Meridian says government plans haven't changed its actions

Power prices are being pushed up by Meridian's strategy of holding back water in the Waitaki hydro system to protect itself against changes aimed at improving the electricity market, according to analysts.

However, state-owned Meridian says it is acting prudently ahead of winter and the government's plans have little bearing on its market behaviour.

The proposed changes include a mandatory floor on spot prices during conservation campaigns and rolling outages, and requiring Meridian to transfer the Tekapo A and B hydro power stations to state-owned Genesis Energy.

Meridian would receive the thermal reserve plant at Whirinaki.

The aim is to create more competition and make power cheaper.

The Tekapo stations effectively control water flows down the Waitaki River to Meridian's remaining six hydro stations downstream.

Power prices rose at the start of the year, and there was unusually low transfer of power north from the hydro stations despite decent storage, a report commissioned by the Major Electricity Users Group shows.

The report, by Energy Link, says Meridian as the major hydro generator contributed to the price rise by rationing the stored water in the Waitaki system.

"We always have to balance the commercial imperatives against the risks, and at that time of year you've always got an eye on winter and we manage those reservoirs in a prudent and responsible manner," Meridian spokesman Alan Seay told NZPA.

Recent heavy rainfall meant the hydro lakes were almost full, well above average levels for this time of year, he said.

Power prices rose steadily over January-March, during which time a dry spell and lower lake levels was broken by heavy rain and good storage levels.

The report concluded that Meridian was operating the Waitaki system more conservatively than in the past, holding higher storage in lakes Pukaki and Takapo as a hedge against what it feared could be higher exposure to dry year spot prices than in previous years.

The company was offering more power at high prices, meaning less was likely to be taken up.

"According to Meridian, the higher net dry year exposure is likely to arise indirectly from recently announced market reforms, aggravated by reduced HVDC (Cook Strait cable) capacity southward," the report said.

Other factors driving prices higher were low levels at Lake Taupo for North Island hydro storage; low levels in the Manapouri and Clutha catchment; and a prolonged and unplanned outage at Contact Energy's Otahuhu B plant.

"Whether or not final decisions have been taken on the exact nature and timing of proposed market reforms, the fact that the loss of Tekapo and the addition of substantial hedges to Meridian's portfolio are likely in the medium term, is sufficient to warrant review of, and possibly changes to operating strategies," the report found.

Meridian has taken hedges with Genesis giving it a possible 1450 GWh per year exposure in the South Island, expected to result in Meridian losing South Island customers but gaining North Island customers.

The MEUG commissioned the report because of concerns about a mismatch between lake levels and electricity spot prices since March, group executive director Ralph Matthes said.

Compared with past years, Meridian had changed its "offer behaviour" although it was not possible to determine the reason unless more information was made available.

Energy advocate Molly Melhuish said the government's policy would mean higher, not lower, prices for consumers.

Competition may increase as a result of the changes, but it came at a cost, she said.

The electricity asset swap was set to cost domestic electricity users at least $89 a year, she calculated.

In March, Meridian said the changes had the potential to cause high prices on the spot market by pushing up hedge prices.

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