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 Transport 1 x Spot 9 x AS

Retail On-going rises in residential prices since 1985 but Hedge not in other prices – why? p y S Spot t AS Prices in 2013 dollars No residential competition No residential competition Full retail competition Full retail competition 3

Hedge Retail t Spot AS S 4 Futures prices for four years ahead at Benmore

Hedge Retail t Spot AS S Prices for long-dated futures fell sharply in 2012

Retail Spot prices are calculated for 250 nodes around NZ Hedge S Spot t Selection of spot prices on 11 February 2013 AS 6

Retail Hydro conditions have large impact on spot prices Hedge S Spot t AS Monthly average spot market prices for Otahuhu and Benmore 7

Retail Dry-year security of supply problems solved: 2012 Hedge hydro inflows were worst on record but no problems hydro inflows were worst on record but no problems S Spot t 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 Competition in the wholesale market 10

Retail Low barriers to entry: 75 separate generating entities Hedge in NZ, with 13 directly connected to the grid , y g S Spot t AS 11

Hedge Retail t Spot AS S 12 Concentration of generation is moderate-low and declining g

Retail 2009 reforms led to big fall in the ability of generators to Hedge unilaterally and profitably raise spot market prices unilaterally and profitably raise spot market prices S Spot t AS 13

Hedge Retail t Spot AS S 14 Hedge prices broadly in line with rises in LRMC of 2001-2008 generation g

Competition in the retail market Competition in the retail market 15

Retail New Zealand has 14 electricity retailers, 24 brands Hedge S Spot t AS Market share of connections 16

Hedge Retail t Spot AS S 17 Small retailers have expanded rapidly since 2009

Retail Retail concentration (HHI) has declined significantly Hedge S Spot t HHI = Herfindahl-Hirschman Index AS 18

Retail Increase in competitive pitching to customers Hedge S Spot t AS Survey question: How many times have you been approached by different power companies to switch to them in last three years? % change 2011 2013 in rate Approached twice Approached twice 18% 18% 23% 23% 28% 28% Approached 3+ times 11% 19% 73%

Retail Published prices increased in 2013 Hedge Spot S t AS Quarterly Survey of Domestic Energy Prices (QSDEP) Q t l S f D ti E P i (QSDEP) Year ending 15 Feb 2014 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

Retail Significant discounting occurred in 2013 to attract and Hedge retain customers S Spot t 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 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

Hedge Retail t Spot AS S 22 Cost drivers for a stand-alone retailer

Retail Costs for retailers rose faster over the last three years Hedge than residential prices: implies a workably competitive t a es de t a p ces p es a o ab y co pet t e S Spot t market AS 21.5% increase 21 5% 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 prices S Spot t AS Prices in 2013 dollars No residential competition No residential competition Full retail competition Full retail competition 24

Retail 1985-98: residential prices rose and C&I prices fell Hedge S Spot t AS Prices in 2013 dollars No residential competition No residential competition Full retail competition Full retail competition 25

Retail 2001-08: all prices increased but residential prices rose fastest – Hedge why? why? S Spot t AS Prices in 2013 dollars No residential competition No residential competition Full retail competition Full retail competition 26

Hedge Retail t Spot AS S 27 Residential demand is very peaky: eg Pauatahanui

Hedge Retail t Spot AS S 28 Whereas demand at Tiwai is very flat

Retail Proposition: the cost of supplying residential consumers increased Hedge sharply once surplus hydro generation was depleted in the late 90’s sharply once surplus hydro generation was depleted in the late 90’s S Spot t AS Ratio of modelled LRMC for three customer types 29

Retail Innovation is flourishing across all markets Hedge S Spot t AS  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 Security of supply Passed two (dry year) tests: issues appear to Passed two (dry year) tests: issues appear to be solved but still early days Wholesale market prices Wholesale market prices Competitive spot prices now occurring 98% of Competitive spot prices now occurring 98% of the time due to the 2009 reforms Hedge prices < LRMC of new generation Retail market prices Retail market prices Much more competition but more needed 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 g g g 31

32 Discussion Discussion

Our objective is specified in s15 of the Act For the long term benefit of consumers For the long term benefit of consumers Statutory Promote Promote Promote Objective j R eliable R li bl E fficient E ffi i t C ompetition C titi supply operation Reducing Facilitating Providing Promoting Fit-for- Increasing How consumer efficient flexibility & compliance barriers purpose participation price signals resilience with the market services rules

Retail Initiatives to reduce barriers to retailer entry/expansion Hedge S Spot t AS 3 rd party access Saves and win backs Saves and win-backs Ensure ‘level playing field’ for Ensure level playing field’ for Retail new retailers LUFC regulations Peak load futures Easier risk-management for Extend FTRs Hedge new retailers Hedge market review Prudential rules Prudential rules Reduce risks for new retailers Pivotal pricing rules Spot Review of spot market MUoSA Reduce barriers & expansion Transport costs for new retailers Embedded networks 34

Retail Initiatives to enhance consumer choice Hedge S Spot t AS Improve tools for consumers to compare retail pricing offers Improve transparency of consumer electricity charges Retail Continue Whats My Number campaign? Review barriers to group switching 35

Further background material Further background material 36

38 Wholesale market Wholesale market

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 outcomes expected in a workably competitive market 2013 Survey 2011 Survey R t il Retail F t Futures S Spot t

Retail Futures trading activity increased 500% c.f. 2011 Hedge S Spot t AS Weak Dry episode demand Max. 5% spreads introduced 40

Hedge Retail t Spot AS S 41 Futures accounted for 50% of hedge contracts in 2012