Complaints mount up over last Saturday's huge wholesale electricity price spike from Genesis

Complaints mount up over last Saturday's huge wholesale electricity price spike from Genesis

A total of 14 organisations, including ASB, Telecom, Vodafone and the company that operates the Marsden Point oil refinery, have lodged complaints with the Electricity Authority over last Saturday's spike in wholesale electricity prices that saw them surge to more than 200 times normal levels.

The surge in prices took place while Transpower was undertaking planned maintenance on circuits between Auckland and the Waikato significantly reducing the transmission capacity from the Waikato region to the Auckland region. As Meridian Energy puts it in its complaint, fellow state owned generator and retailer Genesis Energy's Huntly generation was required to support load in the upper North Island and Genesis could "effectively name its price."

This saw prices rise to between NZ$19,000 and NZ$20,000 Mega watts per hour (MWh) from normal prices of about NZ$100 MWh.

Meridian estimates the price spike cost could hit its earnings before interest, tax, depreciation, amortisation, realisations and impairments, and fair value movements of financial instruments (ebitdaf) by between NZ$10 million and $NZ15 million if last Saturday's wholesale electricity price isn't overturned. And Mighty River Power says it faces a potential ebitdaf hit of up to NZ$25 million. Regulator the Electricity Authority has launched an investigation into what it terms provisional wholesale prices reaching historically high levels. See story here.

The complaints to the regulator include allegations of manipulative or attempted manipulative trading activity, unwarranted speculation or an undesirable practice, and exceptional or unforeseen circumstance at variance with, or that might threaten, generally accepted principles of trading or the public interest.

Genesis has rejected criticism it had acted unreasonably during the "well-signalled" transmission outage. Genesis notes it had offered customers the opportunity to hedge their risk, it wasn't Genesis’ role to cover and pay for the spot market risk some market participants chose to take, and Genesis has high operating costs and "will recover those costs when the opportunity arises."

Vodafone says Saturday's electricity costs were more than 8% of annual expenditure

Other companies to have lodged complaints with the Electricity Authority include Vodafone which says it had calculated the cost to it of the seven hour price spike to be in excess of 8% of its historic annual electricity expenditure.

"This type of event seriously undermines the integrity of the wholesale electricity market for end users, and leads us to question future levels of spot exposure and hedging," Vodafone's Mark Jones says in his company's complaint.

"While we accept that the outage was known of in advance, the level of prices could not have been predicted by Vodafone and is outside of any reasonable forecast based on previous experience."

Vodafone's rival Telecom also says it faces a "significant" financial impact.

'Significant' impact to ASB's profitability

In ASB's complaint the bank argues the events of last Saturday advantaged an electricity generator at the disadvantage of it and other scale consumers of spot electricity.

"The financial magnitude of the impact will significantly affect our profitability," ASB's Perry Waldman says.

Waldman adds that if the Electricity Authority finds that an Undesirable Trading Situation (UTS) occurred, it could direct that interim prices don't stand as final prices and direct the trades that occurred during the relevant period be settled at specified final prices.

Meridian argues that other generators in the same position as Genesis haven't acted in the same way and says the market can't literally be "anything goes" if it's to retain the confidence of electricity users.

Mighty River Power, meanwhile, says it sought hedge pricing from Genesis at 4pm last Friday. But it says the issue was that the only company with sufficient spare capacity for hedges to provide it with cover was also the same company due to control spot pricing the next day.

"We felt these prices were excessive and declined to take up the hedges," Mighty River Power says. "Within one hour of declining the hedges the market forecast was showing that the high prices were alleviated to under NZ$160 MWh and this remained the case until the constraint bound in real time at approximately 10.30am on 26 March."

"The alleviation in day ahead prices caused us to not reconsider hedge cover."

Oil refinery, museum hit too as more grid outages loom

Other complainants include the NZ Refining Company, the Auckland Museum, NZ Sugar, Powershop, Smart Power, Wallace Corporation, Juken NZ ltd, Switch Utilities, and Nufarm. See all the complaints here.

The Electricity Authority says its UTS committee held its initial meeting on the events of Saturday yesterday.

"The focus of the UTS Committee at this stage is on whether a UTS, as defined in Part 1 of the Electricity Industry Participation Code (Code), occurred on 26 March. To assist it in making this decision, the UTS Committee has requested Authority staff obtain additional information from industry participants and report back to it next week. Hence, the Authority is today issuing information requests to participants, with responses requested by close-of-business Tuesday 5 April."

