Competition Provides Cheaper, More Secure Power: Report

A Ministry of Commerce report confirms that wholesale electricity prices are responding to market signals and that trading mechanisms are in place to better manage supply risks, Enterprise and Commerce Minister Max Bradford announced today.

Mr Bradford released the report following a review of recent fluctuations in the wholesale price of electricity.

"Clearly the market has been reacting to recent climatic conditions and the management of hydro lake levels. It is pleasing to see wholesale prices have returned to low, post-reform levels," Mr Bradford said.

Wholesale prices trended upwards in early October as the anticipated spring snow melt and rainfall did not begin.

Storage in South Island hydro lakes was down to 55% of average capacity in mid- October.

Recent heavy rainfall has seen increased inflows into the lakes. Storage capacity has rebounded back to over 100% of the average for this time of year.

With the rapid replenishment of the lakes the wholesale price of electricity has come back significantly to a daily average close to 2c/kWh.

"Rising electricity prices act as a sign of possible shortages and will assist generators, retailers and consumers to better mange any possible supply risk.

"Under the old system, dominated by the one company position, early warning signals were muted," Mr Bradford said.

For further information see the attached background sheet or contact: Jeremy Kirk, Press Secretary, (04) 471 9836 025-424-565

10 November 1999
The Minister for Enterprise and Commerce
WHOLESALE ELECTRICITY PRICES

INTRODUCTION

1 This paper outlines recent wholesale price developments and the underlying reasons for price movements. We reaffirm the appropriate market mechanisms are in place to ensure economically efficient wholesale electricity prices and security of supply. It is recommended you note the content of this report.

RECENT WHOLESALE ELECTRICITY PRICES

2. The Haywards and Benmore nodes are used as the reference points for North Island and South Island prices respectively. Prices quoted below are the average of the prices at Haywards and Benmore for the 48 trading periods each day.

3. Fom 2 April 1999, when competition in generation was introduced, to 30 September 1999 the price has averaged 2.68c/kWh. This compares with a price of nearly 7c/kWh immediately prior to 2 April 1999 and an average of 5.15c/kWh in the first three months of 1999.

4. During the month of September prices ranged from 1.1c to 3.5c/kWh. As in previous years, generating companies reduced lake levels during August/September in anticipation of spring snow melt and higher rainfall in the South Island over the October to December period. If lake levels are not managed in anticipation of the spring melt it can result in having to spill water.

5. Wholesale prices trended upwards from early October as lake levels were not replenished as early as expected by the spring snow melt or rainfall, resulting in a lower proportion of electricity being sourced from hydro generation. Stored energy in South Island lakes was at 55% of the average for the time of year on 17 October 1999. Hydro generation was replaced with higher cost generation including electricity from new gas fired generating plant (there is no overall shortage of generating capacity in New Zealand). Electricity was sent from the North Island to the South Island as required. An average daily price of 7.5c/kWh on 20 October was the peak.

6. The wholesale price responded quickly to more recent rainfall in the South Island lakes. The price on 24 October was approximately 50% of the 20 October peak. Inflows over the previous seven days had been 177% of average. Inflows into the lakes have since continued at high levels. South Island stored energy is now at 107% of average for this time of year and the daily average wholesale electricity price is just under 2.0c/kWh. The average price from 2 April to 9 November 1999 is 2.96c/kWh.

Recommendation

7. It is recommended that you note the content of this report.

Tony Fenwick
Manager
Energy Markets Policy
Resources and Networks Branch