The Electricity Authority (EA) says households may be paying an extra $200 per year for power, as they subsidise the cheap energy the Tiwai Point Aluminium Smelter receives.
The Authority has just released its review into the wholesale electricity market to see if it is competitive, following a prolonged period of high spot prices and market volatility.
It said it is concerned that consumers might be paying to much for electricity because the generators Meridian and Contact Energy sold power to the smelter, which is also the country's biggest energy user, for half a billion dollars less that it cost to produce to keep it in New Zealand.
"The arrangement could be wasteful," EA chief executive James Stevenson-Wallace said, "The subsidy maintains demand and keeps prices high in the wholesale market."
He said as a consequence households could be paying up to $200 more per until 2024, when the power supply contract between the power generators and the smelter expires.
Stevenson-Wallace said the arrangement had led to greater electricity demand, higher wholesale electricity prices, and more gas and coal generation.
However, he said no competitions rules had been broken but it was looking at whether the market rules that allowed this to happen need to be changed.
The Authority's review extended back to 2018 when shortages at the Pohukura gas field first emerged, which had put upward pressure on prices.
The situation was compounded earlier this year when the ongoing gas shortages, combined with dry weather, low hydro storage and a lack of wind saw wholesale prices soar 7-fold.
This prompted questions from the Minister for Energy and Resources Megan Woods and the Major Electricity Users Group as to whether prices were aligned with the level of scarcity in the market.
"The review observed that elevated prices do not always match underlying supply and demand conditions and at times, the market price over cost is at times high ...though noting this sensitive to the cost assumptions used," Stevenson-Wallace said.
"There is some evidence that market power may have been exercised through economic withholding.
"However, different indicators provide conflicting views," he said.
There had been calls from small electricity retailers, who hedge their power contracts with generators to provide power at a fixed rate to consumers, for the separation of power retailers and generators.
The EA said it thought the issues were unrelated to generators owning retail businesses.
Meridian hits back
The company's chief executive Neal Barclay said the EA's analysis incorrectly speculates that if the smelter had closed this year wholesale prices would have been lower for residential customers.
"In reality, if the smelter closed the market would adjust, so any wholesale price effects would likely be relatively short-lived. And residential price effects are hard to predict."
The electricity retailer and generator rejected the view that the smelter's contract was priced to cheaply, saying if companies cannot that require a lot of electricity cannot sigh commercially competitive deals then they would not be able to survive.
Barclay added that the contract with the smelter provided benefits to the Southland economy, such as time to attract and secure new jobs and time for generators to plan and build new transmission and generation projects.
He also pushed back against suggestions that hydro generation should be offered more cheaply than other types of generation because its price point reflects scarcity and during a period of a gas shortage.
"If we had followed the Authority's guidance here and priced our hydro offers lower, there would be implications for security of supply.
"We have estimated that following the Authority's guidance this year would have meant that we would have run out of water well before winter and possibly as early as late March."