Strengthening the wholesale market: quarter two update

The Electricity Authority Te Mana Hiko (Authority) has published its second quarterly report on our delivery of the recommendations from the Market Development Advisory Group’s (MDAG) report Price discovery in a renewables-based electricity system.

Implementing MDAG’s recommendations is a key foundation of the Authority’s work programme to establish the electricity market for the future: Market 2.0.

We are evolving market settings so that Market 2.0 delivers strong competition, increased investment and innovation. These outcomes will enable homes, businesses and industrials to have more choices to manage their own electricity use and put downward pressure on prices.

MDAG concluded that a wholesale market remains the best approach for the future but that improvements are needed, including better tools to manage spot price volatility and to ensure that spot price volatility is not magnified by competition issues. The fuel shortage in August and subsequent high wholesale prices have reinforced the importance of this work.

We have incorporated MDAG’s highest priority measures into our 2024/25 work programme. Work is currently underway on 19 of the 31 MDAG recommendations.

In this last quarter (July to September 2024), the Authority has made significant progress on actions that will enhance information and transparency around price signals, and improve access to risk management tools. This includes:

• Hedge market transparency: The broadened hedge disclosure information requirements take effect from 30 October 2024. The Authority will publish additional information and insights on the contracts market. This will enhance transparency around prices, leading to better risk management, and investment decisions.

• Standardised flexibility products: Flexibility contracts are a form of insurance, providing the buyer with protection against high spot prices at specific times. The Authority has appointed an industry co-design group to develop a new standardised flexibility product. The group comprises members with technical, commercial and risk management experience, who will work together to have this product ready for voluntary trading by early 2025.

• Competition dashboard: The Authority intends to consult soon on the results of the risk management review. This will provide information on the availability of risk management products as one measure of competition. In addition, the Authority will release a set of indicators to assess the broader state of competition in the electricity market, including a set of specific measures related to the provision of flexibility products in the market. This will provide better visibility and understanding of the health of competition across the electricity market.

• Virtual disaggregation: Virtual disaggregation would require gentailers to offer up a portion of their flexible generation supply in the form of risk management contracts. This would have the effect of creating a more level playing field to enable participants to manage the risks within a high renewables system. Work on an outline of virtual disaggregation is in progress. Although this is a backstop measure, designing the rules now will ensure it can be implemented quickly. The Authority intends to publish an outline of virtual disaggregation in early 2025.

• Information on development pipeline: The Authority is already publishing more information on projects currently in the development pipeline, including a dashboard and a dataset of projects. From early 2025, we will publish more information (including development locations and timelines) more frequently to enable developers and other participants to make better informed investment decisions.

MDAG’s measures to strengthen competition in the supply of flexibility products (recommendations 8 and 13) are being accelerated through the Energy Competition Task Force. The Task Force is focused on short to medium term measures to increase investment in new generation, strengthen competition, and provide consumers with more options for how they manage their electricity use and costs, putting downward pressure on prices.

About pricing in a renewables-based electricity system