The New Zealand electricity market is a decentralised electricity market regulated by the Electricity Industry Participation Code administered by the Electricity Authority (EA). The authority was established in November 2010 to replace the Electricity Commission.
Overview Until 1987, New Zealand had a centrally run system of providers of generation, transmission, distribution, and retailing. Reform has since led to the separation of the monopoly elements from the contestable elements to create competitive markets in energy retailing and generation. Regulation has also been imposed on the natural monopolies of transmission and distribution.
Since about 2000, the market is split as follows: regulation, administration, generation, market clearing, transmission, distribution, metering and retail.
The wholesale market for electricity operates under the Electricity Industry Participation Code (EIPC), and is overseen by the market regulator, the Electricity Authority. Trade takes place at more than 200 pricing nodes across New Zealand. Generators can make offers to supply electricity at grid injection points, while retailers and some major industrial users make bids to withdraw "offtake" electricity at grid exit points. The market uses a locational marginal pricing auction which takes generators' offers and retailers' bids, and computes final prices and quantities at each node. These auctions are held every half-hour for a total of 48 trading periods each day.
In addition to the core wholesale spot market there are two associated markets. A hedge market for CFD financial contracts is operated by the ASX Australian Stock Exchange, and an FTR market for Financial Transmission Rights is operated by Energy Market Services, a business unit of Transpower. These markets are linked to wholesale market prices at select locations, allowing market participants to manage their basis risk.
The Electricity Authority contracts out the services required to run the electricity market. The Reconciliation Manager who reconciles all metered quantities, the Pricing Manager who determines the final prices at each node and Clearing and Settlement Manager who pays generators for their generation at the market clearing price and invoices all retailers for their offtake, are all contracted to New Zealand Exchange (NZX), who acquired the previous service provider M-co in June 2009.
The owner of the national transmission grid is Transpower, a state-owned enterprise. Transpower is also the System Operator, responsible for ensuring real time electricity supply security and quality. Transpower is the market scheduler, predicting demand to help generators make offers, as well as the dispatcher, in charge of matching demand and supply in real time.
Distribution of electricity from the grid exit points to the end consumers' premises is the responsibility of about 30 distributors, also known as lines companies, who have monopoly control of the lines services on their networks. Ownership of distributors is through trust-owned companies, such as Auckland Energy Consumer Trust, and public companies. Some major industrial users are directly connected to the grid, such as New Zealand Steel and the Tiwai Point Aluminium Smelter.
There are four major generators: Contact Energy, Genesis Energy, Mercury Energy, Meridian Energy. These four together produce about 90% of New Zealand's electricity. Meridian Energy, Genesis Energy and Mercury Energy are 51% majority owned by the New Zealand government, while Contact is a 100% publicly traded company. An important feature of the New Zealand market is that all the major generators also own retailing arms. The companies are thus commonly known as "gentailers" (generator–retailers.) Proceeding 2021 TrustPower was also a gentailer until selling their retail arm to Mercury under the TrustPower brand and re-branding the remaining generation business as Manawa Energy. Manawa was NZ's largest independent electricity generator, representing around 5% of the New Zealand generation capacity but is slated to be acquired by Contact Energy in July 2025.
Retailers purchase electricity from the wholesale market, and on-sell it to consumers. Competition for retail customers varies across the country but since 1999, when full retail competition was introduced, customers have switched at a rate between 9% and 14% per annum. Consumer NZ, with support from the Ministry of Consumer Affairs, provides a website called Powerswitch that enables consumers to compare electricity and gas prices from different retailers and to switch suppliers.
MBIE published a useful chronology of reforms up to 2015. Marked "This document outlines the main developments in New Zealand's electricity reforms since the mid-1980s."
Wholesale spot market
Electricity is traded at a wholesale level in a spot market. The market operation is managed by several service providers under agreements with the Electricity Authority. The physical operation of the market is managed by Transpower in its role as system operator.
Generators submit offers through a Wholesale Information and Trading System (WITS). Each offer covers a future half-hour period (called a trading period) and is an offer to generate a specified quantity at that time in return for a nominated price. The System Operator (Transpower) uses a scheduling, pricing and dispatch (SPD) system to rank offers, submitted through WITS, in order of price, and selects the lowest-cost combination of offers from the generators to satisfy demand.
The market pricing principle is known as bid-based security-constrained economic dispatch with nodal prices.
The highest-priced offer from a generator required to meet demand for a given half-hour sets the spot price for that trading period.
