The Energy Competition Task Force has unveiled its work programme aimed at bolstering competition and resilience in New Zealand's electricity market in the short to medium term. The Task Force, jointly established by the Commerce Commission and Electricity Authority following the fuel shortage and wholesale electricity price spikes in August 2024, will investigate actions to strengthen and improve electricity market performance for the benefit of consumers.

Package 1: Increased Market Competition

As the Market Development Advisory Group (MDAG) reported in its final recommendations paper “Price discovery in a renewables-based electricity system”, released on 11 December 2023, competition for supply of longer-duration flexibility is expected to decline as fossil fuel generation retires from the energy system over time. MDAG’s view is that this will increase the risk that those able to provide flexible supply develop more concentrated market power, unless and until new sources of flexibility (such as grid-scale batteries) are readily available in the market. 

Accordingly, MDAG recommended a graduated set of pro-competitive measures to ensure competition in the supply of flexibility contracts. These measures are reflected in Package 1 of the Task Force’s mandate, with the Task Force having selected only some of MDAG’s recommendations for its immediate consideration. 

1.    Firming for Power Purchase Agreements (PPAs)

One main hurdle faced by energy users looking to procure electricity from new intermittent generation assets (such as solar and wind) is matching their respective supply and demand profiles. This can be addressed by “firming” the intermittent generation with a supply of flexible, on-demand electricity generation from hydro, geothermal or gas peaker sources (for example). Developers of intermittent generation who have access to firming are then able to enter into PPAs with energy users, having cleared the profile matching hurdle. 

However, the ability to offer firming services is limited mainly to gentailers who own and operate the vast majority of flexible generation assets, and who are also active in developing their own new renewable energy portfolios. 

The Task Force is considering requiring gentailers to offer a minimum volume of flexible electricity as firming for PPAs that support development of new renewable generation. This would be in the form of long-duration flexible supply contracts, which could enable more PPAs between developers and energy users, increasing generation investment as a result. A well-developed PPA market is essential for enabling greater investment in new generation as developers, investors and project financiers all require the revenue certainty they provide over a long-term period (usually at least 10 years). 

2.    Standardised flexibility products

To assist with managing the risks posed by fluctuating electricity prices, the Authority is facilitating the development of standardised flexibility products and equivalent regulated products following recommendations from MDAG. These products (known as flexibility contracts) act as a form of insurance protection for energy buyers against high spot prices, which is expected to become more important as the increased intermittency of generation creates more wholesale market price volatility. The Task Force has stated that flexibility contracts will “provide the electricity sector with more information about future electricity prices, which will support risk management and investment decisions”, increasing competition. 

3.    Virtual disaggregation of the flexible generation base

If the previous measures aimed at increasing the supply of firming contracts in the market do not increase competition, gentailers could be required to offer a minimum volume of their flexible generation base to energy buyers in the form of risk management contracts. Although this is a backstop measure, the Task Force intends to design the rules now, allowing for quick implementation if necessary. 

4.    Level playing field for retailers

The Task Force will investigate other measures to ensure that gentailers and independent retailers can compete equally in case the work packages described above do not create the change needed. This would likely see the development of a stronger regulatory response, including measures such as non-discrimination rules to prevent vertically integrated gentailers from favouring their retail arm over competitors.

Package 2: Increase Options for Electricity End-Users

The Package 2 options are aimed at incentivising and increasing the use of distributed energy resources to mitigate supply shortages and network constraints. The options reflect a growing recognition by policy makers that, collectively, distributed energy resources have the potential to be an important part of New Zealand’s electricity infrastructure. 

1.    Rebates for exporting electricity

Distributors may be required to offer rebates to consumers who export electricity back into the grid at peak times, incentivising the use of home solar and battery systems.

2.    Time-of-use pricing

Time-of-use pricing, which encourages consumers to shift their electricity use to off-peak times, could become mandatory for retailers above a certain size. 

3.    Better rewards for consumer supply

Returns to consumers selling electricity back to retailers often do not reflect the value of the electricity at that time. Retailers may be required to offer better rates for buying back electricity from consumers, particularly at peak times. 

4.    Rewards for short-term demand flexibility

Industrial consumers can help manage electricity supply constraints by reducing industrial plant use at peak times, thus substantially lowering electricity demand. The Task Force is considering rewarding industrial consumers for flexible electricity use, reflecting the benefits to the system of freeing up supply and reducing the need for expensive peaking generation plant.

What's next?

As the Task Force gathers evidence, its recommendations will continue to evolve. The Task Force’s final recommendations will be considered by the boards of the Commerce Commission and Electricity Authority before any final decisions are made, and any changes that impact market settings or regulations will undergo the normal consultation processes before implementation. Special Counsel Rob Macredie says that better access to firming is likely to assist with increasing the depth of NZ’s PPA market, but as the Task Force evolves, it may also need to consider other solutions, including the potential introduction of capacity investment or CfD schemes.

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