References ( [1] , [2] )

[1] . Pages 11-13

[2]

a. Fig. 2 shows the spot market prices for locations at Benmore, Haywards, Invercargill and Otahuhu. It is apparent peak pricing occurred around September the 9th, 2021. Given an explanation for why prices peaked on this day. Sunday, 12 September 2... Weekly Prices - $/MWh Benmore Haywards Invercargill Otahuhu 500 0 06 Sep 07 Sep 08 Sep 09 Sep 10 Sep 11 Sep 12 Sep Fig. 2 b. Generation companies in New Zealand have been criticised as manipulating the market to keep wholesale prices artificially high and making excessive profits [2]. Using information from (1) pages 11-13, explain one mechanism by which prices may be able to be manipulated by large generation companies. wholesale R etailers, and a small number of customers, typically large industrial users, buy electricity directly from the spot market. These parties will typically also enter into financial contracts, often called hedges, which smooth out some or all of the volatility in spot prices. Jointly, the spot and hedge markets are the major components of the wholesale electricity market, which also includes the instantaneous reserves market and the ancillary services market. 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 resources to satisfy demand. The highest-priced generator actually required 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). 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. The Authority is responsible for the effective day-to-day operation of the electricity market in accordance with the Code, with governance and compliance responsibilities, including market development, performance monitoring and breach investigation. Generators that are bigger than 30 MW or are grid-connected, compete in the electricity spot market for the right to generate electricity to satisfy demand, subject to transmission capacity. They do this by submitting offers through the Wholesale Information and Trading System (WITS). Each offer covers a future half-hour period (called a trading period) and is an offer to WHOLESALE MARKET PAYMENTS (S MILLION). DRY-YEAR IMPACT 2008 IS CLEARLY EVIDENT $200 $400 $600 $800 $1,000 $1,200 $1,400 $0 Jan Feb Mar May The Authority undertakes the function of Market Administrator and as with the Registry and Reconciliation functions (page 8) contracts service providers to perform the core wholesale market and system operation services. NZX is contracted to provide three services: Pricing Manager, Clearing Manager, and the Wholesale Information and Trading System (WITS). Pricing Changing demand and supply over the course of a day results in price differences each half-hour trading period. Prices also vary by location, reflecting the costs of getting electricity from source (generators) to destination (consumers). As Pricing Manager, NZX is the service provider responsible for calculating and publishing the spot prices at which electricity market transactions are settled. These are referred to as final prices in the Code. Prices are derived using the same model the System Operator uses to dispatch generation. The model calculates prices at each node, in accordance with Section 13 of the Code for each trading period based on generator offer prices and quantities, demand and system conditions. These final prices are provided to the Clearing Manager to use in the clearing and settlement processes. The Pricing Manager calculates approximately 14,000 prices every day, which are published to market participants through WITS. Clearing In its role as Clearing Manager, NZX is the service provider responsible for ensuring that wholesale market participants are paid, or pay, the correct amount for the electricity they generated or consumed during the previous month, in accordance with Part 14 of the Code. This involves a number of tasks, the primary one being invoicing participants for the sale and purchase of electricity and related services. On a monthly basis, the Clearing Manager does this by combining the reconciled quantity information provided by the Reconciliation Manager, with half-hourly pricing information from the Pricing Manager, to determine the amounts owed to, and by, each market participant. On average, over the last five years, $310 million worth of electricity transactions passed through the clearing system per month. The Clearing Manager also plays an important part in maintaining market confidence, and under the Code, it has the role of administering prudential requirements in the form of acceptable credit ratings or securities, for the purpose of ensuring purchasers of electricity or ancillary services can meet their payment obligations. Jun Jul Aug Sep Oct Nov Dec 2004 2005 2006 2007 2008 2009 2010 Rulings Panel As with other matters, such as breaches and disputes between participants, prudential security decisions made under the Code may be appealed to an independent Rulings Panel. The Panel is appointed by the Governor-General on the recommendation of the Minister of Energy, after consultation with the