More power reforms

We observed in August when the Ministerial Electricity Market Review report was published that the information it provided was not reassuring with respect to the public's expectations of lower electricity costs.

While it concluded "there appears to be room for substantial improvement in the level of competitiveness at retail level", it also noted that consumers had to realise building new capacity to meet increased demand had to be paid for, at a rough estimate of about half a billion dollars a year.

We asked that if, as the Minister of Energy, Gerry Brownlee, insisted, the "primary goal of the review is to tackle the steep price increase to the consumer power bill over the last 10 years, and to examine ways to reduce vulnerability in dry years", what did the Government actually mean?

Did it intend to force power prices down?

Did it plan to require generators to recompense consumers for the past decade of venality?

Well, Mr Brownlee has now shown his hand, and we remain unconvinced that lower power prices will result with any speed.

Indeed, in certain circumstances, consumers could be worse off.

At best, the rate of power price increases may be slowed.

The idea of forcing a "rebalance" of generating systems between power companies in both the North and South Islands is, in theory, sound.

Thus, companies which have dominated parts of the country, such as state-owned Meridian in the South Island, will be forced to shed two of its Waitaki River generators to the North Island's Genesis Energy, being given in return the government-owned emergency diesel generator at Whirinaki, near Napier.

This will assist Meridian - which is expanding its wind generating sector - to provide back-up power when the wind fails.

Meridian, Genesis, and Mighty River Power will have to sell to each other a set amount of electricity a year to lower the risk of shortages in either island.

While these measures will likely improve the security of supply in so-called "dry years", and between the two islands, it remains to be seen whether price rises will be constrained.

It is difficult to see, for instance, how giving the first two dams on the Waitaki's headwaters to Genesis will not also hand virtual control of generation on the whole river to that company and lead to further manipulation of the wholesale market.

However, the power generators have been let out of culpability in influencing circumstances to create a "power crisis" without compensation for consumers, this requirement being illogically imposed on retailers - who have no influence on generation - but who may now have to pay out at least $10 a week to users in the event a savings campaign or dry-year power cut occurs.

More money being made available to educate consumers on the virtues of switching power companies if they think they are being charged too much will be a useful tool to aid competition, and the procedure itself is to be made quicker.

Lines companies will be permitted to invest in both generation and retailing, although standard network price structures and contracts will be a requirement, a reversal of one of the key Bradford reforms.

Hopeful consumers who expected the Government to order the price-gouging power generator/retailers to repay the $4.3 billion the Commerce Commission said they had been overcharged will be disappointed, and, until fully tested by the new market conditions, it is difficult to see how the use of market dominance to maximise profits will change.

The original Bradford reforms, even in their truncated form, were supposed to ensure competition would keep prices down; the reverse was the case since generators were able to so contrive shortages that prices simply were increased, well beyond the rate of inflation.

The Brownlee reforms impose no price controls on generators or retailers, although there is to be some manipulation of "market forces".

Consumers will therefore remain sceptical the proposed changes will produce outcomes that actually matter in lower household accounts, or that the modified market reforms will actually deliver more competition and a truly national market.

To be fair, the Government did not guarantee the former, and Mr Brownlee is suitably cautious about the latter; the changes fulfil a National Party election promise but any political benefits remain to be seen.

Moreover, whether the latest reforms will work depends, in large part, on whether consumers actively try to make them work by shopping for the best deals, and perhaps most importantly, whether the transmission bottlenecks can be speedily removed.

 

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