Progress with improving electricity
industry performance
1 April 2014
There are many sub-markets in electricity
27 x Retail
3 x Hedge
1 x Spot
9 x AS
Transport
Retail
On-going rises in residential prices since 1985 but
not in other p
prices – why?
y
Hedge
S t
Spot
AS
Prices in 2013 dollars
No residential competition
Full retail competition
3
Retail
Futures prices for four years ahead at Benmore
Hedge
S t
Spot
AS
4
Retail
Prices for long-dated futures fell sharply in 2012
Hedge
S t
Spot
AS
Retail
Spot prices are calculated for 250 nodes around NZ
Hedge
S t
Spot
Selection of spot prices on 11 February 2013
AS
6
Retail
Hydro conditions have large impact on spot prices
Hedge
S t
Spot
AS
Monthly average spot market prices for Otahuhu and Benmore
7
Retail
Dry-year security of supply problems solved: 2012
hydro inflows were worst on record but no problems
Hedge
S t
Spot
AS
South Island inflows for each Year (1 Nov – 21 May periods)
8
We use a standard approach to assessing competition
Structure
Conduct
Performance
9
Competition in the wholesale market
10
Retail
Low barriers to entry: 75 separate generating entities
in NZ,, with 13 directly
grid
y connected to the g
Hedge
S t
Spot
AS
11
Retail
Concentration of generation is moderate-low and
declining
g
Hedge
S t
Spot
AS
12
Retail
2009 reforms led to big fall in the ability of generators to
unilaterally and profitably raise spot market prices
Hedge
S t
Spot
AS
13
Retail
Hedge prices broadly in line with rises in LRMC of
generation
g
Hedge
S t
Spot
AS
2001-2008
14
Competition in the retail market
15
Retail
New Zealand has 14 electricity retailers, 24 brands
Hedge
S t
Spot
AS
Market share of connections
16
Retail
Small retailers have expanded rapidly since 2009
Hedge
S t
Spot
AS
17
Retail
Retail concentration (HHI) has declined significantly
Hedge
S t
Spot
HHI = Herfindahl-Hirschman Index
AS
18
Retail
Increase in competitive pitching to customers
Hedge
S t
Spot
AS
Survey question: How many times have you been approached by
different power companies to switch to them in last three years?
2011
2013
% change
in rate
Approached twice
18%
23%
28%
Approached 3+ times
11%
19%
73%
Retail
Published prices increased in 2013
Hedge
S t
Spot
AS
Quarterly
off Domestic
Prices
(QSDEP)
Q t l Survey
S
D
ti Energy
E
Pi
Year ending
15 Feb 2014
Distribution and transmission charges
0.9%
Energy price component
2.0%
Total
2.9%
 But these prices don’t
don t capture ad-hoc
ad hoc discounts
 Same applies to electricity CPI published by Statistics NZ prices
20
Retail
Significant discounting occurred in 2013 to attract and
retain customers
Hedge
S t
Spot
AS
 Ad-hoc discounts to attract residential customers
 Typically $80 - $300 upfront discounts
 A $150 upfront discount = 6.9% price reduction for an average consumer
 This amounts to 1.9c/kWh off 28c/kWh
 Commercial
Co
e ca a
and
d industrial
dust a (C&
(C&I)) custo
customers
es
 Anecdotal evidence suggests C&I sector is receiving up to 2.5c/kWh off
14.5c/kWh
 Implies a pretty competitive market for consumers that ‘shop around’
21
Retail
Cost drivers for a stand-alone retailer
Hedge
S t
Spot
AS
22
Retail
Costs for retailers rose faster over the last three years
prices:
competitive
tthan
a residential
es de t a p
ces implies
p es a workably
o ab y co
pet t e
market
Hedge
S t
Spot
AS
21.5%
21 5% increase
i
over three years
$190m of costs
absorbed by
retailers
12.5% increase
over three years
Note: red-line over-states price rises as
QSDEP doesn’t include many discounts
23
Retail
Two extended periods of residential prices rising faster than C&I
Hedge
prices
S t
Spot
AS
Prices in 2013 dollars
No residential competition
Full retail competition
24
Retail
1985-98: residential prices rose and C&I prices fell
Hedge
S t
Spot
AS
Prices in 2013 dollars
No residential competition
Full retail competition
25
Retail
2001-08: all prices increased but residential prices rose fastest –
Hedge
why?
S t
Spot
AS
Prices in 2013 dollars
No residential competition
Full retail competition
26
Retail
Residential demand is very peaky: eg Pauatahanui
Hedge
S t
Spot
AS
27
Retail
Whereas demand at Tiwai is very flat
Hedge
S t
Spot
AS
28
Retail
Proposition: the cost of supplying residential consumers increased
