New Zealand power generators pocketed an extra $5.4 billion on profits from 2010 to 2016 over and above what they would have if the wholesale electricity market was truly competitive, according to a report by a University of Auckland economist.
Dr Stephen Poletti, a senior lecturer in energy economics at the University of Auckland Business School, said the New Zealand electricity market is one of the least regulated markets in the world and that it was time to re-examine it.
Poletti used computer modelling to simulate how energy traders in generator firms behave in the wholesale market, and compared it to how they would behave if the market was competitive – that is, if generators were forced to always sell power at cost.
The report, part-funded by Auckland electricity and gas distributor Vector, drew widespread scepticism from the the regulator - the Electricity Authority - and the power companies on the basis that it relied on what they saw as discredited research.
Poletti said "market power rents" – the excess profits that generators are able to make – are "substantial" – totalling $5.4 billion over seven years or 36 per cent of revenue, which is similar to or higher than those found by Stanford economist Professor Frank Wolak, in his report to the Commerce Commission, in 2009.
"It's excessive, and we also know from the Electricity Price Review and other work that energy retailers are making excessive profits, too," Poletti said.
"We should redesign the electricity market so that the profits are less and people pay less for electricity," he said.
The prevailing view in New Zealand is that excess profits are needed to recover investment costs in generator plants, "one that we haven't seen expressed by regulators in other electricity markets", the report says.
"The hydro plants were built and paid for by taxpayers years ago – they don't need to make any extra money to cover building costs, and maintenance costs are very low at around $5-10 per megawatt hour, compared to the average market wholesale price for hydropower of $70," Poletti said.
Wolak's report was criticised at the time by academics and policy-makers for the way it assigned value to the water used in hydro dams, among other things.
Poletti's report describes many of the criticisms as "tenuous" and used to justify the prevailing market arrangements.
Rory Blundell, acting chief executive of the Electricity Authority, said Poletti's report was inconsistent with the Electricity Price Review panel's findings.
"This kind of analysis has been found wanting in the past and we believe it will again," he said.
"The panel is in a good position to get to the bottom of it, if it considers that is warranted," he said.
The Electricity Authority - a Crown entity - specifically looks for instances when generators could potentially profit from raising prices and 2017 did not identify any such periods, he said.
Meridian Energy chief financial officer Paul Chambers said reports on the structure of the sector needed to be "grounded in reality".
"We think the real-life evidence is clear. The International Energy Authority recently found that the New Zealand electricity market is one of the best in the world," he said in an emailed response to an inquiry from the Herald.
"Wholesale prices are the same now as they were in 2004, retail competition is healthy, and residential prices are in the bottom third of the OECD and fully 40 per cent less than those in Australia, all while generating 85 per cent of our energy from renewable sources," he said. In Australia the renewable share is 15 per cent.
"New Zealand has a very secure supply of electricity, even in dry years for hydro generators," he said.
The Electricity Price Review currently underway is looking at all aspects of the sector from generation, transmission, distribution through to retail.
A spokesperson for Genesis Energy said the report directly contradicts aspects of the Electricity Pricing Review issues paper released on Tuesday and said research in Poletti's report had taken similar approach to Wolak report, which was discredited at the time.