Energy Minister Megan Woods not ready to give power firms the 'Telecom' treatment

Thursday, 15 April 2021

The Electricity Price Review described the structural separation of gentailers as unnecessary, and for now the Government is sticking by that advice.

Energy Minister Megan Woods has brushed off calls to consider overhauling the “Bradford” reforms of the electricity industry by structurally separating ‘gentailers’ Meridian, Genesis and Mercury.

But she said that while a reform of that nature was not on her work programme, she was “not saying it is resolved for all time”.

“Is it something that may have to be revisited in the future? Probably, maybe.’”

It is now almost two years since the Government’s Electricity Price Review that was intended to create a fairer market and “more affordable prices”, and more than 20 years since the Electricity Corporation was dismantled by former National Minister Max Bradford to create the current market model.

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Energy Minister Megan Woods says she is not happy about conditions in the wholesale market, which she said were “inevitable” and why the Government was considering schemes such as pumped hydro at Lake Onslow.

Woods had said the Government’s response to the price review in November 2019 would “take the pressure off the monthly power bill”.

But dry weather, gas shortages, and a long spell of relatively low investment in new generation have combined to send spot market prices soaring above 30 cents a kilowatt-hour for much of this year.

Spot market prices have been reflected in steep rises in electricity futures prices, which are threatening to flow though into broader price rises for small businesses and consumers.

The proportion of electricity generated by renewables has slipped below 80 per cent as the Huntly Power Station burns more coal to keep the lights on.

Woods acknowledged the share of electricity produced by renewables would have fallen in both 2019 and 2020 but said it was too soon to say if it would fall for a third consecutive year, this year

Woods said she was “not happy” about the current situation but said it was the result of dry weather and problems with supply from the Pohokura gas field.

Major Electricity Users Group chairman John Harbord says generators are “almost incentivised to keep the market on the precipice of shortage”.

“It has happened before, it is reasonably inevitable” and that was why the Government was spending $100m to look into a pumped hydro scheme at Lake Onslow or alternatives to address the issue of dry year risk, she said.

John Harbord, chairman of the Major Electricity Users Group, has been sounding a warning since March that the survival of businesses is at risk as a result of power prices, and said he was very concerned.

“In a workably competitive market, you’d expect to see downward pressure on prices through competition and we just don’t see that in New Zealand.”

“Generators themselves are almost incentivised to keep the market on the ‘precipice of shortage’ because that is where they can sell the individual units at the highest possible price,” he said.

Energy Minister Megan Woods told Parliament in April she was taking the situation in the electricity market very seriously.

The planned closure of the Whakatane Mill in June with the loss of 210 jobs demonstrated what happened when spot prices were too high, he said.

“For a lot of industrial and manufacturing companies, electricity is one of their top two or three costs and when wholesale prices are up to 10 times their long term average, it is just not sustainable.”

National’s energy spokeswoman Barbara Kuriger said the country was “rapidly facing an energy emergency”.

Independent retailers had sought to persuade the Electricity Price Review to recommend restructuring electricity supply along the lines of ultrafast broadband by splitting the gentailers into generation and retail businesses.

Structural separation could allow for the generation arms of the three gentailers to be converted into a Chorus-like utility that operated under different incentives from today, with their retail arms potentially fully privatised.

Harbord said it was “worth having a look” at separation, though the MEUG would want to see evidence from a robust cost-benefit analysis before supporting such a move.

“We wouldn’t want to advocate for separation on an assumption it would lead to better outcomes because we might be wrong.

“[But] it is a genuine open question that we would like to see examined. If you wanted the confidence the market was performing, then I do think you need to have a look at that question,” he said.

Retailer Ecotricity argued in a submission to the Electricity Price Review in 2018 that in contrast to electricity prices, telecommunications prices dropped significantly after Telecom was split into Spark and Chorus in 2011.

Luke Blincoe, chief executive of Electric Kiwi, another company that has argued for a generation/retail split said “no-one is really articulating a rational reason not to do that”.

But the Electricity Price Review concluded in 2018 the structural separation of gentailers was “unnecessary” because lower-cost and less risky options were available to “counter the drawbacks of vertical integration” while retaining the benefits of integration.

Cameron Burrows, chief executive of the Electricity Retailers Association, whose 12 members include the major gentailers, supported that view.

“New Zealand has a well-performing electricity sector with the current system delivering the sixth cheapest residential electricity prices in the developed world,” he said.

”The review found no evidence of integrated generator-retailers making excessive profits.”

Wholesale electricity prices were high at the moment because of shortages of water and gas, Burrows said.

“Electricity consumers, particularly industrial customers, who choose a spot price electricity plan should be well aware of the risk that fluctuating prices can result in higher electricity costs.”

Woods said alternative “market making” reforms proposed by the Electricity Price Review should be given more time to take effect.

But she has asked officials at both the Ministry of Business, Innovation and Employment and the Electricity Authority to look at whether current wholesale prices are reasonable and expected their response within weeks.

“If ‘no’ then I will go back and ask for further advice,” she said.

The Electricity Authority is also conducting its own broad review of the wholesale market.

Blincoe said his own meetings in recent weeks with officials advising Woods suggested they would not promote a fundamental market reform of their own volition.

The view of officials seemed to be that higher wholesale prices were a sign of the market “doing what it should” and that independent retailers should have bought further in advance to avoid the consequences, he said.

“But where can you buy 10-year hedges? At that point you are just speculating.”

Blincoe has previously argued the Government is conflicted in overseeing the electricity market while the Crown remains a 51 per cent owner of Meridian, Genesis and Mercury.

That stake in the three companies is worth more than $13b based on their current sharemarket prices, but could be expected to fall if the Government took steps that reduced their profitability.