Authority. LOCAL GENERATORS DIRECT CONSUMERS GRID INJECTION POINTS (GIP) e IT 990 CONSUMERS DISTRIBUTION TRANSMISSION GRID EXIT POINTS (GXP) GENERATION METERING EQUIPMENT OWNERS REGISTRY (Jade Direct) SYSTEM OPERATOR (Transpower) RECON CILIATION (NZ Stock Exchange) MARKET ADMIN- ISTRATION (Electricity Authority) CLEARING (NZ Stock Exchange) METERING STANDARDS (Test Houses) WHOLESALE INFORMATION (NZ Stock Exchange) PRICING (NZ Stock Exchange) DATA MANAGEMENT (Traders) ENERGY HEDGE MARKET The information system The WITS Manager operates the electricity market wholesale information and trading platform. It is the system used by electricity market participants to upload their bids and offers. WITS also delivers pricing, scheduling and other market data to participants and other parties. Operation of the system as required by Part 13 of the Code, is contracted out to NZX. WITS also offers a free-to-air service providing price, demand and hydrology information for general interest. www.electricityinfo.co.nz The Market Administrator In October 2004 when the existing Market Administrator Service Provider Agreement expired, rather than contract this function out again, the Electricity Commission assumed the role itself. As the Market Administrator today, the Authority provides several operational and administrative services, mostly in regard to the retail market. The hedge market The wholesale hedge market allows parties to agree contracts to partially or fully offset prices paid on the spot market. Traditionally, the hedge market in New Zealand has operated through over-the-counter (OTC) contracts, where buyers negotiate directly with sellers to agree on a price. These contracts can be customised and offer flexibility for both parties. Energy Hedge was established in 2004 and is used by the five large generators as a trading platform for more standardised OTCs. Recently, buyers and sellers of electricity have been able to contract on the futures market operated by the Australian Stock Exchange (ASX). These exchange-based contracts are standardised and participants may move more to these in future. A report by the Major Electricity Users' Group (MEUG) showed Meridian produced $3.5 billion in excess of the cost of capital - a claim questioned by the power company. The Economic Profitability Analysis, carried out by Ireland Wallace and Associates, also showed $1.96 billion (56 percent) of the excess profit was over the past five years. The users group's chair John Harbord said the study was done due to a lack of confidence in the wholesale electricity market. He said the other big power companies also need to be studied to give a full picture and help the Electricity Authority which is carrying out a comprehensive review of the market. "This analysis gives us a partial picture. So I think it's important that we don't soit of resoit to a knee jerk reaction to this. "I think it's really important that we do wait for the Electricity Authority's review to be published next month, before we start talking about what should be done about it. "But certainly, ourselves, our members and other businesses I know have been talking about the impact of these high wholesale electricity prices for some years now," Harbord said. He said there were "market complexities" behind the rise in levels of profitability that were above the Commerce Commission's criteria for persistent excess profit. "This raises some complex questions relating to largely unexplained pricing events, which we believe the regulator needs to work through and answer with the sector, households, SMEs and major electricity users. "At stake is the future of New Zealand's industrial manufacturing and processing base which represents some of the most emissions efficient in the world, including many of the highly skilled jobs which underpin regional economies throughout New Zealand," Harbord said. Meridian casts doubts over the report Meridian declined to be interviewed, but in a statement it questioned the credibility of the group, saying its findings were "radically out of step" with the 2018 Electricity Price Review, and independent analysis by PricewaterhouseCoopers. "The lack of transparency around the release isn't usual form for the business community, which leads us to question the report's credibility and the tactics behind its release today," Meridian chief financial officer Mike Roan said. The company said it has not had the opportunity to fully review the report. "MEUG represents some sophisticated large commercial entities, who may or may not have hedged their exposures to the recent wholesale market highs. We appreciate this is a challenging time, however, there are more constructive ways to achieve a better outcome. "The conversation we all should be having is how we work together to support these large companies make the changes we all need to make, to transition to a zero-carbon future," Roan said. He said Meridian has been active with MEUG members on the point, both on pricing and supporting them to transition