Former Economics Editor of the NZ Herald

Left's power plan 'could boost prices'

Opposition's single-buyer model misses target, Business NZ-sponsored probe finds.

Transmission and generation are only some of the price factors, the inquiry found. Picture / APN
Transmission and generation are only some of the price factors, the inquiry found. Picture / APN

The New Zealand Power proposal of Labour and the Greens is more likely to raise than lower electricity prices, while doing little or nothing to address the genuine issue of energy poverty, according to a report commissioned by Business New Zealand.

The report by Toby Stevenson, Kieran Murray and Joanna Smith of Sapere Research Group, an economic and public policy consultancy, is not an unqualified endorsement of the status quo.

It concludes that the electricity market is more competitive than it has ever been, has resulted in efficient investment in generation and has kept the lights on.

But it says increases in retail power prices over the past decade have not been well explained or justified.

"The relationship between costs, wholesale electricity prices and retail prices is not well understood and retail margins earned by vertically integrated generator/retailers remain opaque."

It calls for more transparency and consistency about the drivers of retail power prices so that people can tell how and where the companies make their money and where inefficiencies might lie.

It would be better public policy to address those problems before undermining parts of the sector that are working, it says.

The report acknowledges that the current arrangements do not "bear down" on fuel poverty, where households have to spend more than 10 per cent of their income to heat their homes properly.

It is a multifaceted problem which includes not just power prices but the state of the housing stock, income levels, household size, location (weather) and access to energy-efficient appliances, among other factors.

But the report's authors doubt NZ Power would do more than nibble at the problem.

Wholesale electricity prices make up less than a third of retail electricity prices.

"To achieve meaningful reductions to retail electricity prices through wholesale electricity market changes would require very large reductions in the wholesale electricity price," it says.

"To deliver a saving of about $300 a year to households the proposals would need to reduce the average wholesale price by about 40 per cent."

The Opposition parties' NZ Power proposal is that a single buyer would compensate generators for fixed costs at a fair return on historic costs and cover the operating costs of generation plant.

The problem is, how historic should those valuations be?

When there has been a switch to historic cost for pricing purposes in other regulated industries, regulators have adopted a recent valuation as the "historic" cost, the report says.

"Picking a valuation from some past date, such as a date when assets were vested from a government department to a state-owned enterprise and taking that value as the deemed historic cost becomes a capricious exercise unsupported by any economic rationale. We are not aware of any democratically elected government that has introduced economic regulation in this manner, because of the risk of destabilising investment in other long-life industries."

Releasing the report yesterday Business NZ recommended a whole-of-government approach to energy hardship which included requiring landlords who receive state money to make their houses available for social housing to submit them toa warrant of fitness, replacingthe poorly targeted low fixed user charge with something better and reviewing initiatives in health and welfare that could help to address fuel poverty.

Labour energy spokesman David Shearer said electricity demand was declining yet prices were still going up, hurting families.

"That tells me and the rest of New Zealand that the market is failing."

Crucial equation

$300 household savings a year to households under the Labour-Greens proposals
40% fall in average wholesale prices that would be required, according to Sapere Research Group

- NZ Herald

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