What is behind our super high electricity prices?
Friday, 9 August 2024
New Zealand’s energy costs have created a spark recently with wholesale electricity prices being the highest in the developed world.
And the high prices, which are behind the closure of two Ruapehu mills, are up to six times what Australia pays and will soon be hitting New Zealand households’ budgets.
So why are our prices so high?
Since September 2021, wholesale electricity prices had increased from about $100 per megawatt hour (MWh) to about $700 per MWh currently.
Electric Kiwi chief executive Luke Blincoe said there were a number of different reasons which were the results of a “broken market”.
“The soaring electricity prices we are currently experiencing are caused by tight supply conditions, but they are a symptom of something deeper.
“Right now, the major factor is hydrology, eg: not enough water in lakes. This is worsened due to Niwa forecasting more dry weather.
“But the fact that the gentailers have been incentivised to hold on to new generation consents and run generation lean to maximise profits is the root cause.”
The four main ‘gentailers’, which are generator-retailers, in New Zealand are Meridian, Contact, Genesis and Mercury.
In August 2023, the companies announced their largest ever single-year rise in earnings, with a combined earning of $2.7 billion in operating profits.
Combined, those top four gentailers made a whopping $2.7 billion in operating profits. That’s around $7.4 million profit every day over the past 12 months.
Associate Energy Minister Shane Jones accused the big power companies of profiteering on RNZ on Thursday.
Jones said the minister of finance and minster of energy were getting urgent work done to look at what short-term measures the Government could take if there were deeper structural failings in the rules and the regulations governing the energy market.
Were these extreme prices to be expected?
Blincoe believes it should have been.
“The generators have been irresponsibly keeping generation lean for years. They do this because it is massively in their economic interests to do so and they have the market power to execute their strategy,” he said.
“We’ve been saying for years that the broken electricity market does not create the appropriate incentives for new generation or retail competition.
“Skyrocketing peak electricity prices over the past few years have been driving mega profits for the gentailers whilst reducing competitiveness in retail and putting upward pressure on consumer and business energy costs.
“There has been canary loudly squawking in the mine for several years - but no one was listening. Finally the canary has carked it.”
Jon Duffy of Consumer NZ agreed the risks and vulnerabilities to New Zealand’s electricity supply had been well known in the industry for decades.
“While some generation has been built more recently, it’s been too little too late.
“With our current market structure, gentailers are most profitable when new generation is delivered late rather than early. We are concerned that the current market structure rewards scarcity in the form of large profits to gentailers, especially if this is a reason as to why the industry has not delivered the investment into new power stations to meet demand, and protect consumers.”
So what needs to be done?
Electric Kiwi wants the Government to step in.
“We need a market where there are incentives for more generation to be built, and where there is fair access to energy hedging products, so that innovation on the retail side of the market can drive new ways of controlling demand, especially peak energy demand.”
Breaking up retail and generation arms of the gentailers needed to be “executed urgently”, he said.
“We have seen independent retail squeezed out of the market lately, and that is a terrible outcome for NZ, and now we are seeing industry squeezed out and job losses too.
“It’s a disaster for NZ and it’s all completely avoidable.”