'Loyal' customers set to benefit from electricity review but gas users may pay more

Thursday, 29 August 2019

The Electricity Price Review stemmed from consumer concerns but not everyone thinks the underlying industry structure is right.

ANALYSIS: New rules are likely to be announced by the Government in the next few weeks that should result in electricity companies lowering their prices for consumers who haven't bothered shopping around for the cheapest power.

Less clear is whether the Government may bite the bullet it has sucked on in the past and begin to overhaul the controversial market model imposed on the industry by former National minister Max Bradford 20 years ago.

Bradford's changes saw state-owned generator ECNZ split into Genesis, Meridian Energy and what is now Mercury, prior to their partial privatisation in 2013 and 2014.

All should be revealed before the end of this month, when Energy Minister Megan Woods is expected to release her response to the Electricity Price Review that the Government kicked off in April last year, along with the final report from that inquiry that ministers have kept under wraps since May.

* Electricity Price Review proposes help for struggling households

* Review finds two-tier power market developing

The review was prompted by concerns that consumers were paying too much for electricity and had seen their prices rise faster than the rates charged to commercial and industrial power users, but the opportunity is there to tackle wider issues, including climate change.

'Energy hardship' has been one focus of the Electricity Price Review.

It is almost a foregone conclusion that the Government will act to prevent electricity retailers offering 'last-minute deals' to dissuade customers who have given notice that they intend to switch suppliers from seeing through their decision.

Outlawing such 'win-back' offers, which are more accurately described by the Commerce Commission as 'saves', should make it easier for independent retailers to win business from Genesis, Meridian, Mercury, Contact Energy and Trustpower.

More importantly, it would mean the big five 'gentailers' (companies that both generate and retail electricity) would have a greater incentive to offer more competitive rates to customers who hadn't shown signs of shopping around for electricity – because once they did shop around it would then be too late.

The Electricity Authority estimated last year that between 400,000 and 750,000 households had never switched supplier since 2002.

A two-tier market appears to have formed, with 'switchers' offered competitive rates and deals, but the remaining 23 to 42 per cent of consumers often taken for granted by their retailer.

Measures are likely to at least tinker at the edges of the shortcomings in the wholesale market, but tackling them head on by structurally separating electricity generation and retailing would be a surprise.

Electricity retailer Electric Kiwi believes the latter group have been paying a '$400 million loyalty tax' because of their inertia, with Mercury 'saving' a staggering 40 per cent of its defections through win-backs.

A more controversial draft recommendation of the Electricity Price Review is that retailers should no longer be obliged to offer plans tailored to low-energy users that come with a low fixed daily charge but a higher price for each kilowatt-hour used.

Phasing out such plans, which would be packaged with extra help for those in 'hardship', would mean consumers who heated their house and hot water using gas could expect to pay significantly more for electricity.

While the review team expects prices would come down 'overall' from such a change, Consumer NZ has advised caution.

There appears to be a much bigger problem buried deeper in the wholesale market for electricity.

Auckland University professor Stephen Poletti has argued that generators are earning nearly $800m a year in excess profits.

Most power is produced at a very low variable cost including through hydro plants that may once have been expensive to build but cost little to run.

But the price that independent retailers pay for their electricity is ultimately determined by the most-expensive megawatt generated to balance supply and demand, which is often fuelled by gas or coal plants that have the reverse economics, leading to a high 'producer surplus' and big incentives to game the system.

Gas users would be hit hardest if an existing requirement for retailers to offer plans with low daily fixed charges and high kilowatt-hour pricing is phased out.

The Electricity Price Review's final report is expected to have recommended several minor tweaks to the wholesale market that could make it a bit easier for independent retailers to buy power on more competitive terms, and which Genesis, Meridian and Mercury have indicated they could largely live with.

The battleground has been centring on whether gentailers should also be forced to 'make a market' in electricity by having to buy power on certain contracts at a price no lower than 5 per cent below the price at which they are prepared to sell.

The simpler solution would be for the Government to instead structurally separate the industry by preventing owners of large grid-connected power plants from selling electricity directly to homes and businesses, requiring them to sell their retail operations.

Energy Minister Megan Woods is expected to release the Government's response to the Electricity Price Review within a few weeks.

Independent retailers Ecotricity, Electric Kiwi, Flick Electric, Pulse, Vocus and Energyclubnz which is partly owned by Stuff, argue structural separation would be the 'gold standard' for eliminating anti-competitive behaviour by generators.

But an 'options paper' published by the review team in February described structural separation as disruptive and 'unnecessary', and no-one doubts they will have stuck to that view in their final report.

If the Government did surprise the industry by overruling its experts – as it has done before by not implementing the capital gains tax recommended by the Tax Working Group – it could pave the way, either now or down the track, for Genesis, Mercury and Meridian to be merged back into a single business.

That would not be an extreme policy.

Structural separation and a re-merger would mean the electricity industry would have approximately the same market structure that the National government imposed on the telecommunications industry when it forced Telecom to split into Spark and Chorus and decided that retailers of ultrafast broadband (UFB) should compete on an even footing.

Unlike Bradford's reforms, National's UFB policy has delivered vastly improved infrastructure and competitive outcomes for consumers.

Reintegrating the 51-per cent stated-owned generators and spinning off their retail arms into fully privatised businesses may ultimately prove necessary.

That is if the industry is to meet the challenge of increasing electricity supply by 43 per cent to generate the 57 terawatt-hours (TWh) that Ministry of Business, Innovation and Employment officials believe will be required by 2050, and the Government's goal of 100 per cent renewable generation by 2035.

There are signs that the major generators are finally about to invest in some decent-sized new power plants, with Contact Energy set to decide early next year whether to build a new geothermal plant at Tauhara and Genesis Energy supporting a 31-turbine wind farm at Waverley in South Taranaki.

But high consumer power prices appear evidence that the fragmented, partially-privatised generation industry will have a natural bias towards under-investing in generation, especially while each generator is dwarfed by the big shadow of the potential closure of the Tiwai Point aluminium smelter suddenly unleashing 5TWh of supply onto the market.

Post the Bradford reforms, the industry has proved its ability to create jobs for about a parliament full of industry executives on Cabinet Minister salaries, and work galore at telemarketing and door-knocking firms churning consumers between power plans.

But low-cost and much greener generation – arguably not so much.

In the event that a reunified state-controlled generator with a different risk profile and priorities were to swing too far the other way and over-build renewable generation to the extent that there was too much for New Zealand's needs, there would seem little danger of it going to waste in an era of international climate change action.

Renewable power can be exported in a myriad of ways, including as it is now in the form of aluminum from the Tiwai smelter, by a reinvigorated IT industry running data centres in New Zealand, or in the form of 'green hydrogen' produced through the electrolysis of water.

The later is a new export industry that Z Energy said in a July report was already being built by solar-power generators in Australia, Middle East, South America.

But first, the Government would have to conclude its opportunity was bigger than just fixing a consumer problem in the industry.