away from fossil fuels. a. Fig. 2 shows the spot market prices for locations at Benmore, Haywards, Invercargill and Otahuhu. It is apparent peak pricing occurred around September the 9th, 2021. Given an explanation for why prices peaked on this day. Sunday, 12 September 2... Weekly Prices - $/MWh Benmore Haywards Invercargill Otahuhu 500 0 06 Sep 07 Sep 08 Sep 09 Sep 10 Sep 11 Sep 12 Sep Fig. 2 b. Generation companies in New Zealand have been criticised as manipulating the market to keep wholesale prices artificially high and making excessive profits [2]. Using information from (1) pages 11-13, explain one mechanism by which prices may be able to be manipulated by large generation companies. wholesale R etailers, and a small number of customers, typically large industrial users, buy electricity directly from the spot market. These parties will typically also enter into financial contracts, often called hedges, which smooth out some or all of the volatility in spot prices. Jointly, the spot and hedge markets are the major components of the wholesale electricity market, which also includes the instantaneous reserves market and the ancillary services market. 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 resources to satisfy demand. The highest-priced generator actually required 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). 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. The Authority is responsible for the effective day-to-day operation of the electricity market in accordance with the Code, with governance and compliance responsibilities, including market development, performance monitoring and breach investigation. Generators that are bigger than 30 MW or are grid-connected, compete in the electricity spot market for the right to generate electricity to satisfy demand, subject to transmission capacity. They do this by submitting offers through the Wholesale Information and Trading System (WITS). Each offer covers a future half-hour period (called a trading period) and is an offer to WHOLESALE MARKET PAYMENTS (S MILLION). DRY-YEAR IMPACT 2008 IS CLEARLY EVIDENT $200 $400 $600 $800 $1,000 $1,200 $1,400 $0 Jan Feb Mar May The Authority undertakes the function of Market Administrator and as with the Registry and Reconciliation functions (page 8) contracts service providers to perform the core wholesale market and system operation services. NZX is contracted to provide three services: Pricing Manager, Clearing Manager, and the Wholesale Information and Trading System (WITS). Pricing Changing demand and supply over the course of a day results in price differences each half-hour trading period. Prices also vary by location, reflecting the costs of getting electricity from source (generators) to destination (consumers). As Pricing Manager, NZX is the service provider responsible for calculating and publishing the spot prices at which electricity market transactions are settled. These are referred to as final prices in the Code. Prices are derived using the same model the System Operator uses to dispatch generation. The model calculates prices at each node, in accordance with Section 13 of the Code for each trading period based on generator offer prices and quantities, demand and system conditions. These final prices are provided to the Clearing Manager to use in the clearing and settlement processes. The Pricing Manager calculates approximately 14,000 prices every day, which are published to market participants through WITS. Clearing In its role as Clearing Manager, NZX is the service provider responsible for ensuring that wholesale market participants are paid, or pay, the correct amount for the electricity they generated or consumed during the previous month, in accordance with Part 14 of the Code. This involves a number of tasks, the primary one being invoicing participants for the sale and purchase of electricity and related services. On a monthly basis, the Clearing Manager does this by combining the reconciled quantity information provided by the Reconciliation Manager, with half-hourly pricing information from the Pricing Manager, to determine the amounts owed to, and by, each market participant. On average, over the last five years, $310 million worth of electricity transactions passed through the clearing system per month. The Clearing Manager also plays an important part in maintaining market confidence, and under the Code, it has the role of administering prudential requirements in the form of acceptable credit ratings or securities, for the purpose of ensuring purchasers of electricity or ancillary services can meet their payment obligations. Jun Jul Aug Sep Oct Nov Dec 2004 2005 2006 2007 2008 2009 2010 Rulings Panel As with other matters, such as breaches and disputes between participants, prudential security decisions made under the Code may be appealed to an independent Rulings Panel. The Panel is appointed by the Governor-General on the recommendation of the Minister of Energy, after consultation with the Authority. LOCAL GENERATORS