Independent expert panel report commissioned by Mercury

This submission, commissioned by Mercury for the Energy Competition Task Force and interested parties on “level playing field” proposal and underlying issues, was written by an independent expert panel involving Dr Stephen Batstone and David Reeve from Sapere.

The Task Force aims to tackle two concerns in New Zealand’s electricity market: potential market power in flexible hedge contracts and cost inequities between vertically integrated and independent firms. While the first is a legitimate competition issue, the second is less so. The Task Force’s proposed regulatory intervention—administered access to hedge contracts—would be a fundamental shift, involving the regulator in determining fair contract terms. This would increase complexity and alter expectations of the regulator’s role.

The Task Force’s formation was driven by high wholesale electricity prices during winter 2024. Its initial stance appears to assume these prices stemmed from weak competition due to vertical integration. It argues that gentailers give favourable internal contract terms, disadvantaging independents, especially in flexible, shaped hedge products. However, the Task Force has not clearly demonstrated this or provided evidence of market failure. It has reversed the burden of proof, expecting gentailers to prove they aren’t exercising market power.

The structure of wholesale prices doesn’t reward investment in security of supply, and neither do contract markets. The paper argues that high spot and contract prices were not caused by vertical integration or market power but by physical gas constraints and uncertainty. With growing reliance on intermittent renewables, flexible supply is becoming critical. While this may create future market power risks, the issue stems from fuel ownership concentration—not vertical integration. The Task Force’s proposed non-discrimination rules won’t solve this.

Economic analysis by Houston Kemp finds the Task Force’s “equal input regulation” could reduce competition and efficiency, particularly given difficulties in pricing complex risk products. Proposals for a strategic reserve (similar to 2003’s Whirinaki) are discouraged due to their distortionary impacts.

Finally, public data does not support claims of margin squeeze, stalled innovation, or crowding out of new generation. Industrial demand decline appears limited, with only the wood sector showing signs of further reduction.

For more information, the convenor of the expert panel, Tony Baldwin, has posted about this report on LinkedIn.