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Wholesale Market

Most consumers buy electricity on contract from retailers, who, in turn, purchase electricity on the wholesale market. Generators compete in the electricity spot market to generate electricity to satisfy demand. They do this by submitting ‘offers' to the System Operator. Each offer covers a future half-hour period (called a trading period) and is an offer to generate a specified quantity at that time in return for a minimum payment. The System Operator uses this price information to rank offers in order of price, and selects the lowest cost combination of offers to satisfy demand. The highest priced generator actually required for a given half hour sets the spot price for that trading period, and all generators are paid the spot price for their production.

Electricity spot prices can vary significantly across trading periods and locations, reflecting factors such as changing demand (e.g. lower prices in summer when demand is subdued) and supply (e.g. higher prices when hydro lakes and inflows are below average) and electrical losses and constraints on the transmission system (e.g. higher prices in locations further from generating stations).

In addition to retailers, a small number of customers, typically large industrial users, also buy electricity directly from the spot market. Spot market buyers will typically also enter into financial contracts (often called ‘hedges') with spot market sellers, which smooth out some or all of the volatility in spot prices. These contracts can be traded as the parties' needs change over time.

The spot and contracts markets are collectively called the wholesale electricity market. The Electricity Authority is responsible for overseeing the wholesale market and the service providers that perform the various market functions on a day to day basis. It is also responsible for ensuring the Electricity Industry Participation Code (the 'Code') which govern market operation remain efficient and relevant.

Spot Prices

Spot prices vary during the day and also on a seasonal basis, as illustrated in the two figures below which shows a rolling weekly average of historic spot prices at Otahuhu (Auckland). For most years, the annual pattern can be relatively flat, but events such as dry inflow periods and related decreases in hydro storage can result in spot prices rising.  In 2001, 2003, and 2008 these events lasted over several months, producing the peaks in the chart.