DIRECT CONSUMERS GRID INJECTION POINTS (GIP) e IT 990 CONSUMERS DISTRIBUTION TRANSMISSION GRID EXIT POINTS (GXP) GENERATION METERING EQUIPMENT OWNERS REGISTRY (Jade Direct) SYSTEM OPERATOR (Transpower) RECON CILIATION (NZ Stock Exchange) MARKET ADMIN- ISTRATION (Electricity Authority) CLEARING (NZ Stock Exchange) METERING STANDARDS (Test Houses) WHOLESALE INFORMATION (NZ Stock Exchange) PRICING (NZ Stock Exchange) DATA MANAGEMENT (Traders) ENERGY HEDGE MARKET The information system The WITS Manager operates the electricity market wholesale information and trading platform. It is the system used by electricity market participants to upload their bids and offers. WITS also delivers pricing, scheduling and other market data to participants and other parties. Operation of the system as required by Part 13 of the Code, is contracted out to NZX. WITS also offers a free-to-air service providing price, demand and hydrology information for general interest. www.electricityinfo.co.nz The Market Administrator In October 2004 when the existing Market Administrator Service Provider Agreement expired, rather than contract this function out again, the Electricity Commission assumed the role itself. As the Market Administrator today, the Authority provides several operational and administrative services, mostly in regard to the retail market. The hedge market The wholesale hedge market allows parties to agree contracts to partially or fully offset prices paid on the spot market. Traditionally, the hedge market in New Zealand has operated through over-the-counter (OTC) contracts, where buyers negotiate directly with sellers to agree on a price. These contracts can be customised and offer flexibility for both parties. Energy Hedge was established in 2004 and is used by the five large generators as a trading platform for more standardised OTCs. Recently, buyers and sellers of electricity have been able to contract on the futures market operated by the Australian Stock Exchange (ASX). These exchange-based contracts are standardised and participants may move more to these in future. A report by the Major Electricity Users' Group (MEUG) showed Meridian produced $3.5 billion in excess of the cost of capital - a claim questioned by the power company. The Economic Profitability Analysis, carried out by Ireland Wallace and Associates, also showed $1.96 billion (56 percent) of the excess profit was over the past five years. The users group's chair John Harbord said the study was done due to a lack of confidence in the wholesale electricity market. He said the other big power companies also need to be studied to give a full picture and help the Electricity Authority which is carrying out a comprehensive review of the market. "This analysis gives us a partial picture. So I think it's important that we don't soit of resoit to a knee jerk reaction to this. "I think it's really important that we do wait for the Electricity Authority's review to be published next month, before we start talking about what should be done about it. "But certainly, ourselves, our members and other businesses I know have been talking about the impact of these high wholesale electricity prices for some years now," Harbord said. He said there were "market complexities" behind the rise in levels of profitability that were above the Commerce Commission's criteria for persistent excess profit. "This raises some complex questions relating to largely unexplained pricing events, which we believe the regulator needs to work through and answer with the sector, households, SMEs and major electricity users. "At stake is the future of New Zealand's industrial manufacturing and processing base which represents some of the most emissions efficient in the world, including many of the highly skilled jobs which underpin regional economies throughout New Zealand," Harbord said. Meridian casts doubts over the report Meridian declined to be interviewed, but in a statement it questioned the credibility of the group, saying its findings were "radically out of step" with the 2018 Electricity Price Review, and independent analysis by PricewaterhouseCoopers. "The lack of transparency around the release isn't usual form for the business community, which leads us to question the report's credibility and the tactics behind its release today," Meridian chief financial officer Mike Roan said. The company said it has not had the opportunity to fully review the report. "MEUG represents some sophisticated large commercial entities, who may or may not have hedged their exposures to the recent wholesale market highs. We appreciate this is a challenging time, however, there are more constructive ways to achieve a better outcome. "The conversation we all should be having is how we work together to support these large companies make the changes we all need to make, to transition to a zero-carbon future," Roan said. He said Meridian has been active with MEUG members on the point, both on pricing and supporting them to transition away from fossil fuels