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."
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.