Turn that light off!

By DANIEL RIORDAN

‘Put out the light and then put out the light.’ Othello’s — and Energy Minister Pete Hodgson’s — message has hit home with business and households, but stronger solutions will be needed to maintain public confidence in a wholesale electricity market that has taken more hits than Rocky Balbao in recent weeks.

As Business New Zealand chief executive Simon Carlaw notes, the supply crisis may be ending but the full impact of higher prices on the economy is still to be felt. He is calling for a review of the market involving all parties and in particular consumers.

“There’s a number of elements we can review — supply, generation and transmission, and the interaction between those. We need to examine how well the price signals worked for various groups of consumers”, he says.

Clearly, businesses caught out because they didn’t, or couldn’t, hedge will be more aware of their risk profile for next winter.

Which could be mean and nasty.

“There’s a prospect that if we have a medium to dry summer we’ll start next winter with a storage situation conceivably worse than where we started this winter.”

Not that the market has done anything other than what it was set up to do — send prices higher when supply got low.

Doug Heffernan, chief executive of state-owned generator Mighty River Power, says critics of the market should look more closely at their approach to managing their energy risk, rather than blame a market which, while not perfect, worked the way it was designed to.

He says the New Zealand model is one of the most advanced in the world and other countries are studying it. What happened this winter was what should have happened.

That said, the market can be improved.

One of the problems, as Standard and Poor’s pointed out, is that the average consumer has barely been affected and so has no financial reason to use less electricity.

When NGC tried to raise its power prices, other — state-owned — retailers made it clear they were not going to move. Faced with the likelihood of losing customers to cheaper retailers, NGC backed down (selling its customers soon after and dropping out of the market).

But, as state-owned Mighty River Power demonstrated, there is more than one way to pass on market signals. It adopted the economically sensible — and politically acceptable — course of giving its consumers financial incentives to save electricity, which could then be sold at higher prices on the spot market. Other companies followed suit — under Government pressure.

Prices rocketed on the wholesale market as businesses chased limited supplies.

The companies hurt by the high spot prices are those without long-term contracts. Some have found it cheaper to buy a lot of their power on the spot market. Others felt they could save money by signing short-term contracts that allowed them to move to whoever was offering the best deal.

Commentators have noted that little was heard from those companies when they were using the system to get cheaper power than anyone else. So why should they be listened to when the system moved against them? Isn’t it just a timely reminder that markets tend to move up and down and people who play them do so at their own risk?

Higher spot market prices have certainly given affected companies a strong incentive to save electricity and some have cut back production as a result (though nowhere near as sharply as during the 1992 power crisis).

The developing shortage has also provided strong incentives for more power stations to be built.

When the present shortage is over, a lot of those companies which previously bought on the spot market or through short-term contracts, are presumably going to want long-term security of supply.

Big customers like that will be highly sought-after once normality returns, because most of the time supply exceeds demand. So power generators will have an incentive to ensure they can produce the power to meet their extra customers’ needs.

Furthermore, the really large customers who have been burned by the shortage, including any surviving power retailers with a lack of generating capacity, will have a strong incentive to consider providing more of their own electricity.

In fact, there are already plans for new hydro and thermal power stations, although hitherto they have been criticised as unnecessary. The promoters of those projects now have even more reason to proceed.

Overall — as the electricity market surveillance committee found — nothing particularly untoward is going on in the market. The country is merely coming to terms with the workings of a new system.

The time may come when the system needs tweaking. It would, for instance, be preferable for the SOEs to have a less dominant position. It is certainly a pity that the retail market seems to be getting less competitive and perhaps generation and retailing should be separate. The price-setting mechanism may turn out to need fine-tuning.

But it would be a mistake to make new rules before the players have had time to assess the impact of the old ones.

By the time it is all over and the hydro lakes have filled up — which may not be far away — those involved will know a lot more about how to use the market properly. Some companies will have learned a valuable lesson in the risks of buying on the spot market instead of signing long-term contracts.

