The electricity sector will be in for radical upheaval if
there is a change of government.
Power bills have been rising relentlessly. Electricity prices
rose 12.1 per cent over the three years to June, according to
Statistics New Zealand's consumers price index. That
outstrips the cumulative rise in the average wage (7.7 per
cent) and general inflation (3.3 per cent) over the same
The two sides of politics are divided on how best to rein
that in -- competition or regulation.
The National Government introduced changes in 2010 intended
to make the energy side of the industry more competitive and
points to various measures to indicate they have had that
But Labour and the Greens see a structural rip-off in the way
wholesale power prices are set. They announced in April last
year a plan to scrap the wholesale electricity market set up
in the 1990s and replace it with a single buyer in the form
of a Crown entity called New Zealand Power, inserted between
generators and electricity retailers (which are generally the
NZ Power would decide which power stations would run when and
how much they would be paid for their electricity. That would
be based on fuel costs -- nothing in the case of hydro and
wind -- and a fair return on the historic cost of the
generating assets. There is a lot of room for argument about
what a fair return would be and how to define the historic
New generating capacity would be commissioned through a
competitive tender process.
It would be a return, in short, to central planning as in the
days of the old New Zealand Electricity Department, except
that this time the capital at risk largely belongs to private
investors, not taxpayers.
However, any relief for hard-pressed households - around $300
a year on average, Labour claims - that might result from
such a radical change is some way off. Labour's alternative
Budget books a cost to the taxpayer from NZ Power of around
$90 million a year, but not until the 2017/18 financial year.
"We haven't put a strict date on it because we have to work
through the details," Labour energy spokesman David Shearer
NZ Power's critics say it is badly targeted, arguing that
most of the recent rises in power bills do not reflect the
cost of energy but higher charges for getting the power to
us, over the national grid (which has had billions of dollars
spent on upgrading it) and the local lines networks.
Both are monopolies whose charges are regulated by the
Commerce Commission and would not be affected by any changes
to the wholesale electricity market.
The Ministry of Business, Innovation and Employment
undertakes a quarterly survey of domestic energy prices. It
has recorded a rise of 2c a kilowatt hour or 8 per cent over
the three years to May 2014 (only two-thirds of the rise the
statisticians' CPI reports), but 90 per cent of the increase
is in line charges.
"I've spoken to the lines companies about that and they
dispute it," Mr Shearer said.
So we have both sides of the industry, energy and lines,
blaming the other for higher power bills and about the only
thing politicians can agree on is the need for greater
transparency in this area.
Another criticism of the NZ Power plan is that if the real
problem is energy poverty, that is more about incomes and
insulation standards in housing than the fact that hydro
generators don't have to pay for their fuel or that the cost
of building their dams was heavily subsidised by the
taxpayers of old.
"That's a fair point. If people are poor they will start
making choices around food or electricity or petrol or
whatever," Mr Shearer said. "We aren't going to be reckless
about this. We will work through it cautiously. But we are
not satisfied that what we have got at the moment will meet
the future needs of New Zealand or is fair on consumers."
NZ Power's critics say any reform has to be fair on investors
too. The wholesale market is designed to push average
wholesale prices up to the long-run marginal cost of new
generation, to ensure that the cheapest next increment in
generating capacity gets built and the lights stay on.
Labour and the Greens say that system allows generators whose
fuel costs are minimal and whose capital costs are long sunk
to make out like bandits.
But the generators are also electricity retailers. They are
both buying and selling in the wholesale market and the
impact of wholesale prices on their profitability will depend
on whether they are net buyers or net sellers in any given
half-hour period at any given point in the grid. They try to
minimise that commercial risk.
What scrapping the market will do, however, is remove price
signals about whether the hydrology is looking menacing and
it is worth conserving water in the lakes and cranking up
gas-fired generation earlier than usual. That decision would
be left instead to NZ Power's engineers and their
And regulating to eliminate generators' pricing power could
distort the economics of investment in new generation in a
way that would crowd private capital out, the critics argue.
Mr Shearer argues that is backward-looking, puts too much
emphasis on the supply side and ignores the potential for
technology and public policy to reduce demand through things
like more-efficient appliances and more insulation.
"We are not necessarily looking at too much more
[generation]. The world is changing quite quickly."
Single-buyer model just nationalisation: ex-boss
Doug Heffernan is not a fan of what Labour and the Greens
plan to do to the electricity sector.
Dr Heffernan retired last Friday as chief executive of Mighty
River Power after nearly 40 years in the industry, during
which he witnessed radical structural changes.
He worked for the New Zealand Electricity Department and its
corporatised successor, ECNZ. He was chief executive of Power
New Zealand, before the local power companies were split into
lines and retail energy businesses.
And he had been chief executive of Mighty River Power since
it was carved out of ECNZ as a state-owned enterprise and
latterly as a listed company under the mixed-ownership model.
Dr Heffernan views the Labour/Greens' New Zealand Power plan
as a political attempt to derail partial privatisation.
"I am definitely not an ardent supporter of the single
buyer," he said, "despite being an engineer in my roots.
Engineers usually like to come up with the most elegant
design and that can lead you to things like single buyer, but
what we have seen in the last 20 years is what most of the
public understand, the benefit of having a diversity of views
He warns of inevitable unintended consequences. Mighty River
already has an alternative plan around reinvestment in its
hydro stations if the cashflows that would require are
Under the NZED central planning model, nearly every
generation investment decision was a bad one, he said, citing
Marsden B (built to run on oil but which never generated a
single kilowatt hour), the Clyde Dam with its massive
over-runs and Huntly, designed to run on coal but which spent
most of its life gas-fired.
"I'm old enough to remember the shortages in the 1970s
because someone made the wrong decision about what plant to
run. Same thing happened in 1992. We actually ran out of
electricity," he said.
"That is what has surprised me over my career. To go from a
position where you think the smartest brains would work out
the best thing to do, to a system where a diversity of
thinking has created far better outcomes."
Dr Heffernan sees the single-buyer model as a form of
"They say, yes, it is someone else's capital but we will
control the outcomes. That's equivalent of having
nationalised the industry."
- by Brian Fallow, NZ Herald