Electricity supply debate fuelled by lack of fuel

By STEVE BARRETT*

If you couldn't get fuel for your car, would buying another car solve your problem? Naturally, the answer is no. You would just end up with two cars that didn't go.

In a nutshell, that is the problem facing the electricity industry as we head into winter.

Contrary to popular opinion, there is no shortage of plans for new power stations, the electricity industry's equivalent of a new car.

Contact Energy alone has three sites where it has all the permissions it needs to build new gas-fired power stations immediately - if it could find any gas to run them. One of our competitors is in the same position.

Those with plans for new hydro schemes are equally hampered by fuel supply issues. In their case, the problem is the necessary, but unduly lengthy, resource consent process to gain access to water.

This is the point that so much of the public commentary now swirling around the electricity market is missing: this is not an electricity market issue, it is a fuel issue.

Indeed, the market is working by signalling through high wholesale prices the stress caused by three coinciding factors - the strong growth in demand for electricity caused by New Zealand's robust economy, the earlier-than-expected rundown of the Maui gasfield and the lack of developed replacement fields, and the summer drought that left hydro lakes with less water than usual.

Any one of these three factors on its own would not necessarily spark a problem this winter. All three occurring together, however, are enough to signal a potentially serious problem, one that requires across-the-board savings if forced power cuts are to be avoided over the next four or five months.

Like all households, most businesses buy their power at fixed prices and are shielded from the recent high spot-market prices.

Others, however, have chosen to buy all or part of their electricity on the spot market. That gamble paid off in five of the past six years, when winter spot prices were lower than contract prices.

Unsurprisingly, no one complained when they paid lower prices than those who took the prudent approach of fixing their electricity costs ahead of time.

This year, some major users are seeking belated insurance from unexpectedly high prices and are finding it unavailable at prices they find acceptable.

While this is a little like seeking insurance after the accident, it does not alter the fact that for some firms, current wholesale prices are having a major impact on their businesses.

Many have been tempted to blame this on a failure of the electricity market. I beg to differ. If there is any market failure, that failure is in the gas market. In the absence of competitive ownership, the development of known gas reserves has been delayed and is now overdue.

However, rather than dealing with this issue, much of the present debate involves proposals that amount to redesigning the car's engine - the rules for the electricity market - in the hope that perhaps this would make it run better.

While the fuel tank remains empty, however, no amount of redesigning will make any difference to the amount of electricity that the nation produces.

This is where the focus of Government policy must lie. Whatever changes are proposed for electricity market rules, those changes must be able to satisfy one simple question: will this intervention lead to more power stations being built more quickly than would otherwise have been the case?

If the answer is no or merely neutral, that policy is not tackling the right issues. Electricity companies are all working hard behind the scenes to find innovative ways to meet the electricity supply gap.

Instability created by the prospect of significant policy change would only slow that work.

None of this is to say that the electricity market is perfect. Electricity companies would be the first to concede there are aspects of present arrangements that need improvement.

This is not the purist, free-market model of popular myth, but a rules-bound market involving an essential commodity with particular complexities.

On the other hand, the present system has delivered a 27 per cent increase in generating capacity since the market began in 1996.

This has been achieved without the waste of national resources, the overbuilding and poor planning of the past.

We tend to forget that the previous era of central planning delivered schemes such as the Clyde Dam, which even today cannot be said to make a profitable return against its enormous construction cost.

New Zealand does face big challenges now that its easy options for increasing electricity generation - hydro at first and then the huge, cheap Maui gas resource - are no longer available.

In meeting those challenges, it is vital that we ask the right questions and look for answers in the right places.

In particular, we need to avoid making matters worse by thinking that market structures, rather than fuel availability, are the problem.

* Steve Barrett is the chief executive of Contact Energy, the country's largest gas and electricity retailer.