New Power Policy – Talk is Cheap

Posted 22 April 2013 by Chris Hargreaves

Man climbing power poleWhen you’re in opposition talk is cheap.  Last week’s announcement by the Labour/Green combo David Shearer and Russel Norman does beg the question why the previous Labour Government didn’t take this course of action when they were in office for nine years.

Compounding this anomaly is the fact that for whatever reason, power prices rose faster during those Labour-controlled years (1999 to 2008,) than they have done over the past four years. Cynics amongst us will also remember that the well-above-budget financial performance of the leading energy companies Genesis, Mercury and Meridian during the Dr Michael Cullen era made a significant additional financial contribution to the NZ Government’s coffers.

Labour seem to be conveniently glossing over the fact that distribution charges are unaffected by this proposed change and that these charges have been responsible for a good percentage of recent price increases.

With the newly-proposed market model it is likely that the much-needed investment in infrastructure would be halted or delayed.  Without market forces at play, poor prospects of gaining return on investment would discourage companies from financing infrastructure improvements. This was witnessed during successive governments from the late 1980’s to late 2000’s, as a result Transpower and some of the generators are now playing catch up  – ironically this has resulted in the increased costs that the Labour/Green alliance are now proposing to combat.

From an industry point of view, the real problems with New Zealand’s electricity are:

  • Continuing ideologically-driven interference from politicians.
  • The cheaper sources of energy that are available have been taken off the table due to the political agendas of those who now complain about rising prices.  It doesn’t matter how much you aggregate power purchasing if the cost of the underlying fuel sources continues to rise.
  • As an average, network pricing has been rising steadily above inflation over some years.   Since January 2011 we have seen fixed price variable volume prices for time of use (TOU) commercial customers reducing year on year while local network prices have increased over the same period.  Electricity network pricing should be considered alongside energy per unit cost – network charges make up around 40% of an electricity invoice.
  • The failure of successive National and Labour governments to invest sufficiently in the National Grid and other infrastructure during the 18-year period from 1990 to 2008.  These assets have been milked by successive Governments and unsurprisingly a catch-up period of investment is now required.
  • The movement towards a spread of renewable sources of power generation increases the strain on transmission and distribution networks.  This investment in renewables pushes costs up.

To announce this plan on the eve of the day that Mighty River Power shares go on the market seems like a cynical move to deflate the current Government’s successful sell off of the SOE.

No matter what the political flavour, if a New Zealand government truly wants cheaper energy then better utilisation of current assets is required.  Unfortunately this would be politically unpalatable due to carbon emissions.

If you break down NZ’s power usage, 30% of demand is residential, over 50% of which is used to heat water. The money proposed to set up NZ Power would be better used by subsidising eco bulbs, installing solar panels and rolling out standardised smart metering.

There is no doubt that both the market and system needs work, however we are only 13 years out of the break-up of ECNZ. If the Labour/Green proposal for standard market pricing goes ahead it will put many jobs at risk in both the retail arms of the power companies and related secondary industries.

We would echo the comments of Contact Energy CEO Dennis Barnes when he stated his belief that “the best way for New Zealand to operate its electricity industry is through markets and competition, something we believe already exists – supported by the regular and robust analysis of the Electricity Authority

 

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