The Electricity Authority assures us that we have an efficient and competitive market and, because we escaped shortages in the dry winter of 2017, we can be confident the market is capable of dealing with any dry year. But is this really the case?
At the moment, the hydro storage lakes remain unusually low in spite of recent rainfall; the snowpack is very low indeed; Huntly has only 230,000 tonnes of coal on its stockpile instead of a prudent 1 million tonnes; the amount of gas that could be available during a shortage is unknown and the EA and Transpower have admitted that the methodology for calculating dry-year risk is optimistic.
Over the last two months, power prices have been nearly as high as they were last winter. How high will they get if, as predicted, there is no period of heavy rainfall in the hydro catchments? What will happen to our economy if rotating blackouts are needed? What will we do with the milk if dairy factories are forced to shut down?
Efficient markets are ruled by the laws of supply and demand. When the demand is low the price drops. When the demand is high the price increases. High prices reduce demand and low prices increase it. But this happens only if the value of the commodity is close to its market price.
With electricity, demand does not drop rapidly as the price increases because, to many consumers, the real value of a continuous supply is more than 100 times the price.
The high value allows generators to rort the market simply by restricting the supply and selling a slightly smaller amount of electricity at a high price — more profitable than selling a bit more at a low price. In a shortage situation the price becomes "a trade-off between greed and guilt".
Fortunately for consumers, generators are aware that if they push the prices too high the economy will suffer and the Government will be forced to act. This is likely to be the major stabilising influence.
The public are entitled to expect a reliable supply at a price related to the actual cost.
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Efficient markets respond rapidly to increases in demand by shipping in more goods or by the customers switching to an alternative. With power systems, it takes years to build new power stations and there is no alternative to electricity.
It is not "a commodity like any other". It is in the same class as roads, water and sewerage systems that are essential for a modern economy. The public are entitled to expect a reliable supply at a price related to the actual cost.
One of the peculiarities of our "market" is that spot prices are often very high early in the morning and fluctuate wildly during the day. Faced with rapidly fluctuating prices, major consumers cannot plan ahead to minimise load when the price is high.
So they don't bother. So, contrary to economic theory, price does not effect demand in the short term. But continued high prices drive energy intensive industries and their jobs overseas.
The market does not reward generators who can guarantee to be available during peak demand periods and it does nothing to ensure that adequate reserve capacity is always available during a dry year to avoid high prices and shortages.
Transpower's latest review of system security pointed out that we will soon have insufficient capacity available to meet peak demands.
If the market put a realistic value on the cost of meeting peak demand it would reward generators who provide reliable capacity and those who were able to shed load during peak demand periods.
This could rejuvenate our rundown hot-water control system that once gave New Zealand the best demand-side management system in the world.
Transpower's dry-year review is not helped by the fact that the Electricity Authority (EA) dictates how Transpower should evaluate the risk of dry-year shortages. The EA methodology seriously overestimates the amount of reserve generation available and underestimates the actual peak demand. These errors lead to a false sense of security.
The Government needs to face up to the fact that the market has failed to control prices and may well put the economy at risk in the event of a dry year.
What is needed is an independent review of the whole electricity system and market. This should be done by people with experience in operating and managing power systems and who are not wedded to the existing market structure or make money from it.
The review should start off with the premise that the consumers are entitled to a reliable and economic supply. It should look at what has been happening in our market and why it has happened.
It must also examine other market structures such as subsidiary markets for peak demand capacity and dry year reserves and the single-buyer market that was recommended to the Wholesale Electricity Market Development Group right at the beginning. Had it been accepted, New Zealand consumers would be billions of dollars better off.
• Bryan Leyland has been in the electricity industry for more than 60 years and worked in more than 30 countries. He and his wife are major shareholders in a small hydropower station that profits from the shortcomings of the electricity market.