Progress with improving electricity Progress with improving - - PowerPoint PPT Presentation

Progress with improving electricity Progress with improving electricity industry performance

1 April 2014

There are many sub-markets in electricity

27 x Retail 3 x Hedge 9 x AS 1 x Spot Transport

On-going rises in residential prices since 1985 but not in other prices – why?

S t Hedge Retail

p y

Prices in 2013 dollars

AS Spot Full retail competition No residential competition Full retail competition No residential competition 3

Futures prices for four years ahead at Benmore

S t Hedge Retail AS Spot

4

Prices for long-dated futures fell sharply in 2012

S t Hedge Retail AS Spot

Spot prices are calculated for 250 nodes around NZ

S t Hedge Retail

Selection of spot prices on 11 February 2013

AS Spot

6

Hydro conditions have large impact on spot prices

S t Hedge Retail

Monthly average spot market prices for Otahuhu and Benmore

AS Spot

7

Dry-year security of supply problems solved: 2012 hydro inflows were worst on record but no problems

S t Hedge Retail

hydro inflows were worst on record but no problems

AS Spot

South Island inflows for each Year (1 Nov – 21 May periods)

8

We use a standard approach to assessing competition

Structure Conduct Performance

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Competition in the wholesale market Competition in the wholesale market

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Low barriers to entry: 75 separate generating entities in NZ, with 13 directly connected to the grid

S t Hedge Retail

, y g

AS Spot 11

Concentration of generation is moderate-low and declining

S t Hedge Retail

g

AS Spot 12

2009 reforms led to big fall in the ability of generators to unilaterally and profitably raise spot market prices

S t Hedge Retail

unilaterally and profitably raise spot market prices

AS Spot 13

Hedge prices broadly in line with rises in LRMC of generation

S t Hedge Retail

g

AS Spot

2001-2008

14

Competition in the retail market Competition in the retail market

15

New Zealand has 14 electricity retailers, 24 brands

S t Hedge Retail

Market share of connections

AS Spot

16

Small retailers have expanded rapidly since 2009

S t Hedge Retail AS Spot 17

Retail concentration (HHI) has declined significantly

S t Hedge Retail AS Spot

HHI = Herfindahl-Hirschman Index

18

Increase in competitive pitching to customers

S t Hedge Retail AS Spot

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 twice 18% 23% 28% Approached 3+ times 11% 19% 73%

Published prices increased in 2013

S t Hedge Retail AS Spot

Q t l S f D ti E P i (QSDEP) Year ending 15 Feb 2014 Quarterly Survey of Domestic Energy Prices (QSDEP) Distribution and transmission charges 0.9% Energy price component 2.0% Total 2.9%  But these prices don’t capture ad hoc discounts  But these prices don t capture ad-hoc discounts

• Same applies to electricity CPI published by Statistics NZ prices

20

Significant discounting occurred in 2013 to attract and retain customers

S t Hedge Retail

 Ad-hoc discounts to attract residential customers

AS Spot

• 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 and industrial (C&I) customers Co e c a a d dust a (C& ) custo e s

• 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

Cost drivers for a stand-alone retailer

S t Hedge Retail AS Spot 22

Costs for retailers rose faster over the last three years than residential prices: implies a workably competitive

S t Hedge Retail

21 5% i

t a es de t a p ces p es a

• ab y co

pet t e market

AS Spot

21.5% increase

• ver three years

$190m of costs absorbed by retailers

12.5% increase

• ver three years

Note: red-line over-states price rises as QSDEP doesn’t include many discounts

23

Two extended periods of residential prices rising faster than C&I prices

S t Hedge Retail

prices

Prices in 2013 dollars

AS Spot Full retail competition No residential competition Full retail competition No residential competition 24

1985-98: residential prices rose and C&I prices fell

S t Hedge Retail

Prices in 2013 dollars

AS Spot Full retail competition No residential competition Full retail competition No residential competition 25

2001-08: all prices increased but residential prices rose fastest – why?

S t Hedge Retail

why?

