Why our biggest power companies should be broken up (and why they shouldn’t) – Power to the People, part 4

As hundreds of thousands of households struggle to pay for electricity, the New Zealand Herald’s Power to the People campaign has highlighted practical steps that power companies could take, such as best-price promises and ending disconnection fees. But many critics think more fundamental change is required. In the last of this four-part series, Raphael Franks looks at the arguments for and against reforming the market by splitting up the biggest players.

Former Energy Minister Simon Bridges has a blunt message for the big four companies that dominate New Zealand’s electricity market.

The former state-owned companies – Mercury, Contact, Genesis and Meridian – control about 85% of the market and last year collectively made daily profits of $7.8 million.

Known as gentailers because they both generate electricity and sell it as retailers, the big four have come under increasing attack from their critics as rising power prices squeeze households and businesses alike.

These days, Bridges is leading the charge.

“Gentailers come up with all manner of clever explanations from high-paying executives about all of this,” the chief executive of the Auckland Business Chamber and former National Party leader told the Herald.

“But as we lurch from crisis to crisis, they are ruling the roost more than ever.”

The chamber was a co-signatory of an open letter to the Prime Minister this month calling for market reform.

It’s the latest in a growing list of public complaints by influential business leaders, politicians, and other campaigners, who say the electricity market is not working for people.

Households are now feeling the pain along with businesses, as higher transmission charges drive a 10.4% increase in power bills.

Consumer NZ’s most recent quarterly sentiment survey in April showed 35% of people ranked the cost of energy as a top-three financial concern, up from 21% last April.

The same survey found one in five households have had difficulty paying their power bill in the last year.

Many prominent critics, including several smaller retailers, claim the prices are high because our four biggest companies control both the generation and the sale of electricity. Most have suggested breaking up the gentailers as the way to fix it.

‘A cynical tactic’ – the case for change

Under the current system, the gentailers sell the electricity they generate to their retail arms at an Internal Transfer Price (ITP) before the remaining electricity is sold to retailers for spot (floating) or hedged (pre-agreed) prices.

In 2022, Flick – which has recently been bought by Meridian – started a petition to split up the gentailers, saying the Internal Transfer Prices gentailers set for their retail divisions were artificially lower because they “don’t include the same costs and risks an independent retailer faces”.

Flick said at the time: “Essentially, gentailers are leveraging their vertically-integrated position to benefit from low electricity prices acquired through inherited assets.”

Simon Bridges, CEO of the Auckland Regional Chamber of Commerce, a co-signatory of an open letter to the Prime Minister this month calling for electricity market reform. Photo / Dean Purcell

The open letter that Bridges signed to Prime Minister Christopher Luxon suggested a range of reforms, which could include splitting the gentailers into separate generation and retail companies.

“When a handful of companies control both generation and retail supply, the competitive pressures that should attract new investors and drive innovation, efficiency, and fair pricing are severely diminished,” said the letter, which was also signed by the Employers’ and Manufacturers’ Association, the Northern Infrastructure Forum, Consumer NZ and four other independent power companies, Pulse Energy Alliance, Octopus Energy, 2degrees and Electric Kiwi.

When advocacy group Common Grace Aotearoa asked every power provider what initiatives they were taking to curb energy hardship, most pointed to their philanthropic donations and support programmes.

Two companies, though, said the issue went beyond each provider, and only market reform would get to the root of high prices.

Switch Utilities, owned by 2degrees, said: “We believe that the real issue is wider than those in immediate hardship. All Kiwis are paying too much for power, and we are strongly championing reform to the electricity market which will deliver greater competition and more affordable electricity.”

Electric Kiwi said gentailers’ dominance was keeping wholesale power prices artificially high.

“Weʼve long said that the root cause of high-power prices, a key driver energy hardship, is the structure of New Zealandʼs electricity market.

“The dominance of the big gentailers allows wholesale prices to remain artificially high. Itʼs a cynical tactic that is harming New Zealand. We are trying to change that.”

While the smaller power companies have an obvious commercial motive in attacking gentailers’ dominance, many other politicians and business groups have taken a similar stance.

The Electricity Authority (EA) says evidence that gentailers are using market power “is not well defined, [but] industry consultation has not yielded any evidence to contradict our view that the status quo may be stifling competition”.

A review of new regulations by NZIER for the Major Electricity Users Group said gentailers appeared to “actively take advantage of the additional flexibility from vertical integration to smooth the allocation of wholesale price and volume volatility to their in-house retail divisions”.

“The ITPs for gentailers are estimated to be around $130 to $145 per MWh (megawatt hour, for the year ended 30 June 2024) compared with a wholesale spot price for the year ended 30 June 2024 of about $186 per MWh, and for the 10 months to 30 April 2025 is estimated at $215 per MWh,” it said.

Political commentator Shane Te Pou claimed in a Herald column the four gentailers had protected their profits by holding back renewables generation and consents for new generators for years.

“The electricity shortage works for the gentailers,” he said.

“When there’s not enough renewable generation, they can run their expensive gas and coal plants. The way the electricity market works is everyone gets paid the price of generating the most expensive unit of electricity.

“So, the best situation for gentailers is most of their power comes cheap as chips, through hydro dams that the taxpayer paid for decades ago and wind farms, but they get paid like it’s all coming from gas peaker plants.

“It’s this set-up that’s allowed the generators to make $7.6 billion in profits over the past decade, according to Council of Trade Unions analysis, and pay out over $10b in dividends.”

