Opinion: How Genesis Energy showed it was the 'smartest guy in the room' by cynically and greedily manipulating power prices to make NZ$56 mln

Opinion: How Genesis Energy showed it was the 'smartest guy in the room' by cynically and greedily manipulating power prices to make NZ$56 mln

Genesis Energy's Huntley Power Station.

Powershop CEO Ari SargentBy Ari Sargent

I bet they’re calling it Big Saturday over at Genesis Energy. Last Saturday, the Government-owned electricity company cornered the Auckland electricity market for seven hours and turned what should have been around $230,000 worth of electricity into an estimated $56 million. It was an action that could fundamentally change New Zealand’s retail electricity market.                                     

The story of Genesis Energy’s Big Saturday begins with a routine notification from Transpower that they were planning to close down a section of their national transmission grid for maintenance from 10.30am to 5.30am. It was a run-of-the-mill outage that would restrict supply of electricity into Auckland from any source south of the Waikato for those seven hours. Transpower knew that Genesis Energy’s huge Huntly power station could easily cover the electricity needs north of Waikato for that time.  

All the electricity retail companies with Auckland customers were well informed about the Transpower outage, but were also well aware that the outage had been well planned by Transpower and timed to minimise disruption to the market.

Over at Genesis Energy, the thinking was quite different. Genesis executives realised that as soon as Transpower had restricted power supply south of the Waikato, they would have cornered the wholesale market for electricity in Auckland and they could name their price. As thousands of Kiwis queued up to buy Lotto tickets in the country’s biggest ever Powerball jackpot, Genesis would be creating its own Big Saturday.

And so it did.

The price Genesis named was $20,000 per megawatt hour. No, that’s not a misprint. It’s a 26,700% increase on the $75 they were charging the previous week. Based on the previous week’s prices, it was $230,000 worth of electricity. Over the seven hours that they had the market cornered, Genesis pulled in a cool $56 million. Not a bad afternoon’s work.

The Electricity Authority is investigating. They say it’s a complex matter and it will take some weeks to decide if it was right or wrong.

But I don’t think the average New Zealander sees it as complex. Most people I’ve spoken to see last Saturday afternoon for what it was - a chilling and cynical act of deliberate market manipulation motivated by greed on a scale that we’ve never seen before in New Zealand.  And the facts support this simpler view; Genesis increased their generation from Tokaanu power station south of Taupo to lock out competitor generation into Auckland, manipulated their market offers for Huntly power station to sell their energy at prices in excess of $19,500/MWh, reducing its output to a little over a half of the Saturday prior, despite the transmission outage.

Making $56 million in an afternoon out of $230,000 worth of the electricity that was generated to power our homes is wrong, plain and simple. It sounds like something from an Enron movie about rogue energy traders.

The fundamental flaw in the cunning Genesis plan was that it was recklessly untargeted. With such excessive and extreme behaviour collateral damage was inevitable; massive financial damage to the growing list of Auckland businesses also complaining to the Electricity Authority, and massive risk to the integrity and credibility of the market. Genesis clearly saw this as a profit maximising opportunity without giving a second thought to how consumers of electricity would be affected.

What about the spirit of the market? The electricity wholesale market exists in New Zealand to get power to New Zealand households in the most efficient and cost effective way possible. It’s supposed to send signals to generators about when it’s economic to build new generation plants. It’s supposed to encourage competition between many retailers so Kiwis can be assured they’re getting the cheapest possible prices.

'A chilling threat to consumers'

But competition is what Genesis seems hell bent on driving out of the Auckland retail market. As a result of Big Saturday, Mighty River Power has to pay Genesis $25 million, Meridian $12 million, my company Powershop has to cough up $1.7 million.

Genesis shrugged off the morality of their actions in a statement on Wednesday that reads like a chilling threat to consumers:

“No residential retail customer was exposed to the high prices in the spot market and customers are at liberty to choose their electricity provider in what is a highly competitive market.”

