Energy crisis threatens NZ economy, time for gentailer reform - Simon Bridges

The Government needs to separate gentailers’ generation and retail functions, says Simon Bridges.

When it comes to cost of living and the economy, much of the current public and political focus is on supermarkets, butter prices, banks and service fees. There’s no question these are big issues, but the bigger issue facing the country – certainly from a business perspective – is energy, namely prices and a lack of supply.

With the cost of energy driving businesses to scale back production and, in some cases, to close their doors, New Zealand has begun a slide into de-industrialisation. A lack of projected supply into the future means we are unlikely to be able to make the most of big data, AI and the higher productivity and standards of living that would come from these technology enablers.

Simon Bridges

Put bluntly, energy today is a severe handbrake on business and the economy, and on our collective goal of making New Zealand a more productive, prosperous nation.

Before 2018, long-term energy contracts averaged $70-80 per MWh. But since 2021 the average has been $150-plus per MWh and over the last year it’s averaged a whopping $190 per MWh.

Meanwhile, Transpower’s annual Security of Supply Assessment, which evaluates the ability of the electricity system to meet national demand in the years ahead, shows that there has been a marked decrease (i.e. 70%-80%) in anticipated new supply, in comparison to prior expectations. This is despite the high future wholesale prices, which should (at least in a well-functioning market) result in more supply and enhanced competition.

A sharp fall in the availability of gas over recent years (much sharper than anyone had foreseen) certainly hasn’t helped matters, but it is far from the only factor suppressing demand, as some are suggesting.

Delayed or cancelled solar and wind projects make up half of the projected fall Transpower speaks of. The reality is that neither the big four gentailers nor the smaller independent players have brought renewable energy projects to market as quickly as had been indicated.

To understand what’s driving this, I believe we need to look squarely at the current structure of the energy market, where the four gentailers operate on both the generation and retail sides, and completely dominate both (combined market share is close to 90% in each case, and climbing). This model incentivises gentailers to hold back supply and foreclose competition, and provides them with the power to do so.

When a single business controls both sides of the market, basic incentives to increase supply are dulled. After all, more supply will only mean lower prices, and poorer returns for the gentailers’ retail arms.

Energy today is a severe handbrake on business and the economy, and on our collective goal of making New Zealand a more productive, prosperous nation.

Simon Bridges

Likewise, there is minimal incentive to facilitate the entry of new players into the market by offering adequately long-term, competitively priced contracts – not just for energy supplied to gentailers by independent generators, but also for energy sold by gentailers to independent retailers.

This is not to say that no investment in new generation is taking place, or that no contracts are being signed with independents, but rather that these things are not happening on the scale or at the speed they need to.

Nothing the gentailers are doing is crooked or underhand – they’re simply acting rationally and commercially in their shareholders’ interests.

The problem is the rules of the game that the gentailers are responding to. As the energy sector lurches from crisis to crisis, it’s very difficult not to reach the conclusion that these rules need to change.

My view – which has strong support across the energy sector, bar the gentailers – is that the Government needs to separate gentailers’ generation and retail functions. This would be a case of corporate separation rather than structural separation – common ownership would be maintained across the generation and retail sides, but there would be operational independence between them.

Changing the structure of the market on its own won’t fix all the sector’s problems. We also need immediate steps to boost supply, such as a government tender for additional generation to fill the unmet need in the next five years (with the cost potentially recouped via an industry levy). Over the longer term, we need a stable, settled energy strategy, underpinned by bipartisan consensus.

But it is arguably the most important single step we can take.

What I’m proposing isn’t wacky or radical. The same approach has been used to good effect overseas to address competition and affordability issues in the energy market, and in our own telecommunications sector a decade or so ago. The OECD has recently called for gentailer separation to be brought back to the table in New Zealand.

Still, some argue that it’s all too bold, and that government intervention will have a chilling effect on the market. I’d argue the opposite – that failure to intervene, and allowing the slide into de-industrialisation and productivity loss to continue, will do far more to undermine investor confidence.

The time for incrementalism is over. Let’s see real structural reform.

Simon Bridges is CEO of the Auckland Business Chamber, and a former Minister of Energy and Resources.