NZ First MP Shane Jones in Parliament. Photo / Mark Mitchell

Current politicians have also weighed in. Associate Energy Minister Shane Jones has called the gentailers “the most powerful economic institutions in New Zealand beyond the supermarkets and the Aussie banks”.

Last August, he told RNZ gentailers were not acting “in a way that enhances competitiveness”.

The Green Party‘s energy spokesman Scott Willis has a member’s bill titled the Electricity Industry (Separation of Generation and Retail Businesses) Amendment Bill written last year.

And the Organisation for Economic Co-operation and Development (OECD) commissioned a report that said the EA’s reviews “should reexamine separating the generation and retail operations of large electricity companies to boost competition in the futures market and provide industry with more hedging options”.

A public poll earlier this year, commissioned by Octopus Energy and conducted by Curia, found 49% of people supported splitting up the gentailers, compared to 16% who did not agree. The remainder, 35% were unsure.

The halfway house - a same-price deal

As the controversy rages, a Government task force has come up with a compromise proposal to force gentailers to offer the same electricity prices and hedge contracts to independent retailers as they do to their own retail divisions.

The Energy Competition Task Force was created by the Commerce Commission and the Electricity Authority, two independent Crown entities, in response to surging wholesale power prices in August last year. The price spiked due to low gas supplies, record-low hydro lakes and a shortage of wind and sunshine.

The EA says its proposed regulation would give New Zealanders more competition, more choices and lower power prices.

“We consulted on a proposal to introduce a new electricity industry rule called ‘mandatory non-discrimination obligations’ that the four large gentailers – Genesis, Contact, Meridian and Mercury – would have to follow," the EA said.

“This new rule would prevent the gentailers from giving preferential treatment to their retail arms for hedge contracts. Instead, they would have to make these contracts available to all industry participants on effectively the same terms as they use when trading internally.”

The EA proposed the mandatory non-discrimination obligations as part of its Level Playing Field Measures, which the EA said would “give all participants equal access to electricity hedge contracts, to increase competition and ultimately give consumers more choices and lower power prices”.

The taskforce is considering feedback to its proposals, and a decision is due in August.

Bridges told the Herald he did not necessarily believe the gentailers had to be broken up and remained open to any reform which created a clear delineation between divisions of one company.

“It may be a functional Chinese wall situation, right? Where one part of the business doesn’t help the other.”

He added he was not necessarily pointing a finger at gentailers.

“They are doing what rational players would do.”

‘A chilling effect’ – the case against

The chief executive of the organisation representing generators and retailers said the EA’s Level Playing Field Measures, as proposed, would not bring down power prices.

“Retailers believe the most effective way to reduce electricity prices and address energy hardship is by tackling the underlying causes of rising costs, such as constrained supply, infrastructure investment, and high input costs,” said Bridget Abernethy, chief executive of the Electricity Retailers’ and Generators’ Association of New Zealand (Erganz).

Bridget Abernethy is the chief executive of the Electricity Retailers' and Generators' Association of New Zealand (Erganz).

Erganz claimed in its submission that the EA’s same-price proposal could increase power prices by 25% – a claim Abernethy said was backed up by a report it had commissioned.

“In 2021, Erganz engaged Dr Richard Meade of Cognitus Economic Insight to review the economic literature on the pros and cons of separating the generation and retail arms of the large generator-retailers.

“Dr Meade’s report informed the Erganz submission [on Level Playing Field Measures] and our view that the proposed changes will not lead to better outcomes for New Zealand electricity consumers.”

Abernethy rejected calls to split up the gentailers, pointing to the cost involved and the ability of large gentailers to manage volatility and risk.

“This [status-quo] structure has contributed to lower retail prices than would likely result under a separated model,” Abernethy told the Herald.

“Separation would be costly, take years to achieve, and introduce a chilling effect on investment that would slow our journey to a more renewable future.

“Most importantly, it would not address the underlying issues for consumers in hardship and would introduce inefficiencies that would likely result in worse consumer outcomes in the long term.”

Abernethy claimed New Zealand already had one of the most competitive electricity markets in the world, with more retailers per capita than the UK or Australia.

She also said the generation and retail gross profit margins, as a percentage of sales, had tracked below the all-industries average over the last decade and a half. EA figures showed gentailers’ profit margins per megawatt-hour in 2024 had been lower than the smaller companies’ margins.

And Abernethy hit back at suggestions generators had not invested in new generation.

“Erganz members have spent around $10 billion on energy generation in the past decade, and more than $6 billion will be invested in renewable energy generation between now and 2030.

“[And] three of the four large retailers return more than half of their profit to the Government (as a 51% shareholder) for the benefit of all New Zealanders.”

Winstone Pulp International's Karioi Pulpmill is was shut down last year. Photo / Alexa Cook, RNZ

Bridges hit back with a pointed reference to the series of large business shutdowns driven by soaring energy costs – especially Oji Fibre Solutions closing its paper mill in Penrose, Auckland, and Winstone Pulp International closing two mills in the Ruapehu district.

“The fundamental pushback [from the industry] is that it’ll have a chilling effect on the marketplace. My response to that is; well, what about the chilling effect of the wholesale deindustrialisation of New Zealand that’s going on right now - not all because of power, but with that being a significant part about it? What about the businesses that are going bust?”

Monday: As Kiwis battle rising electricity bills, campaigners call for change

Tuesday: Could you get a cheaper plan for electricity? Most companies won’t tell

Wednesday: Major company moves to stop disconnecting customers in hardship

Thursday: Why our biggest power companies should be broken up (and why they shouldn’t)