Meridian blamed for $80m of power cost over-charging

Electricity consumers may have been over-charged by as much as $80 million in December after generators charged more for power than usual when hydro-lakes were full and spilling, the Electricity Authority says.

Meridian Energy, the country's biggest generator, chose to reduce its generation and spill water in order to keep power flows moving on the high-voltage link to the North Island - the HVDC - thus holding up prices in the South Island.

While all South Island generators benefited from the higher prices - and both Genesis Energy and Contact Energy had also been spilling - the authority is most concerned by Meridian's actions.

It considers they were sufficiently serious to have potentially created an "undesirable trading situation" - or a UTS - in the wholesale power market. Such an event - last declared in 2011 - must be serious enough to have shaken confidence in the pricing in the electricity market.

"Thermal generation ran in the North Island when South Island stations were spilling, despite the HVDC not being at capacity and abundant hydro fuel," authority chief executive James Stevenson-Wallace said.

"When we looked to the companies involved and viewed in isolation, the authority considered the behaviour of Contact and Genesis would not constitute a UTS.

"Meridian's behaviour was material enough to constitute a UTS and was contrary to previous advice to Meridian that we do not agree with using offers to manage transmission constraints."

The authority is yet to propose "corrective action" at this stage and a separate investigation is underway as to whether the generators may have also breached the industry's standards for high trading conduct.

The authority will spend the next nine weeks consulting with industry.

Meridian said it is reviewing the decision but noted that it was dealing with "exceptional" weather events at the time.

It said it was the first time in its history that it had spilled from all its hydro structures, with significant inflows to the Waitaki catchment and both Lake Te Anau and Lake Manapouri recording the second-highest lake levels on record.

Contact chief generation and development officer James Kilty said there is still a "long way to go in terms of the process."

He said the company had been managing an extreme flood event at the time and had always disagreed with the allegations. It would be "fully engaging" with the authority's consultation process.

Meridian's shares rose 1% to $4.99. Contact shares rose 1.4% to $6.33 and Genesis shares rose 0.5% to $3.02.

The complaint was kicked off by Haast Energy Trading, which also had the backing of renewable retailer Ecotricity, Flick Electric, Oji Fibre Solutions, Pulse Energy and Vocus.

They complained in December that South Island power prices should have been much lower, given the level of flooding in the lower South Island in November and December and the volume that Meridian and Contact were spilling from their dams.

Usually when dams are spilling, the value of the stored water falls close to zero. That often results in much lower spot electricity prices and sometimes stark differences in prices between regions and islands.

While the authority investigated trading from November 10 to January 16, it believes the UTS only existed from December 3 to December 18. Power prices subsequently fell as demand dropped with the start of summer holidays.

Complicating factors were gas shortages and preparations North Island generators were taking to store water for a major upgrade of the HVDC link starting in January. Hydro generators also have resource consent obligations to comply with during such major flood events.

The authority noted that during December it did not see the price separation that it would have expected during such big flood events. Nor did northward transmission become constrained as it would have also expected.

While offer prices fell at Contact's power stations on the Clutha River and at the Tekapo scheme run by Genesis, Meridian's pricing from its Waitaki stations only fell for a period before increasing around December 12, the authority said.

"Despite this short period when offer prices fell, offer prices at Meridian's Waitaki stations were much higher than at other stations in the South Island throughout the entire investigation period."

The authority estimates that the unnecessary spilling of water reduced available South Island electricity generation by about 41 gigawatt-hours.

That made South Island electricity more expensive than it needed to be and in-turn required more costly gas and coal-fired generation on the North Island to run instead.

Even with those plants running, the authority believes another 12.6 gigawatt-hours of generation was required from Mercury NZ's Waikato River hydro scheme.

The authority noted that that foregone storage in Lake Taupo likely meant the industry was less resilient during the major work programmes on the HVDC link and at the Pohokura gas field earlier this year, than it would have been otherwise.

Late last year, Genesis chief executive Marc England said there had been a structural change in the way competing generators were pricing their energy.

Whereas thermal plant operators used to compete with hydro plants to get their production into the market, high coal and gas prices had now created a higher price "floor" in the market which some hydro operators were now pricing their output up to, he said.

If today's preliminary finding is confirmed it will be the first from four UTS complaints the Electricity Authority has considered since 2011.

In mid-2016, during high winter evening demand, Meridian prompted a similar complaint from Electric Kiwi by raising the pricing on some of its South Island generation to stop prices on the two islands separating and leaving the firm's North Island retail business exposed to very high power prices.

The authority ruled that was not a UTS, but an investigation was initiated into the standard of Meridian's trading conduct. No formal complaint was laid by the authority, but it declared a breach and a warning letter was sent.