MDAG report published; risk management review underway

The final report from the Market Development Advisory Group’s (MDAG) project on price discovery in a renewables-based electricity system has been published today.

The report contains 31 recommendations to the Electricity Authority (Authority) related to the challenges and opportunities of a renewables-based electricity system.

The MDAG previously assessed that an increase in the renewable sources of generation will mean the system will need to operate differently to react to the intermittent nature of much of that new generation.

The report is the final stage of a multi-stage project which started in 2021 to understand how price discovery would work in the New Zealand wholesale electricity market (including spot and hedge markets), in a renewables-based electricity system.

The Authority thanks the MDAG for the time and effort put into this comprehensive report. We value the perspectives from industry representatives and the independent insights that the MDAG has put forward for the Authority's consideration.

The Authority will consider the recommendations and decide on next steps in early 2024.

The Authority has already commenced a series of projects that relate to seven of the 15 recommendations prioritised in the report including improving hedge disclosure obligations, reviewing forecasting provisions for intermittent generators and updating regulatory settings for distribution networks.

Review of risk management options available to electricity retailers

The MDAG has highlighted the importance of risk management and competition in electricity markets, and we are commencing work to increase our understanding and the transparency of risk management options for electricity retailers.

This work will focus particularly on over-the-counter (OTC) contracts, following on from the recent development of the (voluntary) OTC Code of Conduct.

This review of risk management options for retailers will include considering whether the current approach to OTC contracts (including availability, shape and price), and other risk management options, is effectively creating a barrier to entry or expansion in the retail electricity market, and therefore harming competition.

The Authority will shortly be requesting data from participants, including detail on OTC contract requests and responses to those requests, to build a picture of the state of contract markets.

We are aware of concerns that have been raised by some retailers about OTC contracts. We have used the common themes in these complaints to assist us in developing the scope of this review.

We are engaging with the Commerce Commission on this risk management review, including drawing on their competition analysis approach and staff expertise during the review.