Wolak was wrong - electricity market review

Wednesday 12th August 2009

The claim that electricity users were "over-charged" $4.3 billion between 2001 and 2008 was wrong, the Ministerial Electricity Market Review report concludes.

The claim was used by Energy Minister Gerry Brownlee as a political king hit to frame the Ministerial Electricity Market Review of electricity markets, whose report was released today for a five week public consultation before government decisions on electricity reforms before the end of the year.

The over-charging claim came from a five year, multi-million dollar study for the Commerce Commission by Professor Frank Wolak, an electricity markets expert from Stanford University, and a report based on Wolak's findings by the Commission itself, which made the $4.3 billion calculation explicit.

Both reports found evidence that electricity generators had been able to exercise market power, and the Ministerial Review agrees, but says Wolak used the wrong benchmarks for calculating impacts.

Citing widespread criticisms of Wolak's methodology, the panel's report says there is "no clear evidence of the sustained or long term exercise of market power" in the New Zealand wholesale electricity market.

Wolak's model relied on the short run marginal cost of generation to create a competitive benchmark cost, but SRMC "is not sufficient to cover the costs of building new capacity and ensuring security of supply", the panel says.

"A more useful benchmark of wholesale market performance is to compare average contract prices over time with the cost of building new capacity, or long run marginal prices over time, with the cost building new capacity, or long run marginal cost (LRMC)," the review panel concludes.

"Using the LRMC benchmark, there is no clear evidence of the sustained or long term exercise of market power", although "there is scope for the exercise of short term market power in the spot market", which arises when hydro lake levels are low or there are transmission constraints or thermal plant outages.

In those situations, generators may hold back available generation, and in turn "reduce confidence that hedge contracts are fair, and may lead to less hedging than is desirable, particularly when the option of lobbying for a conservation campaign is available".

Key recommendations in the report seek to increase the incentives on electricity generators and major industrial energy users to make better hedge cover arrangements by substantially raising the costs they should expect to face in the event of a shortage, and improving the tools and information available to the electricity market to make such hedge arrangements.

Businesswire.co.nz

Comments from our readers

No comments yet