Plea for relief from power pains

Morris Watson, of Premier Plastics, wishes he was in the power business instead of manufacturing. Picture / Martin Sykes

Morris Watson set up Premier Plastics 36 years ago. It makes plastic bottles, employs 62 people at its Sandringham plant and has an annual power bill of around $200,000.

Faced with cut-throat competition from Chinese exporters, Watson is doing the sensible thing, trying to trim costs as much as possible as he strives for profitability.

But these savings come to nothing when each power bill arrives. His new contract will see his power charges rise 17 per cent next year, followed by 3 per cent to 4 per cent hikes each year after that.

Watson has no complaints about the service he gets from his power retailer - state-owned Genesis Energy - but as a man who knows a thing or two about competition, he sees little rivalry between the power companies.

With the ability to lift prices each year to match their generation costs, the electricity retail game seems a whole lot easier than plastics.

"They just can't lose ... I'd love to be [selling electricity] rather than manufacturing," says Watson.

Because no matter what happens to power prices, his electricity company can always recover it from him. A healthy profit margin for the power company would simply always be tacked on to each bill.

Watson is one of millions of business owners and consumers who have seen their power bills rise steeply in the past five years. And, while they can expect more price rises in the next five years, they may not be so severe.

Higher electricity prices such as those paid by Premier Plastics come as no surprise to Hitesh Patel, founder of Auckland energy consultancy EnergyPro. He says most companies' power bills have risen between 40 per cent and 45 per cent in just two years.

But most organisations have not changed their energy management systems since the days of ECNZ a decade or so ago when all power generation was Government owned.

Patel said prices and charging options were now much more complicated and companies needed to take a more sophisticated approach to cope with this "long-term uptrend" in prices.

"Many firms are looking at ways in which they can secure their future power supplies but that is just part of the equation. What is often overlooked is what they can do right now to conserve energy, manage loads and become more energy efficient."

After several years of soaring prices, businesses like Premier Plastics and those using consultants such as EnergyPro are understandably nervous about what the next few years will bring. A general feeling exists across the sector that the worst of the double-digit price hikes is over, but even the present enthusiasm for investment in new generation is unlikely to mean any price reductions.

Electricity Commissioner Roy Hemmingway does not think there is enough competition in the electricity market and is refreshingly candid when he says he does not know exactly why.

It is something the commission will look at closely in the coming year as part of a larger study into whether the market system is delivering what was promised.

He says one area it is succeeding in is sending price signals needed to trigger the building of new power stations.

"Earlier, there was scepticism about whether generators would build new generation and I think it's clear now that they will. We are not in a situation where we face a shortage of new generation ... The market is providing incentives to companies to build new generation but the steadily increasing prices are a real concern."

The wholesale market's high prices are showing investors it is time to build new generation but the same market does not appear to ever be placing "downward pressure"on prices.

"We certainly know the market is working to provide incentives to generation, but it's not clear the market is providing incentives for companies to keep their prices as low as possible in order to be able to compete."

The big five power companies - Contact, Meridian, Genesis, Mighty River Power and TrustPower - all generate electricity which they sell into the wholesale market. Their retail arms then buy this power and sell it to customers like Premier Plastics.

David Hunt, chief executive of the largest private sector generator, Contact Energy, says the worst of the recent power price rises is probably over but smaller increases are still likely in the next few years.

He says it is not lack of competition that is lifting prices but a fundamental shift from the days when the huge Maui gas field supplied industry, homes and electricity generators with a great surplus of cheap energy.

Now, as Maui runs down, fuel prices increase, which means that electricity bills also needed to rise.

"I think a lot of that movement has already occurred. I think we've seen a lot of that already turn up in customer bills and that's why they've gone up so significantly. There's a wee bit more to go - but I do think we're through most of that increase in price."

Those with longer-term contracts may have been shielded from the worst of these price hikes but not for long, since they will face the new, higher prices when they renegotiate.

Hunt said that in the past few years - but particularly in the last 12 months - the high wholesale power prices had prompted a great surge in activity on the generation front.

"This is fundamentally because people are saying, 'Gee, there's a bit of money to be made here, prices have moved up and suddenly the project that I've got on my drawing board that didn't make economic sense does now'."

So while prices may not actually be coming down, he says competitive pressure in the market is acting as a brake on prices.

Whether this brake will mean a return to profits for Morris Watson and the 62 workers at Premier Plastics is unclear but the gloomy days of rampaging price hikes do seem to be over.