Prices in 2013 dollars

AS Spot Full retail competition No residential competition Full retail competition No residential competition 26

Residential demand is very peaky: eg Pauatahanui

S t Hedge Retail AS Spot 27

Whereas demand at Tiwai is very flat

S t Hedge Retail AS Spot 28

Proposition: the cost of supplying residential consumers increased sharply once surplus hydro generation was depleted in the late 90’s

S t Hedge Retail

sharply once surplus hydro generation was depleted in the late 90’s

Ratio of modelled LRMC for three customer types

AS Spot 29

Innovation is flourishing across all markets

S t Hedge Retail AS 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 pricing plans eg 5-year cap contracts

p g p g y p  Spot market

• Rapid growth in unsubsidised wind generation

p g g

• Industrial consumers offering their own generation into the spot market

 Ancillary services (AS) market y ( )

• 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 few years

Progress since November 2010 Security of supply Passed two (dry year) tests: issues appear to 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 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 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
• But price rises for passive consumers

Innovation and efficiency Innovation is flourishing Investment risk borne by investors Strong incentives for on-going efficiencies

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Discussion Discussion

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Our objective is specified in s15 of the Act

For the long term benefit of consumers Statutory Objective For the long term benefit of consumers Promote C titi Promote R li bl Promote Effi i t j Competition Reliable supply Efficient

• peration

Reducing barriers Providing efficient Fit-for- purpose How Facilitating consumer Promoting flexibility & Increasing compliance price signals market services participation resilience with the rules

Initiatives to reduce barriers to retailer entry/expansion

S t Hedge Retail

Ensure ‘level playing field’ for Saves and win backs 3rd party access

AS Spot

Retail Ensure level playing field’ for new retailers Saves and win-backs LUFC regulations Peak load futures Hedge Easier risk-management for new retailers Prudential rules Extend FTRs Hedge market review Spot Reduce risks for new retailers Pivotal pricing rules Prudential rules Review of spot market Reduce barriers & expansion costs for new retailers Transport Embedded networks MUoSA

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Initiatives to enhance consumer choice

S t Hedge Retail AS Spot

Improve transparency of consumer electricity charges Improve tools for consumers to compare retail pricing offers

Retail

Review barriers to group switching Continue Whats My Number campaign?

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Further background material Further background material

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Wholesale market Wholesale market

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Big lift in perceptions of wholesale competition but no change for retail competition change for retail competition

Survey statement: prices in [this] market reflect the

• utcomes expected in a workably competitive market

2013 Survey 2011 Survey

R t il S t F t Retail Spot Futures

Futures trading activity increased 500% c.f. 2011

S t Hedge Retail AS Spot Dry episode Weak demand

• Max. 5% spreads

introduced

40

Futures accounted for 50% of hedge contracts in 2012

S t Hedge Retail AS Spot

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Key areas for improving wholesale market competition

 Futures market

• Reviewing market-maker arrangements

Meters Retail Futures OTC g g  Financial transmission rights (FTR) market

• Extending FTR market to more nodes

Meters Distribution Spot Futures FTRs  Spot market

• Dispatchable demand starts next month
• Considering pivotal pricing rules now

Spot FK x 2 IR x 4 Volt. Supp. g p p g  Frequency keeping (FK) market

• Multiple frequency keeping introduced last year

AUFLS OFR Black

• Allowed demand-side to provide FK (eg batteries)
• Currently working on making FK market

nationwide markets Trans- mission Black Start  Currently working on making IR markets nationwide

Retail competition Retail competition

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Sharp reductions in HHI are clearly possible in NZ

S t Hedge Retail AS Spot

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Significant reduction in market share of largest retailer per region … driving the reduction in HHI

S t Hedge Retail

p g g

AS Spot

45

Retailer advertising now more price-focused?

S t Hedge Retail

Before What’s My Number campaign After What’s My Number campaign

AS Spot

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Our latest enquiry is on ‘saves’ and ‘win-backs’

S t Hedge Retail AS Spot