A statement with not a whiff of remorse that gives no confidence about the future of fair priced electricity to power our homes. Any more Big Saturdays and we’ll be out of business. And we won't be the only ones; Pulse Energy, another small player in the market, has made similar comments in the media this week. 

The new Electricity Authority must act now to restore confidence in the market – talk about being dropped in the deep end. Meanwhile, I'm off to join the queue for Lotto.

* Ari Sargent is the CEO of Powershop.

Genesis has rejected criticism of its actions. See more here in Gareth Vaughan's March 30 article.

See Gareth Vaughan's original article on Meridian and Mighty River Power protesting at the price spike.

See more here from Gareth Vaughan on how ASB and various telcos have warned about the effects on their profits.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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If I were a company who was serviced by such a greedy supplier I would vote with my feet.

My first move will to vote with the cheque book. I will ask for a reduction in my power bill due to their cynical manipulation of the pricing structure and expected profitability. Failing success there, then a move to a new supplier seems automatic. Corporate responsibility is required in a less than perfect market. 

Corporate responsibility - I hope you are right, especially as the Chairman of the board is the Rt Hon Dame Jenny Shipley. Good luck with your request John H, keep us posted.

Between this corporate thuggery, EQC bullying and Government mishandling of everything, we may as well give up on NZ.

It's a disgrace that a market could be set up where key players can manipulate prices.  Surely there is some kind of anti-trust law that Genesis broke?  If not there should be.  And they should not only lose the $56m, they should be forced to pay fines for such an action.

Where is John Key?  A Government that does not believe in fairness isn't worth having.  Thank goodness it's an election year.  Unfortunately the opposition isn't any better.

With Shipley in the Chair, and Maxie's legacy, I can't see them changing anything.

These are ideologues.

"As Bradford explained proudly to an Asia Pacific Economic Cooperation (APEC) meeting of electricity business interests in 1999, New Zealand offered "excellent investment opportunities" through its predictable and transparent regulatory framework and its lack of restrictions on foreign ownership. New Zealand had no electricity industry regulation or regulators, and relied on the general competition law set by the Commerce Act. "Above all", he said, New Zealand has "no formalised ‘energy plan’" (Bradford, 1999). Security of ongoing electricity supply would not be a problem because Bradford believed competitive conditions and accessible information would solve everything: "Rising electricity prices will act as an early warning mechanism of an impending shortage," and these "better price signals" will assist all, generators, retailers and consumers alike, to manage their "future supply risks".

Oops.

Bill English comes from that idiom (I chose the word with care - where are you Christov?)

Bernard should have by now enlisted Roger Kerr to explain how this example of "efficient markets" provided near optimal resource allocation.

You gotta laugh - this from Sideswipe 2003;

People whose views on how to run New Zealand's electricity system should be taken with more than a grain of salt: Max Bradford, John Luxton, Doug Kidd, David Caygill, Richard Prebble, Graham Scott, Mike Lear, David Butcher, Bill Birch, Terrence Currie, Jim McLay, Doug Heffernan, Keith Turner, John Belgrave, Mike Underhill, Ralph Matthes, whoever's speaking for Comalco, anyone from Mercury Energy, Greenpeace or Coal Corporation, David Russell, Barrie Leay, Rod Deane, Phil Pryke, Paul Anthony, Drew Stein and, now, Pete Hodgson. Funny how many of them still have plenty to say on the subject. Will the fixit gang of Michael Cullen, Jim Anderton and Helen Clark avoid that list? Don't count on it.

http://www.nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=3350616 

 

I have to wonder if somebody, somewhere in Genesis was trying to make a political point with this action. Because presumably they have had the opportunity to do this, or similar, on prior occasions, and yet this is the first time (to my knowledge) that is has happened.

Coinicidentally, we are approaching an election where the Govt is seeking a mandate to privatize the SOE power cos. I just wonder if someone is trying to make a point about how fundamentally flawed the wholesale electricity market is and how unsuitable it is for privatizing?

Or perhaps I'm giving them too much credit and they're actually just a bunch of greedy ----s.

