The Commerce Commission is giving the country’s four largest electricity generator-retailers the go-ahead to establish a fuel reserve of up to 600,000 tonnes for dry winters with low hydro flow.
It also means Genesis, Mercury, Meridian and Contact can get to work on their plan for a 10-year ‘Huntly Firming Options’ covering 150 megawatts - with 50 megawatts each for Contact, Meridian and Mercury.
After giving a provisional green light in September, the Commerce Commission said it has authorised the proposed arrangements for 10 years, releasing its final determination report on Thursday.
Commerce Commission chair Dr John Small said that it was aware of the difficulties currently facing the electricity sector.
“After thoroughly testing the impacts of this authorisation, [the Commerce Commission] believes there is significant public benefit in ensuring security of supply for New Zealanders during dry years.”
Small said the Commerce Commission “found the public benefits of these proposed arrangements likely outweigh any potential lessening of competition”.
The plans
In August, Genesis, Mercury, Meridian and Contact shared their plans for the 10-year ‘Huntly Firming Options’ and Genesis’ plan to establish a fuel reserve.
The stockpile would be coal but Genesis has previously said the reserve may transition to biomass such as wood products as it becomes available in coming years.
The Commerce Commission’s approval also means one of Huntly’s three coal and gas powered Rankine units (Unit 2), which was set to be retired in February 2026, would still be working. Rankine is a thermodynamic cycle used in power generation.
Lower wholesale prices
The Commission said “the proposed arrangements give Contact, Meridian and Mercury an option to access certain notional generation capacity from Genesis’ Rankine Units at the Huntly Power Station until 31 December 2035”.
“In exchange, Contact, Meridian and Mercury will pay an annual premium and pay for running costs incurred on their behalf.”
Small said: “It is our view that, as well as improving security of supply, they will lower wholesale prices compared to a future scenario in which Unit 2 is shut down.”
In its final determination report, the Commerce Commission said “current evidence indicates that lower wholesale prices will produce a sizeable public benefit, in the range of $13.5 million - $15.8 million over the next five years”.
Commission to monitor Genesis’ progress
The Commerce Commission said Genesis had also informed the Commission that some Rankine capacity remained unallocated.
“It has said it intends to design hedge products for the remaining capacity that are suitable for third parties, such as independent retailers and generators, industrial customers, and financial intermediaries,” the Commission said.
Small said the Commerce Commission noted that a number of interested parties had expressed concerns that this benefit would not materialise.
“The Commission intends to monitor Genesis’ progress,” Small said. This would be done through the Electricity Authority.
The Commission said the Electricity Authority gathers information about hedge contracts entered into by the Gentailers, as well as requests for firming cover that are ultimately not agreed.
The Commission describes hedge contracts as a "financial instrument" involving buying insurance against electricity price volatility - purchasers of hedges receive insurance against high prices and sellers of hedges receive insurance against low prices.
In the final determination report, submitters had proposed conditions such as mandating Genesis to offer and sell hedge contracts to third parties or other forms of information disclosure.
The Commission, in the report, said this would be costly, difficult to monitor and enforce, and likely of limited additional benefit.
"Overall the Commission's assessment is that the benefits of the proposed arrangements outweigh the public detriments, regardless of the frequency of dry years over the authorisation period," the Commission said.
“Therefore, we are satisfied that, in all scenarios, the proposed arrangements will likely result in a net public benefit."
9 Comments
600,000 ton of coal is over 70 NZD million of capital sitting around and likely attracting interest and other costs.
Thats $14 per Kiwi sitting around, $0.08 per month per kiwi in interest costs at the ~6% rates our gentailers borrow at.
They own the land it sits on (with little opportunity cost), and Coal doesn't rot.
Round up to 30c each per kiwi per month once they add margin.
As a leftie who kind of deplores coal, this makes sense.
"Coal doesn't rot" True. Unfortunately coal has a habit of igniting if stored incorrectly. No doubt Genesis are aware of this.
Fair points...and at least it appears those millions will be spent locally.
Good article Mandy.
Long overdue action by the oligopoly.
Could and should have been implemented five years ago but as you noted this action reduces their profits.
If done when first proposed would have likely avoided the closure of so many energy intensive productive facilities who were unable to get a hedge and therefore suffered from high electricity prices with resultant job losses. Also would have helped slow the rise in cost of domestic electricity prices.
The CC and EA have teeth but do not use them. Why is that?
For better or worse, this wasn't a viable solution under the previous government. Genesis were trying very hard not to use the 'C' word. Now we seem to be slipping on the climate requirements and burning stuff is back on the menu.
Speaking as a bit of a Greenie myself, I'm not too concerned about this and far more concerned about any slipping on the cap and trade scheme. If the scheme stays strong, then burning that pile of coal means someone else in the economy doesn't burn fossil fuels, and keeping the lights on in a dry year seems like a reasonable use of scarce carbon credits (until the market decides otherwise).
But a better idea would be to locally produce and stockpile biomass such as wood pellets. Doesn’t do the climate damage of burning coal and we’re definitely not short of supplies of wood. Huntly can run on pellets. We just need to kickstart this supply chain and this is perfect opportunity
Totally agree. Wood pellets is apparently in the mix. Unsure whether a Rankine can run a 100% on wood. Might need the higher BTUs of coal into the blend. Great way to reduce NZs carbon footprint.
Thanks for your reply. In my view thats a solid reason why the EA and CC should have used their powers to act in the national best interest of New Zealand five years ago.
"Firming reserves" provided by stockpiled coal (and wood pellets) will protect everyone from substantally higher wholesale market prices which occur when the lakes are dry.
I agree with you regarding the fossil fuel generation side to domestic side substitution. Consistent affordable electricity is essential to New Zealand's socio-economic wellbeing and will help many industries and kiwis transition from burning gas.
On net, with the new firming reserve, we can expect a reduction in CO2 for NZ given time. The new large scale solar generation is already making a significant difference but like all green friendly power we need something to keep our factories, hospitals, farms and homes powered when the sun shines less, rain does not fall in our hydro lakes and wind stops blowing.
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