In the meantime, the UTS Committee has received assurances from a number of participants that they have put in place sufficient hedge agreements to manage commercial risks regarding this Saturday, April 2, when grid outages near Hamilton are scheduled.

"Despite these assurances parties exposed to spot market prices must assess the risks for themselves, and must not rely on the above statement for managing their own circumstances."

The Electricity Authority, an independent Crown entity responsible for the efficient operation of the New Zealand electricity market that succeeded the Electricity Commission last November, says it has also launched a Market Performance investigation into the events of  Saturday 26 March.

"The scope of that investigation will encompass both the spot and hedge markets, and focus on identifying areas of the Code for possible further development."

It already has a "comprehensive" set of reforms underway to "substantially" improve market performance, in both the spot and hedge markets.

"A key reform initiative relevant to recent events is the proposed introduction of a financial transmission rights (FTR) market. If an FTR market had been in place prior to last Saturday then FTR-holders could have been substantially protected from the price spikes at Otahuhu relative to Benmore, and participants would have been likely to have had a wider range of choices for hedging their risks arising from scheduled transmission outages. The Authority is on track to decide Code amendments by 1 November 2011 and have the FTR market operating in 2012."

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11 Comments

Meanwhile, Genesis says it expects to register a prospectus next week for an offer of unsecured, subordinated Capital Bonds to the New Zealand public. See background on the offer here - http://www.interest.co.nz/news/52510/soe-genesis-bond-offer-delayed-sp-m...

Our friends at Genesis told us pre Xmas that a bond offer would be available in February. February comes and goes and nothing until early March when they advise us that surprise, surprise that there's a delay in the offer being made public but no reason given as to why. Here we are in April and still no public announcement but thank you anyway Gareth for updating us.

It would appear that the importance of full and timely public disclosure has escaped the attention of this particular SOE. Dare I suggest as a humble taxpayer and prospective shareholder in one of these monopolistic generators that with partial privatisation on the horizon a different approach that shows some respect for their potential audience might be worth considering.

why borrow from the public when you can just whack the price up for a short time to make a huge pile of cash?

They should just be encouraging more maintenance outages:)

Are these the same free and open markets that decry supply and demand... except when it doesn't suit?

 

Oh hang on, this no doubt will be exceptional, and a problem, because its corporates being hit and not consumers.

 

I keep misunderstanding that unwritten policy that the 'free market' has that its ok to shaft end users but not the businesses in between.

 

Whats good for the goose, certainly isn't good for the gander.

The Electricity Authority will have a great opportunity to set an example for others thinking of copying Genesis behaviour in future if they happen to be in a position of abusing market power which Genesis clearly did last weekend. If not expect more of the same and we know who'll be paying for this nonsence in future. This is a simple redistribution of wealth from Joe Public to the Government via the dividend flow for SOE's. There's nothing new here.

Spot on. Truly a genuine case of '(power) supply and demand'.

It wont be an Undesirable Trading Situation. On the other hand it seems clear that Genesis offered hedges at reasonable prices and Meridian and Might River Power didn't accept... isn't the first rule of trading to cover your risk? 

 

Not so sure about that Newzealand222 if Mighty River Power's explanation (in the story and copied below) is to be believed. Even if they'd hedged with Contact it may not have helped...

Mighty River Power, meanwhile, says it sought hedge pricing from Genesis at 4pm last Friday. But it says the issue was that the only company with sufficient spare capacity for hedges to provide it with cover was also the same company due to control spot pricing the next day.

"We felt these prices were excessive and declined to take up the hedges," Mighty River Power says. "Within one hour of declining the hedges the market forecast was showing that the high prices were alleviated to under NZ$160 MWh and this remained the case until the constraint bound in real time at approximately 10.30am on 26 March."

"The alleviation in day ahead prices caused us to not reconsider hedge cover."

If MRP or/and Meridian would have taken up the hedges then Genesis would have covered their short position and spot prices would have seen only small changes in prices. The weekend just gone is an example of this. At the end of the day, energy retailers need to understand their risks and hedge them. The market cap has increased in the past year, the risks are therefore a lot higher.

 

Friday humour

 

Of the un-funny ironic kind, but true, category , late as usual

 

Way, way, too late.

 

An Obituary printed in the London Times - Interesting and sadly rather true

Today we mourn the passing of a beloved old friend, Common Sense, who has been with us for many years. No one knows for sure how old he was, since his birth records were long ago lost in bureaucratic red tape. He will be remembered as having cultivated such valuable lessons as: 
- Knowing when to come in out of the rain; 
- Why the early bird gets the worm; 
- Life isn't always fair; 
- and Maybe it was my fault. 

