearly it is not necessary or it would have had to do it in the past.

but how do we know that the hedges weren't ridiculously expensive as well?

We dont, but I imagine the EA will take this into consideration?

by Ms de Meanour | 31st Mar 11, 1:27pm 1301531273

Presumably then you don't subscribe to the apparently popular view that pollies and bureaucrats are all incompetent overpaid pointy head idiots? For it is impossible both to hold that view and simultaneously to argue that businesses would do a better job if they were regulated by the Government.

Looking at this particular case, I think that if I had let myself get into a position where a routine, clearly notified maintenance operation enabled one of my competitors to gouge me to the tune of 200 x normal prices, I'd be distinctly embarrassed and keeping a bit quiet about it.

by AndyC | 31st Mar 11, 1:51pm 1301532713

Indeed.

Although in fairness im not really informed on how their hedging works or the market rules. For example (playing devil advocate) it could be that Genesis will be found to have breached some market rule or fair-play assumption, and the price will be scaled back. If MRP or MEL knew a $20,000 price was unlikely to ever be achieved (or allowed by the EA to stand if reached) then they have correctly not bothered to hedge to protect against such an outcome.

by childofthesun | 31st Mar 11, 1:25pm 1301531154

Hedges may have been available but at what price? Monopolistic behaviour? probably. What units did Genesis run to justify these offer prices? If they have such an inefficient generation mix that requires this type of behaviour, what have they been doing for the past 5 years since a price on carbon has been clearly signalled?

Ongoing poor financial performance leaves them having to be opportunistic (read monopolistic) when outages by Transpower are planned. Participants, please note when the next Transpower outage is scheduled.

Oh, by the way, have we overloked who's going to pay for this behaviour? Joe Public yet again and this is supposed to be a competirve market?

by AndyC | 31st Mar 11, 1:53pm 1301532834

Ongoing poor financial performance leaves them having to be opportunistic (read monopolistic) when outages by Transpower are planned.

Not sure the two statements are related. They could have bid like these even if they were swimming in money.

by childofthesun | 31st Mar 11, 2:18pm 1301534301

In the case of Genesis, they're clearly related. Look at the latest half yearly financials, their last 3 years year end financials, dividends paid and then compare with their peers MRP and Meridian. Also consider, First NZ Capital's recent analysis and their propsects 2013 and you get a picture of an organisation looking at some big financial holes. Factor in the prospect of partial privatisation and you have an organisation needing to make up a lot of ground in a short space of time. One solution - take advantage of the market rules. Prices will probably end up being scaled back by the EA review but nevertheless when you're commercially limited, $5,000 MWh is better than $100.

Organisations 'swimming in money' usually rely on consistently high levels of performance over many years rather than adopting "Enron" type behaviour.

by AndyC | 31st Mar 11, 2:24pm 1301534651

Your points are probably all valid (im no expert on Genesis's financial position), but I still think the organisation could have done the same regardless of whether they were in a hole or not.

Organisations 'swimming in money' usually rely on consistently high levels of performance over many years rather than adopting "Enron" type behaviour.

They do? Many many monopolies would disagree... :)

by AndyC | 31st Mar 11, 2:25pm 1301534752

Prices will probably end up being scaled back by the EA review but nevertheless when you're commercially limited, $5,000 MWh is better than $100.

Do you think this will happen? I have no idea what's likely, so any insight would be interesting.

by childofthesun | 31st Mar 11, 2:46pm 1301535965

While I'm not familiar with every clause in the rules, I don't believe that Genesis has breached them by offering these prices. The EA will need to ensure that a participant can't repeat this behaviour as planned outages occur at regular intervals many times throughout the year. The prospect of more of these UTS events taking place will test the credibility of the wholesale market rules and the EA's ability to deliver positive outcomes for the market as a whole. Ultimately, it may be case that Genesis has done everyone a favour by exposing this loophole to make money albeit unjustified. On this basis, I'm assuming a scaled back price by the EA as a sort of first offence type penalty for breaching the spirit of the rules and as a compromise solution.

by iconoclast | 31st Mar 11, 3:39pm 1301539142

Gareth Vaughan: A question for you. "Alexander said Genesis offered hedges to cover the potential trading risk market participants faced from the outage as late as Friday afternoon and during the constraint itself"

I know what a hedge is and how they work. But what does Alexander mean by "they offered hedges". That I do not understand. A simple hedge would have been for the other generators to simply "buy" adequate volume, on-market, on the Friday knowing any shutdown was only going to drive the spot price up, and those "other" generators would have been happy sellers at the higher prices as they liquidated, and not forced buyers.

Is the Retail electricity market open 24/7. Was the wholesale spike reflected in the retail market?

A more sinister apect is the the fact Genesis, knowing none of the other generators had protected themselves, had inside knowledge, and if they had any street smarts would have had a couple of traders on deck on Saturday.