Hedge
sharply once surplus hydro generation was depleted in the late 90’s
S t
Spot
AS
Ratio of modelled LRMC for three customer types
29
Retail
Innovation is flourishing across all markets
Hedge
S t
Spot
 Retail market
 Competitive roll-out of smart meters
 New energy management services: GEM and MyCoach
 New billing and service offerings eg Glo-Bug, Budgie
 New p
pricing
gp
plans eg
g 5-year
y
cap
p contracts
AS
 Spot market
 Rapid
p g
growth in unsubsidised wind g
generation
 Industrial consumers offering their own generation into the spot market
 Ancillaryy services ((AS)) market
 Consumers offer interruptible load into the reserves market
 Demand aggregator will shortly be offering into the frequency-keeping market
Conclusion: significant progress has been made in last
few years
Progress since November 2010
Security of supply
Passed two (dry year) tests: issues appear to
be solved but still early days
Wholesale market prices
Competitive spot prices now occurring 98% of
the time due to the 2009 reforms
Hedge prices < LRMC of new generation
Retail market prices
Much more competition but more needed
•
•
Retailers absorbing significant cost increases
Sizeable price discounts offered to consumers
that ‘shop around’
• But price rises for passive consumers
Innovation and efficiency
Innovation is flourishing
Investment risk borne by investors
Strong
g incentives for on-going
g g efficiencies
31
Discussion
32
Our objective is specified in s15 of the Act
For the long term benefit of consumers
Statutory
Objective
j
How
Promote
C
Competition
titi
Reducing
barriers
Promote
R li bl
Reliable
supply
Promote
Effi i t
Efficient
operation
Facilitating Providing Promoting
Fit-for- Increasing
consumer
efficient
flexibility & purpose compliance
participation price signals resilience
with the
market
rules
services
Retail
Initiatives to reduce barriers to retailer entry/expansion
Hedge
S t
Spot
AS
3rd
Retail
Ensure ‘level
level playing field’ for
new retailers
party access
Saves and win-backs
win backs
LUFC regulations
Peak load futures
Hedge
Easier risk-management for
new retailers
Extend FTRs
Hedge market review
Prudential rules
Spot
Reduce risks for new retailers
Pivotal pricing rules
Review of spot market
Transport
Reduce barriers & expansion
costs for new retailers
MUoSA
Embedded networks
34
Retail
Initiatives to enhance consumer choice
Hedge
S t
Spot
AS
Improve tools for consumers to compare retail pricing offers
Retail
Improve transparency of consumer electricity charges
Continue Whats My Number campaign?
Review barriers to group switching
35
Further background material
36
Wholesale market
38
Big lift in perceptions of wholesale competition but no
change for retail competition
Survey statement: prices in [this] market reflect the
outcomes expected in a workably competitive market
2013
Survey
2011
Survey
R t il
Retail
F t
Futures
S t
Spot
Retail
Futures trading activity increased 500% c.f. 2011
Hedge
S t
Spot
AS
Dry episode
Weak
demand
Max. 5% spreads
introduced
40
Retail
Futures accounted for 50% of hedge contracts in 2012
Hedge
S t
Spot
AS
41
Key areas for improving wholesale market competition
 Futures market

Reviewing
g market-maker arrangements
g
 Financial transmission rights (FTR) market

Retail
OTC
Meters
Futures
Extending FTR market to more nodes
 Spot market

Dispatchable demand starts next month

gp
pivotal p
pricing
g rules now
Considering
Distribution
FTRs
Spot
 Frequency keeping (FK) market

Multiple frequency keeping introduced last year

Allowed demand-side to provide FK (eg batteries)

Currently working on making FK market
nationwide markets
 Currently working on making IR markets nationwide
FK x 2
IR x 4
AUFLS
Transmission
Volt.
Supp.
OFR
Black
Start
Retail competition
43
Retail
Sharp reductions in HHI are clearly possible in NZ
Hedge
S t
Spot
AS
44
Retail
Significant reduction in market share of largest retailer
per region
… driving
p
g
g the reduction in HHI
Hedge
S t
Spot
AS
45
Retail
Retailer advertising now more price-focused?
Hedge
S t
Spot
Before What’s My Number campaign
After What’s My Number campaign
AS
46
Retail
Our latest enquiry is on ‘saves’ and ‘win-backs’
Hedge
S t
Spot
AS