The Great NZ Electricity Rort.

Twenty years ago, even ten, NZ had some of the cheapest electricity in the world.
This was a source of comparative advantage for our exporters and support for NZers as electrical heating was mandated to replace wood burning.

Now in NZ, electricity costs users as much or more than in other countries.

This seems strange, as more than 60% of our supply still comes from hydro- and heritage hydro at that, long since amortised.

How come NZ homes, businesses, and farms can't now buy electricity at world competitive prices?

And how come we're now also facing uncertainty of supply- having to live each year in hope that enough rain will fall at the right times in the South Island's main catchment areas? Have we run out of hydro sources and can't afford other options?

And how come South Island generated electricity is cheaper in Auckland than it is in Dunedin- when the line losses in transmission from the Waitaki to Auckland are in the order of 15%? By what rort is this being subsidised for northern users? And is the northern population bias that this drives in the national interest?

Obviously a failure of policy- but why and how has this happened?

Naive government and power companies that were too clever for them?

An ideological fog that prevented consideration of useful options?

A strange view that making electricity harder to get would somehow save the planet?

Or all of these and additionally, that the policy makers have their sticky fingers in the till and are reaping huge dividends and taxes from the power companies- which they then use to buy our votes?

A bit more than 60% of NZ's supply currently comes from state owned generators. They operate as a monopoly and set high prices- which the independents are then more than happy to take as well of course.
To justify these prices, they all "re-price" their assets at intervals to get a "fair" rate of return (around 8% currently). But wait a minute, isn't this a circular argument?- increase the asset "valuation"- then increase prices to get 8% on whatever increasingly inflated valuation has been applied. There is no reality check on this except that they probably sell to Comalco for 6c/ and do sell to Mid Canterbury irrigators for 10c/kw. hr,- because these buyers have market power enough to call their bluff. The real cost of generation is therefore likely to be in the 3c to 5c range, and line costs would generally add the same again. Domestic consumers currently pay 20c/ and more.
But no doubt every time government ministers start having second thoughts about the damage to NZ this price rort is doing, someone whispers in their ear "but where are we going to replace this money from?"

Of course, they won't ever admit to this- so what excuses do they put forward?

For a start, they say that electricity isn't too expensive now- but that it was previously too cheap.
The first part of this is blown out of the water by international comparison. Of course it is too expensive in NZ now- as evidenced by comparison with countries like Singapore, where all generation is from imported gas, oil and coal. Singapore has no component coming from cheaper sources such as the hydro and geothermal that NZ has.

That "it was too cheap before" is explained by saying that pricing then hadn't made allowance for investing in future capacity. This is like a trader putting prices up so as to buy a bigger store- which only works if their customers are mugs and there's no shop down the road that's controlling its costs better. In any real world, new projects aren't financed by applying a surcharge on top of an already above average rate of return (power company profits have been at the upper end for years) but by investors who believe that whatever they put in will bring them as good or better return than alternative opportunities.

After these excuses have been disposed of, the last ditch reason for high electricity prices in NZ is that it's just the way the market is- 'sure electricity generating and distribution companies are rorting consumers, but this is not our fault'. Usually Max Bradford gets mentioned at this point.

As for why generative capacity is lagging demand; Officially, apparently it's not. Officially, we just 'experienced a few unusual seasons'. But we all know that weather is always being 'unusual', and that capacity IS marginal, and we know that one of the reasons for inadequate new capacity is that the Resource Management Act makes new power stations expensive to build and uncertain of consent even after large sums have been expended on the application process. And we know that it's also in the best interests of generators to limit supply and not install new capacity- because, by artificially restricting supply, they can charge us more for what they have.

And, as for why South Island electricity sent to Auckland is subsidised, but North Island electricity (mainly from gas and oil fired thermal stations) sent South isn't- the answer given is that this isn't true; line losses are averaged out over all consumers, North and South. Yeah right- but because the flow is overwhelmingly northward, there is a substantial subsidy of North Island users by South Island users.

The electricity sector is of national importance and appropriately therefore has a crown minister overseeing it and its own special laws and regulations with statutory bodies to promote and ensure effective operation. These systems aren't working though, as is obvious from the years of delay that the Electricity Commission's own investigation has been subject to, the watered down terms of reference they were permitted and the blanked out pages in even the stuff they have released so far.
I doubt that there can be even one NZer who doesn't hold miss-administration responsible for this appalling mess- unless they're blind , deaf and dumb

Most of this has happened on Labour's watch, but at least they have the excuse that their anti-business, anti-development anti-growth bias was not rejected for three consecutive elections. That they failed to provide the leadership required for adequate supply at acceptable prices should be no surprise to those who voted them in.

Yes, NZ does have significant new hydro sites capable of economic development, but far from their having received encouragement, they have instead been subject to tacit government opposition- culminating in Labour's 2008 policy initiative of requiring all future such schemes to price in the cost of restoring the sites to original condition. Just how stupid is it possible to be? And as an extra ideological extreme, they then actively moved to prevent most other realistic choices by effectively banning any consideration of additional thermal capacity.

But perhaps this was driven by power-seeking as well as ideologically; Labour may have been hoping to pull some votes from the Greens- voters for whom burning fossil fuels or damming rivers would be a defining issue. This notwithstanding that Labour knew that such developments, when adequately planned and executed, would have majority support from NZers and be overwhelmingly in the national interest.

Ideological, strategic or addicted to the money they've been sucking from power companies?
It doesn't matter much which, the result is that we've had huge amount of talk about alternative energy sources such as solar, wind and even tidal- when none of these, except for wind, has any chance of being significant in the next 20 years or more- and even wind can only ever make a minor contribution.
And, at the same time, we've had equally voluminous rhetoric about the need to use less electricity. This is rather like the policy of not building adequate roads for NZers, because "roads just encourage cars"- which are "bad". During Labour's nine years in office there was no progress towards practical economic generation to ensure NZ's cost competitiveness and security of supply into the future.

As a consequence, it's now likely that NZ will have to add new thermal stations burning imported gas and oil (the worst choices by any standards) within the next few years because better options cannot be developed in time to bridge coming shortfalls.

The Nats aren't beholden to Labour's destructive interest groups, nor, I hope, to their ideological baggage, but will they do any better?.

Four things need to happen now we have a new lot on the treasury benches:

Firstly, and urgently, the failures listed above need to be corrected as far as is now possible. In particular, power companies (line and generator) need to get off the re-value- re-price carousel, reign in their cost structures and executive pay scales and, to the extent that they are reaping monopoly profits, be regulated to operate in the national interest.

Secondly, there must be a return to sensible policies that override nimby pressure where necessary and repudiate destructive ideologies.

Thirdly: Line losses and transmission costs should be paid for by users. The north-south rort is creating perverse incentives that hold back efficient development in the South and lead to unproductive congestion in Auckland. And besides, it's basically just bullying that will sooner or later generate an extreme reaction if not stopped.

And fourthly, those responsible- the ministers and the ministries- need to be held to account- held up to the public ridicule they so richly deserve so as to discourage such policy failures in the future.

Why am I not holding my breath in anticipation of prices coming down then?

Because this new lot will also have someone whispering in their ear; "but how are we going to buy votes without the money the power companies are bribing us with to let them continue their rorts?"

Peter Lynn,
Ashburton, July '09
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