ASEC Calculates Value of Pulse Energy to Buller Consumers

Buller Electricity Ltd (BEL) is the small trust-owned electricity distribution network serving the Buller region. Andrew Shelley Economic Consulting Ltd (ASEC) was retained by BEL to estimate the value to BEL's consumer-owners of the company's ownership stake in Pulse Energy.

Frequent congestion or constraints on the transmission lines providing power to the region means that retailers operating in the area face high levels of wholesale electricity price risk. ASEC's analysis considers the risk management options that are available to a retailer, and how this leads to a regional retail electricity market. Limited risk management options for those retailers without generation increases risk and is likely to reduce competition,

Pulse Energy entered the retail electricity market in Buller region after Buller Electricity entered a recapitalisation agreement with Pulse Energy in 2010. BEL currently owns 59.47% of Pulse Energy. In the space of two years, Pulse Energy gained a market share of over 25% of Installation Control Points (ICPs), and currently maintains a market share of 23%-24% of ICPs. The process of competition would be expected to result in lower retail prices, providing BEL's consumer-owners with a benefit that is unlikely to have occurred absent the entry of Pulse Energy.

The actual market share of retailers is known, as are their actual prices. Estimates are developed of the market share and weighted average retail price that might have prevailed but for the entry of Pulse Energy. Comparing this "counterfactual" weighted retail price with the actual retail price provides an estimate of the benefit per kWh. Average annual loads for consumers on the BEL network then allow the calculation of an annual benefit. This is converted to a net present value over the period 5-15 years, using a social discount rate. The period 5-15 years is the timefame over which independent generation might be expected to enter the regional electricity market, providing opportunities for retailers to hedge their exposure to transmission constraints.

A copy of the ASEC report can be downloaded from the Buller Electricity website here.
View the Buller Electricity press release here.

ASEC Disagrees with Electricity Authority Proposals

Andrew Shelley Economic Consulting Ltd (ASEC) has submitted on its own behalf to the Electricity Authority's ("the Authority's") consultation on the use of the "loss and constraints excess" (LCE) to offset transmission charges.*

The Authority issued its working paper, Transmission pricing methodology: Use of LCE to offset transmission charges, on 21 January 2014. ASEC made this submission because the Authority's working paper lacked the intellectual rigour that should reasonably be expected from professional economists. In a letter to the Authority, Andrew Shelley states that "it is important to distinguish between conjectures that seem logical and robust demonstrations of fact."

Mr Shelley's letter demonstrates that the LCE should be returned to the party paying for transmission. If this is not done then locational marginal pricing creates a distortion in favour of market participants owning transmission assets (and thereby keeping them out of the wholesale electricity market). Mr Shelley also argues that the resulting “muting” of the marginal price signal is not a concern from an economic perspective, with a price equal to marginal cost only being optimal in a narrow set of circumstances such as perfect competition.

It has been claimed that payment of LCE to parties that pay for transmission could introduce a risk that generators would "game" the LCE. Mr Shelley examines this claim and concludes that it is unlikely that generators will have such an incentive, with an increase in LCE normally being associated with a decrease in generation and decrease in profitability.

ASEC's letter to the Authority can be downloaded here.

Note: The LCE arises from the pricing system used in the wholesale electricity market. Locational marginal prices are set based on the marginal cost of electrical losses and constraints, whereas the average cost of losses is the cost actually incurred. A fundamental characteristic of the physics of electricity is that electrical losses are proportional to the square of current, which means that marginal losses are greater than average losses. In the wholesale electricity market this means that more money is collected from customers than is paid to generators, and the difference is termed the "loss and constraints excess". This does not represent a super-profit, but is instead currently returned to consumers by way of a reduction in lines charges.