Wholesale power price jumps – caused by gas problems and other issues – mean that retail rates are likely to rise when energy companies perform their annual price reviews in April, Marc Daalder reports
Despite its best efforts to lower power prices, the Government might see a retail rate hike just six months before next year’s election.
The Labour-New Zealand First coalition agreement mandates that the Government perform a review of electricity prices, which wrapped up in October. Moreover, the Tiwai Point aluminium smelter, which uses 12 percent of New Zealand’s electricity, could close next year, which would theoretically further lower prices. A decrease in interest rates also means that investment into the national power grid, which is funded in part by transmission fees on consumer power bills, would be cheaper, leading to lower transmission fees.
Nonetheless, electricity rates are likely to go up before they come down, industry insiders say.
“We normally see a round of price reviews in April in line with the network pricing,” said Murray Dyer, founder and CEO of Simply Group, an energy consultancy firm. “I think given where wholesale prices have been tracking in the last 12 months with the Pohokura gas outage, I’d be surprised if we don’t see some price increases needing to flow through.”
This was already visible to large commercial customers whose multi-year contracts have expired and are being renegotiated with higher prices, Dyer said.
Wholesale prices high
Wholesale prices have been unusually high and retailers will have to raise retail rates to make up for that. “What we’re seeing [now], and certainly for the next 12 months, wholesale prices are continuing to be elevated,” Dyer said.
What happens next “will depend a little bit on the gas market. There’s work going on now to try and get more more gas out of some of the existing fields and there’s some additional work going on with some new fields. The reality is, we are reliant on gas.”
Jonathan Young, National’s spokesperson for Energy and Resources, agrees. “Essentially, the high price is because people understand that the Maui gas field is at the end of life, Pohokura is off its peak, gas supply at this point is only diminishing. Added to that, we’ve got the ban on exploration,” he said.
“Everybody, from what I hear, is really uncertain about gas being a backup for when lake levels are low. We’ve ended up having to burn coal [due to gas shortages],” he said.
Given that, wholesale prices will remain high through 2020 at the very least. “The question is, when does that need to flow through to the retail electricity market, because you can’t continue to have a wholesale price that’s four or five cents above the long run average that doesn’t impact on electricity retail prices,” Dyer said.
While transmission or network costs may come down because of increased access to capital to invest in the grid, there may be “a corresponding price increase on the electricity or the energy component of your electricity bill”.
However, Energy Minister Megan Woods pushed back on that. In Parliament in October, she told Young that “there is no reason to think that higher wholesale rates will necessarily flow through to retail rates. I remind that member again that it didn’t in 2017 when we saw prices in the $300 range per megawatt hour.”
“I’d also like to tell that member that I am confident that we will see price drops, because as I told him in the answer to the primary, we have already seen $5 million flow back into the pockets of consumers, and the Electricity Price Review said that if all companies do away with their late payment fees, we could see $45 million flow back into the pockets of consumers.”
In a statement to Newsroom, Woods said, “Wholesale price volatility is not generally a significant driver of household power pricing. Wholesale prices account for only around a third of the makeup of the power bill consumer’s pay each month. Retail prices are driven by a wide range of factors, including retail overheads, the amount of power consumers’ use, distribution costs and transmission charges, the wholesale market and any contractual terms that apply.”
In addition to the Electricity Price Review, Woods highlighted the Government’s support for renewable energy, “which has a significantly lower cost to consumers than fossil fuels. Transpower estimates that next year we will see a levelised cost of energy for new wind and solar generation of just 6c and 8c per kwh respectively, compared to 20c per kwh for gas. In just the last year under our policy settings we’ve seen over $880 million invested in new renewable generation.”
“Alongside this action to bring down power bills, we’ve also introduced the Winter Energy Payment, which gives up to $750 a year to over a million New Zealanders to help them pay the bills and keep warm in winter,” she added.