However, they may think they are masters of risk, but what they haven't accounted for in their calculation is political risk. They could have easily scooped a nice premium during the maintenance outage and nobody would've said much, but by hiking the price to such absurd levels they have raised a red flag. 

Anyway, kudos to interest.co.nz for its coverage of this issue which is a very serious one and has been largely ignored by the mainstream media (although, no surprises there). It should be an election issue. Increased privatization of an already flawed market is a disaster waiting to happen and the opposition should be all over it.

A serious issue indeed and if the NZ public had their priorities in order, this is the issue that should get them marching in the streets and I wonder what Mr Smiley Wavey has to say about it. Not much. He'll maybe get Dame Jenny on the phone and tell her to stop this nonsense because in case we haven't noticed, NZ is on its knees economically and there's worse to come in the next 18 months.

This 'Enron' type behaviour might help the runt Genesis prop up a sad financial performance and make people sit up and pay attention to the importance of the decrepit Huntly units but their corporate responsibility is absent. Big Gerry thought it might be a good idea to gift Genesis Tekapo A & B by taking them away from the stellar dividend deliverers at Meridian in the name of competition but one wonders that with Dame J in the chair that there may be some political manipulation at play with our friends at Genesis feeling somewhat immune from government intervention at this recent behaviour. Certainly their ability to avoid making dividend payments to the Crown is impressive. 

As for you Joe Public, your non discretionary spending power is just about to shrink even further. As for the Rt Honourable member from Dipton (or is it Karori, I get confused), you might want to get involved or is it all too late anyway and shall we just call our mates in Canberra and add another star to the Aussie flag.

Do you mean re-nationalise? I hope not....even if we did that doesnt make power cheaper...we are growing in electricity usage at 2 to 4%? per year, somehwere somehow investment in new plant is needed, the SOE model is providing that.

And National want to sell off the SOEs? and the danger is result would be this....several times a year....I bet foreign companies will be licking their lips at the prospect of buying in here....I would.

Im not sure if it was to make money as the primary objective, or to send a clear signal to the public as voters to not go with National's scheme....Brownlee if he can think that hard must be spitting nails.....

I just hope the good will come through....

We do regulate btw, just needs some tweaking....the SOE model seems to be pretty effective as an alternative to publically owned model or privatised....We may have struck gold on that idea/mix. 

If its publically owned the Govn has to fork out for new stations, which it never wants to....if its private well look at California, they suffer brown outs and blackouts (when did NZ last see one?) they make more money by not building more stations. We seem to have SOE companies that are making some money and thinking long term by investing in new plant....Yes I can see you consider electricty expensive, the reality is its cheap compared to where it will be in a few years time....50% to 100% more in real terms is quite probable....we have wasted 50 years of opportunity and noew the oil is limited, that is going to hurt.... Anyway the dividends go to the Govn....so in effect our taxes stay lower, but yes its regressive....not perfect but it could be a lot worse....

regards

Come on Ari get a grip. You are exactly wrong.

The reason there is an electricity market is so that participants can book the supply they need ahead of time.

Your  lazy buyers got caught with their pants down. This is just the silly sods trying to cry foul to cover up their own ineptitude. You should sack them..

Absolutely.  If I'd let myself get into a position where a routine and well notified piece of maintenance enabled a competitor to make a stack of money out of me, I'd be well embarrassed and keeping very quiet about it.

@Roger:

If only life were that simple. We actually have a very conservative energy hedging policy and are typically fully hedged 6-12m in advance for our aggregate volume. However, there is very little liquidity in the hedge market and securing contracts at the locations required is difficult and/or expensive. In particular, exchange trading at the Otahuhu node only commenced late in 2010 - after we had fully hedged our position elsewhere (for March 2011).

Further, if MightyRiverPower is unable to support a retail position in Auckland using its hydro stations just down the road in the Waikato there will never be any retail competition in the Auckland region.

The hedging and risk management decisions of market participants really aren't relevant to addressing the underlying mis-behaviour of Genesis.