Electricity spot prices can vary significantly across trading periods, reflecting factors such as changing demand (e.g. lower prices in summer when demand is subdued) and supply (e.g. higher prices when hydro lakes and inflows are below average). Spot prices can also vary significantly across locations, reflecting electrical losses and constraints on the transmission system (e.g. higher prices in locations further from generating stations).
Negative prices are not permitted in the New Zealand electricity market. However, generators may bid in a Must Run Dispatch Auction (MRDA) for the right to submit offers at $0/MWh. For all other generators, the minimum offer price is $0.01/MWh.
Trades take place at approximately 285 nodes (grid injection points and grid exit points) across New Zealand every half-hour. Generators make offers to supply electricity at 59 grid injection points (GIPs) at power stations, while retailers and major users make bids to buy electricity at 226 grid exit points (GXPs) on the national grid.
Final prices at each node, taking account of grid losses and constraints, are processed and confirmed the following day.
All electricity generated is required to be traded through the central pool, with the exception of small generating stations of less than 10MW. Bilateral and other hedge arrangements are possible, but function as separate financial contracts. Trading develops by bids (purchaser/demand) and offers (generator/supply) for 48 half-hour periods for each pricing nodes on the national grid.
Bids and offers start 36 hours before the actual real-time consumption or trading period. Up to four hours (pre-dispatch) before the trading period starts a new forecast price is calculated to guide participants in the market. From four hours to the start of the trading period every half-hour a dispatch price is calculated and communicated. One hour before the start of the trading period bids and offers can no longer be revised (with some exceptions) and the new prices reflect Transpower's adjustments in load forecasts and system availability.
During each half-hour period Transpower publishes a new real-time price every five minutes, and a time-weighted 30-minute average price. The real-time prices are used by some large direct-connect consumers to adapt their demand. The prices are however guidelines only as the final prices are calculated ex-post—normally around 10:00am the following day, unless there are irregularities or disputes. Using the offer prices as established two hours before the trading period and volumes as established during the trading period. Differences between forecast, dispatch, real-time and final prices can be significant.
Market abuse
Studies In 2009, the Commerce Commission released a report by Stanford economist Frank Wolak on the ability of the four largest electricity suppliers to exercise unilateral market power in the wholesale electricity market and the economic rents (any payment in excess of the cost of production) that may have resulted. Using empirical industrial organization techniques, Wolak estimates these rents to be $4.3billion over the 7 years he studied when compared with a perfectly competitive market. The methodology he used and the results are also described in a working paper. His report was criticised for aspects of its methodology, with the Electricity Technical Advisory Group (ETAG), Ministry of Economic Development, claiming that there is no evidence of the sustained exercise of market power. The Commerce Commission decided not to act. Rex Ahdar, University of Otago, later opined that competition law in New Zealand is inherently ill-suited to tackling a network industry such as electricity.
An agent-based model (ABM) developed at Auckland University was used to analyse the New Zealand wholesale electricity market. The model suggests considerable market abuse and quantified the combined market rents for 2006 and 2008 to be $2.6billion, when compared with a perfectly competitive market as counterfactual.
In terms of residential electricity prices, a 2015 report found these were twice as high under retail competition.
Incidents There have been long-standing concerns about the potential for market abuse under nodal pricing, particularly when the transmission system becomes congested.
Genesis Energy was "net pivotal" north of Hamilton on 26 March 2011. The HVAC network was under scheduled maintenance with 2 of 6 220kV lines out and 3 of 5 110kV lines out, thereby restricting supply from the South Island. Extreme bids by Genesis Energy sent Auckland spot prices to $/MWh (€/MWh), these prices later returned $197/MWh (€125/MWh) – a factor of 117×. The Electricity Authority declared a UTS (undesirable trading situation) and subsequently dropped the final price to $/MWh (€/MWh). The Electricity Authority decision was challenged and the High Court of New Zealand found in favour of the regulator. In its submission, the Electricity Authority stated that "the high interim prices on 26 March 2011, if they are allowed to become final prices threaten to damage the integrity and reputation of the wholesale market for electricity".
History of reform Regulation of the electricity market started in a light-handed fashion but there has been an increasing trend towards more heavy-handed regulation. Light-handed regulation is based on the threat of regulation providing an incentive on companies with market power to exercise self-regulation. The normal regulatory legislation such as the Companies Act, Electricity Act, Resource Management Act 1991, Commerce Act 1986, and Fair Trading Act 1986 provide the framework for regulating normal commercial and environmental transactions.