They need an annual payment. So our market encourages generators to keep the system on the edge of a shortage to maximise profits. Until about 15 years ago New Zealand's system for controlling domestic water heating was the best demand-side management system in the world.
This system has been run down because the regulations do not allow lines companies to make money from managing demand.
Instead, they are rewarded for overbuilding their systems to meet unrestricted peak demand.
As a result many lines companies have spent millions of dollars overbuilding their systems and Transpower spent about $1 billion on the 400 kV line.
The industry is now squandering millions of dollars on so-called "smart" metres that are not as smart as the system they replaced. I know of no study that demonstrates that the benefits exceed the costs.
In addition, we have seen a huge increase in electricity lines costs, and retail margins seem to be very high.
So what can be done?
Labour and the Greens are pushing a so-called "single buyer market" they claim will reduce electricity generation costs - about 25 per cent of the consumer price.
Years ago a single buyer market was put to the Wholesale Electricity Market Development Group as the preferred option. They turned it down.
A proper single buyer market recognises that electricity systems must be run in a coordinated manner and that competing for the right to build and operate power stations against a long-term contract exposes the generators to competition in an international market.
The single buyer decides what combination of stations can meet demand at the lowest cost and minimise the risk of blackouts in dry years.
It invites generators to compete for a long-term contract, with annual payments covering the capital cost of the station and profits.
It chooses offers that will meet long-term demand and provide adequate reliability in the most cost-effective manner and pays them at cost for the power they generate. In day-to-day operation the lowest cost combination of demand-side management and generators is used.
As long as the single buyer is independent of political interference, this provides a competitive market that is simple, transparent and effective.
The Labour/Greens proposal has the government directly controlling generation and dictating prices. This would devalue the partly privatised generators and rip off the many ordinary New Zealanders who bought their shares. They will also specify what new generation was to be built and consumers would have to subsidise the construction of expensive wind and solar generation.
What is really needed is an objective study based on a sound understanding of how electricity systems work that, unlike previous studies, would look at all aspects of the market and associated regulations.
It must closely examine the market structure, reasons for the demise of our excellent hot water control system, why the retailers' margins are so high, and any other factors that disadvantage the consumers.
Anyone who sets up such an inquiry will need to be aware that almost everyone involved in the electricity market in New Zealand either believes it is competitive or are making large amounts of money from it.
The study will need people who are able to look at our existing market and alternatives from a consumer's point of view.
Bryan Leyland is an experienced electrical engineer. He and his wife are major shareholders in a small hydropower scheme in the South Island that has benefited from the electricity market.