The NZ electricity market is far from a "pure" market; it is a small market that operates over a long stringy transmission system with low liquidity and depth in the contracts market. Since it's inception in 1996 there have been numerous periods of time when one generator or another has transient market power. Historically though generators have exercised a degree of self-restraint; I am not suggesting that they haven't profited to some extent in the past, but Genesis behaviour over the weekend is so extreme it cannot go unchallenged.

While contracting is one mechanism available to curb the exercise of market power, it shouldn't be the only one. Requiring participants to contract with the very party/parties that have market power to manage price risk does not solve the underlying issue; the market power will merely manifest itself in the contracts market.

What is now required, because self restraint can no longer be relied on, is new regulations that deal with the imperfections of the market; the objective of these regulations should be to deliver prices that reflect competitively set prices, even during periods of transient market power. This doesn't require intervening with the ordinary market pricing mechanisms all of the time, only during periods of time where market power has been abused (there ought to be ways of measuring this objectively).

In simple terms the NZ market isn't and won't ever be the "perfect market". The Electricity Authority now needs to deal with the performance of the market *in practise* rather than *in theory*.

Two words: Windfall Tax?

Firstly I should say that I do not work for Genesis and do not condone their choice of offer price for march 26th.  However, the Electricity Authority is considering even scarier ideas such as minimum prices of $500/MWh during dry spells and VOLL pricing during real shortages.  If this policy was in place, and Genesis had shut Huntly down, then the price your company would have paid was VOLL.  Note that VOLL is proposed to be $20,000/MWh.  Would that constitute a UTS?

Perhaps Ari you could explain what was different about Big Saturday, and Big Winter - back in the wild west days of 2001 when TransAlta was deliberately set up and shafted - with no regard whatsoever for the superannuitants whose life time savings were destroyed.   

Also if I were you I would check your facts about Tokaanu offers - and you will see that they were higher than MRP's.  All roads do not lead to Auckland, and with the DC link being constrained to 400 MW there was a significant southwards flow from the central north island. Quite why MRP generated at a low price, instead of withdrawing and alleviating the constraint, is an interesting question.

@ Ari

Thanks for the article but I am with Roger and would add BRING BACK THE NZED. No consumer can tell the difference between power from hydro or thermal generation, so what meaning is there in an electricity market?

We now have hundreds of people calculating (and gaming) market prices and very few technicians/engineers, as evidenced by recent failures and the sad state of our NI generation assets. We are gradually wearing out the physical legacy of the NZED..

Doesn't the Huntly transmission line connect directly into the Taranaki power stations, I am not sure how the constraints work here? With our weak NZ network there are times when having this large plant is of huge benefit to NZ and $20,000 per MWh sure beats a blackout..

Yes it was a con and a total ripoff but the complaints in the article sound to me like the pot calling the kettle black, the whole retail and trading sides of the industry provide no benefit that I can see.

You don't complain when the price is 1c per MWh for extended periods, will you pay Genesis these profits?

Trim the fat in Wellington/Hamilton/Auckland and move system control back to Whakamaru I say. I should start a referendum :)

 

Perhaps a whole unit had be fired up, skelton staff increased to full capacity. Was coal or gas used? Hence complicated, rather than complex (which implies nobody can work it out!).

Need to know far more facts, than provided on pricing. Need to know costs involved. Perhaps there was a primium due to the switch on, switch off, which is a very inefficient way to make and use power.

As far as I know Huntly has four 250 MW turbine units and one 300 MW jet unit. The jet is the most new and efficient. The others run at about 60% efficiency, remember this is relatively old technology.

If one or more of the turbine units needed to run for a short 7 hours from a cold start, well there would have been two or three days warm up, then a day or two cool down period.

Staff numbers increased a lot, and more gas or coal burnt. Cannot assume all the units where running at the time needed.

 

More here on why 'Big Saturday' was brewing for some time and why Genesis' customers didn't hedge - http://www.interest.co.nz/news/53066/wholesale-electricity-customers-cou...