Common Sense lived by simple, sound financial policies (don't spend more than you can earn) and reliable strategies (adults, not children, are in charge).

His health began to deteriorate rapidly when well-intentioned but overbearing regulations were set in place. Reports of a 6-year-old boy charged with sexual harassment for kissing a classmate; teens suspended from school for using mouthwash after lunch; and a teacher fired for reprimanding an unruly student, only worsened his condition. 

Common Sense lost ground when parents attacked teachers for doing the job that they themselves had failed to do in disciplining their unruly children. 

It declined even further when schools were required to get parental consent to administer sun lotion or an aspirin to a student; but could not inform parents when a student became pregnant and wanted to have an abortion.

Common Sense lost the will to live as the churches became businesses; and criminals received better treatment than their victims. 

Common Sense took a beating when you couldn't defend yourself from a burglar in your own home and the burglar could sue you for assault. 

Common Sense finally gave up the will to live, after a woman failed to realize that a steaming cup of coffee was hot. She spilled a little in her lap, and was promptly awarded a huge settlement. 

Common Sense was preceded in death, by his parents, Truth and Trust, by his wife, Discretion, by his daughter, Responsibility, and by his son, Reason. 

He is survived by his 4 stepbrothers
I Know My Rights 
I Want It Now 
Someone Else Is To Blame 
I'm A Victim 

 

And a sibling sister who thought SAVE FOR A RAINY DAY, was the right thing to do.

Not many attended his funeral because so few realized he was gone. If you still remember him, pass this on. If not, join the majority and do nothing.

 

Here's a press release today from the Northern Employers & Manufacturers Association:

Power price spikes hurt many businesses, damage investor confidence

Many businesses buying power at spot prices have been caught out over the past two week-ends as power prices spiked as high as $19,000 Mwh, the Employers & Manufacturers Association says.

“One smaller business reported to us that Saturday, March 26th cost them an unforeseen extra $7000 for electricity,” said Alasdair Thompson, EMA’s chief executive.

“Another reported it cost them an unbudgeted $180,000.

“Several power retailers have reported the spot price peaks cost them tens of millions; $25 million alone for Mighty River Power.

“So business wants to know who made all the money – at least $50 million in all - out of this?

“We might expect prices to rise by perhaps 65%, or even 3 or 4 times in such an event, but never by 200 times!

“The question to be answered is, did Genesis use its market power at the time of the outage when other generators power supply was constrained, to manipulate a massive price increase?

“Second, can we expect this to become the norm when issues like this occur in the future, and will all generators in future follow Genesis’ lead?

“If so, then what will the cost of hedging for all businesses buying power on the spot market rise to?

“Business needs answers to these questions from the Electricity Authority; it will be a real test for it.

“But we don’t even know if the Authority has any power to retrospectively do anything about this.

“So it’s a political issue until such anomalies are resolved, though it won’t help those so massively stung by the enormous prices they retrospectively found they had incurred.

“The government itself should therefore take retrospective action, which though something business never likes, may well be warranted on this occasion.

“It must be noted that Transpower signaled the constraint in the upper North Island due to their planned grid outage, and Genesis found itself in a temporary monopoly position - the question to ask of it is, did Genesis abuse its near monopoly position or did it just act in a commercial manner because it could take advantage of the situation?

“If so the fault lies with how the Wholesale Electricity Market works and buyers’ failure to recognise the possibility of prices 200 times greater than usual.

“Genesis issued a statement after last week’s event noting they had offered price hedges to cover the potential trading risk in the Wholesale Electricity Market as late as the day before the constraint. Not our fault was the message from Genesis.

“Other winners from the outages may well have been very big electricity consumers which had hedging in place. Some may well have even made a lot of money, along with Genesis.

“Indicative spot prices on Friday prior to the first event were that they would likely rise to around $165 Mwh, not $19,000.  Those firms unhedged against the known outage at that level may not have been overly concerned, but I would be surprised if they didn’t at least enquire about the Genesis hedges on offer.

“Many businesses buying power at spot prices would not have realised the potential risk.

“But I am surprised the power companies constrained by the outage did not take hedging for it if the pricing and extent of the hedges on offer was historically reasonable.

“However the spot price users of electricity will not readily believe any finding by the Electricity Authority that suggests there was no market failure, or that’s how the market is supposed to work in a planned outage of this nature.”