Commission authorises Gentailers’ application for Strategic Energy Reserve Huntl…
The Commerce Commission has issued its final determination authorising Genesis, Contact, Meridian and Mercury to enter into and give effect to a series of agreements referred to as the Strategic Energy Reserve Huntly Firming Option. We have authorised the proposed arrangements for 10 years.
The proposed arrangements give Contact, Meridian and Mercury an option to access certain notional generation capacity from Genesis’ Rankine Units at the Huntly Power Station until 31 December 2035. In exchange, Contact, Meridian and Mercury will pay an annual premium and pay for running costs incurred on their behalf.
The arrangements were proposed to provide a commercial incentive for Genesis to maintain Rankine Unit 2, a gas/coal-fired unit at Huntly Power Station, for use as ‘dry year cover’ when other forms of electricity generation, such as hydro generators, may not be sufficient to ensure security of supply.
“The Commission is aware of the difficulties currently facing the electricity sector and, after thoroughly testing the impacts of this authorisation, believes there is significant public benefit in ensuring security of supply for New Zealanders during dry years,” Commerce Commission Chair Dr John Small says.
“We have found the public benefits of these proposed arrangements likely outweigh any potential lessening of competition.
“It is our view that, as well as improving security of supply, they will lower wholesale prices compared to a future scenario in which Unit 2 is shut down.”
In addition, Genesis has informed the Commission that some Rankine capacity remains unallocated. It has said it intends to design hedge products for the remaining capacity that are suitable for third parties, such as independent retailers and generators, industrial customers, and financial intermediaries.
“The Commission notes that a number of interested parties expressed concerns that this benefit would not materialise, and the Commission intends to monitor Genesis’ progress,” Dr Small says.
The Electricity Authority gathers granular information about hedge contracts entered into by the Gentailers, as well as requests for firming cover that are ultimately not agreed. The Commission is able to obtain this information from the Electricity Authority.
The Commission has previously acknowledged the urgency regarding this particular application by the Gentailers and has worked with pace to issue a determination in a timeframe that allows Genesis to undertake the necessary investment in Rankine Unit 2 before winter 2026.
A copy of the Commission’s written reasons for this decision is available on the case register.
Background
New Zealand’s electricity system is susceptible to ‘dry year risk’: extended periods of dry weather that lower lake levels, thereby reducing the amount of hydroelectricity that may be generated and increasing the risk that there is inadequate electricity supply to meet demand.
Genesis owns the Huntly Power Station in Waikato. Huntly Power Station comprises a number of thermal generation units, including three Rankine Units. The units are well suited to help manage dry year risk. They are coal-powered electricity generators that can be turned on as required during extended dry periods to help ensure sufficient electricity supply.
Genesis determined that without support from other market participants in the form of long-term hedge contracts, it would close one of its Rankine Units – referred to as Unit 2 – in early 2026.
The Gentailers submitted that Unit 2 is essential to managing seasonal energy risks over the next decade, such that the proposed arrangements would help meet New Zealand’s electricity demand for at least the next 10 years. The Gentailers submitted that this would improve security of supply and result in lower wholesale prices compared to a situation where Unit 2 is retired, while New Zealand pursues net zero carbon emissions by 2050.
Unit 2 requires significant investment if it is to remain operational. Genesis stated that the uncertain revenues from operating Unit 2 as ‘dry year cover’ through other arrangements or spot market revenues were unlikely to offset the costs of maintaining the plant and a sufficiently large stockpile of coal.
Against this background, Genesis proposed to enter into and give effect to proposed arrangements with the other three Gentailers to help keep Unit 2 running.
Hedge contracts
Hedge contracts are a type of financial instrument that involve the purchase of insurance against electricity price volatility rather than the purchase of physical electricity.
Purchasers of hedges receive insurance against high prices and sellers of hedges receive insurance against low prices.
Authorisation requirements
The Commission may grant authorisation under section 58 of the Commerce Act 1986 (the Act) for agreements that may breach the Act if it is satisfied that the agreement will in all the circumstances result, or be likely to result, in a net public benefit.
The Commission’s Authorisation Guidelines explain when anti-competitive agreements that may lessen competition or which contain a cartel provision can be authorised under section 58 of the Act, and our process for determining applications.
The granting of an authorisation protects the applicant from court action under the Act by the Commission and private individuals.
A copy of the guidelines can be found on the Commission’s website.