Former Economics Editor of the NZ Herald

Opposition's new plan for power

Labour and Greens want Crown-owned single buyer to set prices for generators.

Declaring the electricity market a failure, Labour and the Greens plan to replace it with a model where a Crown-owned single buyer sets prices for generators, but one which they hope will maintain competition and innovation on the demand side.

While there are some differences between the two parties' policies, they both interpose a Government monopsony (monopoly buyer) called New Zealand Power between the supply and demand sides of the industry.

They say this will lower prices to consumers, echoing claims made for the market model when it was introduced in the 1990s.

Each generator would be paid a "fair return", calculated by NZ Power on the basis of their historic capital costs, possibly adjusted for inflation, plus operating costs like fuel, depreciation and maintenance, Labour said.

That would replace the current market where the marginal generator - the most expensive generation which needs to run in any given half-hour to ensure that demand is satisfied - sets the spot price which all the generators dispatched receive.

In practice, as the same companies are on both sides of the market, how much they are exposed to the spot price depends on the extent to which they are net buyers or net sellers of electricity in any period, and have managed the exposure through various hedging options.

The existing vertically integrated generator/retailers will have to separate their retail arms into standalone companies with their own boards and management. Whether full divestment is required would be determined later.

Something like the existing spot market would remain, Labour's finance spokesman David Parker, a former Minister of Energy, said.

"Not all contracts between the single buyer and those who buy from it will be at a fixed price. Not all of them will have a fixed quantity. You would not want that, because you have to be able to deal with what happens in a dry year," he said.

"There will be between the single buyer and those who buy [from it] a market, some of which will not be at fixed price or for a fixed term. We want competition between retailers. I wouldn't want to speculate how much of [their purchases] will be on spot."

He would not be surprised if some of the lines companies re-entered the retail energy market, reversing another of the 1990s reforms.

"We used to have monopolies before the Bradford reforms, in local electricity companies, but they were not profit-maximising monopolies. And that's the difference. If you have a monopoly which is trying to run fair prices, rather than maximise price, you will have a different outcome to an oligopoly which is price-maximising."

The proposed regime would also mark a return to central planning for new generation investment, instead of relying on the wholesale market to push prices up to the long-run marginal cost of the next cheapest investment option.

NZ Power would forecast demand, invite offers to build new generating plants and buy their output under long-term contracts.

The cost of that new generation would be averaged into the retail market, an approach which was commonplace overseas, Parker said.

Large industrial users of electricity would be able to contract directly with NZ Power, with contracts flexible enough to cope with constraints in dry years.

The Opposition announcements came a day after the Electricity Authority released a report on the performance of the electricity market in 2012.

Business New Zealand is unimpressed.

"Those who have invested heavily would basically find their profits confiscated," said Business New Zealand chief executive Phil O'Reilly. "Interfering in the market in this way would send a signal to the rest of the world that it is not safe to invest anywhere in New Zealand," he said.

"The knock-on impact from that, on jobs and growth, would dwarf any short-term benefit from artificially reduced electricity prices." But energy analyst Simon Terry said the market had failed to discipline excess profits relative to capital invested.

"This was going to happen," Terry said.

"The irony is that by going for privatisation the Government has crystallised the problem and narrowed the opportunity to do something about it."

- NZ Herald

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