Power generators 'made $5.4 billion in excess profits'

Friday, 14 September 2018

Tacit collusion may have handed New Zealand power generators $5.4 billion in excess profits over six years, an economist says.

A new report by University of Auckland economist Dr Stephen Poletti concludes that a lack of competition added 36 per cent to generators' profits between 2010 and 2016.

Poletti, a senior lecturer in energy economics at the University of Auckland Business School, 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 simulation also factored in hydro dam water level data.

Poletti said he would need to do more research to prove there was tacit collusion driving the prices, but it was one potential reason for the extra earnings - in much the same way that petrol stations' prices tend to follow each other.

**READ MORE:

* Rising power prices pushing Kiwi households into power poverty

* Review finds two-tier power market developing

* Electricity review a smoking pop-gun**

Currently, traders in Aotearoa New Zealand's five generator companies bid on supplying certain amounts of power into the wholesale market. This bidding operates a little like a deadline sale in real estate, except the drive is towards higher not lower prices: each bidder is blind to other bids, so the trick is to set the bid as high as possible but not so high that you are undercut by other bidders.

He said there were a lot of low-cost offers being made in the wholesale market. But the low-cost offers always stopped just short of demand, so the final price was set by the higher offers.

'The market price is considerably higher than the price would be if it was competitive.'

New Zealand's electricity market was one of the least regulated in the world, he said.  'We could have a different market design where people pay less for electricity.'

In Pennsylvania, Jersey and Maryland, in the United States, generators have to bid at the cost of production. 

Other options include a price cap or a 'single buyer' that would negotiate long-term contracts for different types of generation reflecting their cost structure,

The first discussion document released as part of the Electricity Price Review said it had not seen evidence of the industry making excessive profits, although it could have a more effective wholesale contract market.

​Poletti said he was sceptical of how the industries' costs were calculated to determine that. In Alberta, Canada, a 20-year auction for wind power had resulted in prices that were less than half what had been established as the long-run marginal cost in New Zealand.

 'Even if it's true, that doesn't suggest there's not market power.'

While the research looked at wholesale prices paid by retailers, Poletti said they would affect what customers paid, too.

'In the short term some customers on real-time price contracts will be paying higher prices than they would if prices were competitive,' he said.

'However, customers on fixed-price contracts, most of the market, would see no change in prices. However, in the long run it is hard to see that the retail price is not benchmarked to some extent to the average spot price.'

 Rory Blundell, acting chief executive of the Electricity Authority, was unconvinced by the report. He said it was inconsistent with the findings of the panel conducting New Zealand's electricity price review.

'This kind of analysis has been found wanting in the past and we believe will again. The panel is in a good position to get to the bottom of it, if it considers that is warranted,' he said.

'The authority specifically looks for instances when generators could potentially profit from raising prices. In 2017 we did not identify any such periods. We have provided this information to the panel.'

*Comments on this story are closed