Understanding New Zealand’s energy ecosystem - Part 1: Generators

The wholesale energy market as of late has been getting significantly more attention in the media. Most recently the main reasons for this have been the steep hike in electricity and gas prices for the everyday New Zealander, the staggering profits made by three of the Gentailers and the Government’s focus and criticism of this.

Electricity generation is complex with many participants and the everyday New Zealander is usually not aware of how the industry operates and the reasons for power price increases. At Reliance Utilities, we believe that sharing our in-depth knowledge of the industry with New Zealanders better equips them to have more control over their power bills. This is why we are on a mission to shed light on how the industry operates, the tools and options available for consumers and how to be more efficient in using power.

Key players in the energy industry

To begin with, let’s look at some of the key players in the energy industry:

1. Generators: There are approximately 80 generation companies, 62 retailers and 4 major gentailers (companies that act as both generators and retailers). The majority of power is generated by Meridian, Genesis, Mercury, and Contact, and most of this power comes from renewable sources.
2. Transmission: The National Grid, managed by Transpower, transports electricity from generators to substations across the country. This network ensures reliable supply and integrates renewable energy.
3. Distribution: Local distribution networks, more commonly known as the lines companies, deliver electricity to consumers. They maintain the infrastructure and ensure safety and reliability. Some of the well-known lines companies are: Examples include Vector and Powerco, which manage Auckland’s and Central North Island’s electricity distribution, respectively.
4. Retail: Electricity retailers purchase power from generators and sell it to consumers. This is who the everyday Kiwi knows about generally and interacts with when it comes to their power bill. There’s significant competition among retailers, offering various pricing plans and services.
5. Price comparison sites: There are several price comparison sites such as Power Switch where a customer can compare power prices. These sites are usually very easy to navigate and helpful for residential clients. The downside of these sites however is that they don’t cater well towards businesses. Businesses can sometimes have unique supply needs based on the industry and require a more specific analysis. Furthermore, they usually display the generic promotional price currently available.
6. Brokerage companies: Broker companies on the other hand usually have access to better rates due to the knowledge of the industry, buying power and relationship with suppliers. Brokers predominantly focus on businesses but also support residential clients too. While the energy broker industry is relatively small in New Zealand, in this volatile energy industry, more and more New Zealanders are turning to brokers to help negotiate better prices on their behalf.
7. Regulation: The Electricity Authority regulates the market to promote competition and efficiency. It also oversees market rules, consumer protection, and investment in infrastructure. Independent dispute resolution schemes, such as Utilities Disputes, which offer free services to resolve any complaints consumer may have.

How Generators operate in the energy market

While there are several generation companies, the majority of New Zealand power is generated by four companies – Meridian, Genesis, Mercury and Contact. These companies are also operating as retailers. Most of our power is generated through renewable sources such as hydro, wind and geothermal. According to the Electricity Authority website, in 2022, 87% of our power was generated through renewable sources. Despite this, the reliance on renewable energy sources like hydro has led to price volatility when conditions are not favourable, such as during dry spells that reduce hydro capacity.

Generators need to compete in the wholesale market to sell the power they generate. The wholesale market is where Generators sell electricity and retailers buy electricity through the spot and hedge markets. Retailers then sell that electricity to businesses and households in New Zealand.

The wholesale market consists of two main components: the spot market and hedge market. Since electricity cannot be stored, the amount of electricity produced needs to match the amount consumed. Otherwise, there could be blackouts. The Spot market is used to match the supply and demand of electricity and also to calculate the price based on this.

Generators make offers to supply electricity. These offers are made to cover a half-hour period into the future. Transpower who acts as the system operator, then ranks these offers in the order of the lowest price. They also take into consideration how far the generator is from the area where power is needed.

Retailers and major users then make bids to buy that power. Prices are usually more expensive for areas that are further from areas where power is produced.

In the hedge market, Generators enter into future financial contracts with other participants. For both Generators and Retailers, the hedge market helps them protect against the rapid price changes in the spot market, reducing risk.

Spotlight on Gentailers

In August this year, Consumer NZ, Stuff and other major media outlets raised an alarm over the large profits reported by the top four gentailers – Merdian, Contact, Mercury and Genesis. The combined profits of these gentailers were a staggering $2.7 billion. That’s around $7.4 million profit every day over the past 12 months.

This has come at a time when businesses and households are under immense pressure with higher than-ever power prices and a slow economy.

Part of the problem could be how the New Zealand energy market is set up. We have recently experienced a shortage in New Zealand's hydro lakes, which is about 47% below normal levels earlier this year. This has created a scarcity resulting in generators increasing their prices in the wholesale market. Moreover, daily charges in Auckland, for example, have risen by 8.6% since April 2024. (Vector, 2024) (MBIE, 2024)

Associate Energy Minister, Shane Jones commented that the government is exploring the option of intervening into the electricity market to force major energy generators to cut prices.

While this may be a potential solution in the long run, an overhaul of the energy market, or government involvement may take a considerable amount of time. In the meantime, businesses and families are feeling the pressure of having high power prices. The best way we can do that in the immediate future is to create competition through proactively shopping around and negotiating with retailers for better rates. Yes, it takes a lot of time and knowledge, but in this market, its well worth it.