Thursday, April 18, 2013

Fixing the electricity market

Back in the 90's, the then-National government "reformed" the electricity sector, breaking up the state-owned ECNZ into competing generators and lines companies, and selling one of them (Contact Energy) off to foreigners. The reforms are widely acknowledged to have been a disaster, producing an oligopoly rather than competition, regular shortages (with windfall profits due to high spot prices) and continually rising residential prices as rapacious foreign owners (particularly of lines companies) used their market power to extract monopoly profits. Despite this, successive governments have refused to admit that the market is fundamentally broken, and focused on attempting to boost competition rather than fixing the fundamental problems.

Now Labour and the Greens have broken with the competitive market model in favour of introducing a Pharmac-style single buyer as an intermediary. This will effectively set electricity prices, removing the unearned super-profits and producing solid savings to consumers. But more interesting is its effects on the wholesale end: the new single buyer will contract for new generation capacity as needed using long-term fixed-price contracts, giving it control both over prices and the generation mix, and effectively giving us a feed-in tariff system by stealth (in the sense that new generation will have a reliable, fixed price for their electricity, rather than being exposed to the vagaries of the spot market). Incidentally, this should make it much easier for generators to finance new investment, as they will be able to point to that long-term supply contract, and borrow against it (which is another advantage of feed-in tariffs).

It looks like a workable system, and its in use overseas, both in the EU, and in Ontario (where it was introduced after a similar spectacular failure of a market model). The major losers will be electricity generators, who will lose the ability to screw us for monopoly rents. At the moment, they're mostly owned by the government anyway, so its effectively the government choosing to have lower (non-gougy) returns. But its also quite deliberately aimed at privatised electricity companies, like Contact Energy and Mighty River Power. Both will be looking at much lower profits under this system. Those thinking of stealing part of Mighty River should take note.