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Economist John Kenneth Galbraith once famously said “under capitalism, man exploits man; under communism, it is just the opposite”. New Zealand electricity is a superlative exemplar of exploitation, with its grossly excessive and totally unnecessary mark-ups resulting in unaffordable electricity for many.
If New Zealand is to successfully transition away from fossil fuels, it is axiomatic that electricity prices, both domestic and industrial/commercial/agricultural, will need to become affordable.
Since 1986 our domestic electricity prices have risen at twice the rate of inflation, increasing from 4.84c per kWh in 1985 to 34.37c in 2020. In comparison with other OECD countries, many of which, like us, underwent market-orientated reform programmes, our rise has been unusually rapid. The bulk of this increase has been rises in the cost of generation and distribution carried out by the ‘‘gen-tailers’’ rather than transmission cost, surprisingly perhaps given Transpower’s monopoly status. The result is, as an energy source, the price of electricity exceeds three times the corrected price of petrol. My basis for this statement is that the cost of one litre of 91 octane petrol after GST, taxes and levies are subtracted is about $1 per litre, and a litre of petrol has the energy content equivalent of 8.9 units of electricity.
Many New Zealand houses, particularly social housing, were built during the era of cheaper electricity and were reliant for warmth on electric heating rather than insulation. It is estimated that now 25% of these occupants nationwide and more than 40% in the South suffer energy poverty, contributing to avoidable hospitalisation. For the poor, the choice is starkly binary — suffering the misery of either cold or hunger.
The increases in industrial/commercial prices have been less marked as such consumers have stronger bargaining muscle. However, industrial electricity prices are almost four times the prices of our Australian counterparts at present. This has jeopardised the future of the Whakatane Board Mill and reduced the output of NZ Steel and the Kawerau packaging producer Norske Skog. This risks businesses relocating to Australia, and consuming electricity with a much larger carbon footprint.
The pricing regime for electricity is deeply flawed, the spot price being based on the marginal most expensive mode of generation during any 30-minute increment, even though about 75% of electricity is generated through the renewable sources of hydro and geothermal, which costs 0.6c per kWh; electricity generated from gas and coal costs typically 6.5c/kWh (both 2013 prices, but CPI-indexed increases since then to now amount to 11.5%). Demand for the more expensively generated electricity sources occurs by Meridian egregiously “spilling water”.
There is a clear consensus that our electricity is overpriced. This was concluded by studies by Stanford University’s Frank Wolak (2007) and by Auckland University (2014) finding profiteering amounting to billions of dollars and considerable market abuse. Economist Geoff Bertram (2015) confirmed that if electricity prices had been indexed to the CPI, they would be halved.
A global league table of electricity prices reveals generally that the cheapest electricity occurs in the poorest nations. This is because the price is based on what consumers are able to afford and there is a total disconnect between the electricity price and the cost of production, exemplified by New Zealand.
The provision of electricity, whether from state or privately owned sources, needs to be central to the social contract. Before 1985, the New Zealand government acted to protect small consumers from predation. In 1986. the Lange-Douglas government, unwisely embracing neoliberalism, legislated that the electricity utility NZED was to be corporatised and become the profit-driven ECNZ and ripe for private sale, resulting in our present cartel of five big ‘‘gen-tailers’’. The public have been placated by the Electricity Authority contention that these are ‘‘regulated” by the Commerce Commission. The Commerce Commission has proven itself to be impotent, ignoring the findings of profiteering in the 2007 report it commissioned by Prof Wolak. Successive governments have failed to regulate rigorously and effectively against profiteering and monopolies despite a 51% controlling stake in Genesis, Meridian and Mercury, which produce 70% of our electricity.
Charging the hydro companies water royalties and using the proceeds to make disbursements to the public as a rebate on electricity prices is now possible because immunity from water royalties was removed in 2013. This solution has been suggested by Dr Bertram. Legislation could prevent the ‘‘gen-tailers’’ from passing this cost on to consumers. Sixty-five percent of the cost of water royalties would be levied on private ownership.
Electricity pricing has components additional to that of generation, but these contribute to less than half the final cost. Thus, 75% of our electricity, hydro and geothermal, costs about 2c a unit to provide. The remaining 25% costs less than 10c a unit. This means the average nationwide cost of electricity is less than 4c a unit in total. It retails at 34.37c. This equates to a 750% mark-up!
Governments need to do far more than providing winter energy supplements. Right now, I can’t think of a better way for any government to ingratiate itself to the voters than by reducing electricity prices.
- Ian Breeze is is a retired surgeon living in Dunedin.