Rod Drury talks to Herald NOW's Ryan Bridge on his call for structural separation in NZ's electricity market. Video / Herald NOW
Opinion by Tony Clifford
Tony Clifford is managing director of Pan Pac Forest Products
THE FACTS
New Zealand’s energy system faces challenges, requiring new generation and smarter energy management.
Electricity generators say they have spent $10 billion on new generation over the past decade and are investing over $6b in renewable projects between now and 2030.
However, industrial users say they have lost confidence in the existing market.
It is important that New Zealanders understand the true impact of our dysfunctional electricity market, as generators resist the call for restructuring after years of making high profits at the expense of industrial users.
Industrial users have lost confidence in the existing market, even though generators arenow initiating new builds and co-operating on firming options. This recent flurry of activity appears to coincide with the threat of regulation.
New Zealand needs an electricity market structure that is fit for purpose for the next 100 years – not just for one election cycle or recurring short-term responses to avoid market intervention.
Bridget Abernethy, the chief executive of the Electricity Retailers and Generators Association, argues that major disruption to the electricity market structure is the “last thing we [New Zealand] can afford”
As a major energy user and economic contributor, we would argue the opposite – New Zealand cannot afford the status quo to continue. Taking a “we’ll be right” attitude to nine years of price increases for wholesale users has had negative impacts for all consumers.
Citing a “decade of flat electricity prices” for household consumers, Abernethy notes a short-term period of marginal increases is inevitable. What is missing from this statement is that electricity costs have been anything but flat for wholesale users, with spot prices increasing 3.5 times in nine years.
(Index graph– Averaged Spot Market Real Time Pricing with forecast to April 2026).
How can this disparity between retail and wholesale pricing occur in a properly functioning market? Could it be because residential consumers would demand earlier political intervention if their bills skyrocketed to the same degree as that of wholesale consumers?
We accept that inter-year volatility will increase with the rise in intermittent renewables. However, it is not the main factor hurting large industrial users – it is this rising average price that cannot be insulated by hedging forward. Hedging contracts are now unaffordable for most large users because futures hedge prices are linked to the rising spot prices.
The wealth transfer from large industrial users to generators over the past decade in the form of inflated prices has not resulted in investment into more net supply. The market has not created sufficient incentives to build new generation ahead of when it is needed.
Pan Pac general manager Tony Clifford at the Whirinaki plant. Photo / Warren Buckland
Instead, generators have sat on approved RMA (Resource Management Act) consents and continued to profit at the expense of business. We have seen the impact on manufacturers in regional areas no longer able to operate profitably. Residential consumers are then affected through loss of employment and services, while the economy and our communities suffer.
Blaming the shortage of gas as a driver of rising prices is overstating its impact. Electricity generation from gas makes up less than 10% of all electricity generated. While prices would have increased because of gas shortages, we dispute the premium over the relationship to the gas costs. Independent analysis of generator margins shows at least $38/MWh of increases cannot be explained by gas or ETS (Emissions Trading Scheme) charge increases.
In summary, the gas shortage should not be impacting the electricity pricing to the extent claimed. However, the shortage of gas has been used to justify many years of high profits for generators and large dividend payouts to shareholders (which include successive Governments). These profits have not been reinvested into new generation until the recent threat of market intervention.
We are not blaming generators for maximising profit; they are working within the existing market rules that incentivise them to keep the market on the edge, but we do have an issue with them telling only a part of the story to regulators, politicians and the public, that they can do nothing about rising costs and that consumers just have to ride it out.
Market regulators and successive Governments have seen this train wreck approaching from a long way off but have chosen to do little. Simply not making a bold decision is a decision in itself.
