Friday, 21 August 2009

ETAG Report and Wholesale Competition

As I noted yesterday, the ETAG report has some recommendations to improve the wholesale market. Their main recommendation is to require some asset swaps between Meridian and Genesis so that Meridian would own some thermal generation units in the North Island and Genesis some hydro units in the South Island.

Over at Progressive Turmoil, this is seen as
an implicit admission that the contracts market doesn’t work properly. In principle, these two firms should have been able to (and should have wanted to) contract for exactly the same outcomes as will be delivered by the asset swap.
I am not so sure. The ETAG is a bit equivocal in its treatment of wholesale market power. I suspect that the members of the group were unable to reach a consensus. The recommended asset swap may simply be a case of a policy that would increase competition if there were market power and do no damage if there is not, and so can be recommended even without an admission that the “contracts market doesn’t work properly”. I can also imagine a story in which decision making under uncertainty in the allocation of scarce hydro resources would work better if each hydro-owning generator were able to substitute to its own thermal capacity.

In any event, there is another reason why a swap of some of Meridian’s South Island hydro capacity with some of Genesis’ North Island thermal capacity is an attractive policy suggestion. More on this later….

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