Those who want to build new power stations will have been encouraged. Power retailers should have seen that giving customers incentives to conserve can pay dividends.

In all likelihood New Zealand will survive this electricity crisis better than it did under the old system in 1992, in which case the market will surely deserve some of the credit.

Auckland Regional Chamber of Commerce chief executive Michael Barnett has been urging his members to take the lead by switching off neon lights and making sensible cuts in the factory. Many have responded.

Christchurch leaders talked of bringing in emergency power generators if the crisis worsened. Christchurch International Airport has been using diesel power during peak hours and the Wellington City Council has turned off the fairy lights along Oriental Parade.

The ASB Bank is running its 31-storey headquarters and computer centre off diesel generators, and has its 117 branches conserving energy wherever possible by reducing lighting, promotional signage and monitoring air-conditioning. The bank reckons it can save energy equivalent to that needed to power about 1200 average households.

Carter Holt Harvey dusted off some of its old generators to power paper mills at Whakatane and Mataura.

The country’s biggest electricity user Comalco agreed to allow interruption of supplies to its Bluff aluminium smelter if there is a problem elsewhere on the network.

The 85-store Woolworths chain, which includes Big Fresh and Price Chopper supermarkets, turned off one in 10 lights across the chain — 20,000 in total — and reduced air-conditioning from 22 to 20 degrees.

Property services manager Bill van Tilburg said he expected the company to cut 10 per cent off its power bill, saving enough electricity to power more than 1000 average-sized homes for seven days in winter.

Several power retailers are offering rebates to customers who cut back consumption.

Although the worst may be over, with lake levels rising and spot prices falling in recent weeks, power users coming off contracts in the next few months could expect price rises of 30 per cent or more, warns Employers and Manufacturers Association (Northern) chief executive Alasdair Thompson.

He says businesses need to know the options and implications of signing renewal contracts for two or three year terms or whether to “tough it out” when exposed to spot prices.

Business New Zealand chief executive Simon Carlaw says if companies had done things “by the textbook” they should have taken out longer hedge contracts.

Many had contracts that expired on October 1, and replacement contracts being offered were sometimes up to 150 per cent more expensive.

He says businesses had no idea what was going on, so had been unable to make proper decisions about the market. There was not enough information, transparency or accountability, said Mr Carlaw.

The Major Electricity Users Group says its members are doing their bit to cut consumption, while maintaining the market is flawed and calling for a review of its structure.

Alongside the Consumers Institute, Federated Farmers and Business New Zealand, it is arguing for a full review of the wholesale market’s part in this year’s power crisis.

Energy Minister Pete Hodgson has already discounted price controls, likening them to “covering up your fuel gauge and pretending that the car won’t run out of petrol.”

Instead, he said, increasing supply or reducing demand would bring prices down — which is what has happened.

Longer term, the Government is relying on the Electricity Governance Establishment Committee — David Caygill’s self-regulatory body due to report by December — to tune up the sector.

As part of its brief it will signal the first steps towards a “real time” market that will give consumers and wholesale buyers a clearer idea of power prices at different times of the day and year.

And as the country builds more non-hydro generation its reliance on the southern lakes and therefore rainfall will diminish, reducing the impact of future “dries” on supply and prices.

That includes a $400 million extension to Huntly Power Station (owned by Genesis Power) that will come onstream in time for the next major predicted shortage in 2005.

All of which the Government hopes will prove its belief that intervention in the market is not required.

Still, Mr Carlaw speaks for many when he maintains companies can’t be blamed for failing to predict what was going to happen to power prices. He says he’s nervous of Government regulators, but isn’t convinced competition is the full answer.

The one certainty is that business needs to sit down with the industry and Government and see what lessons they can take from the crisis.

“We should not have these sorts of arbitrary impacts on our economy — we need them like a hole in the head.”

Power to the People Supplement