Chasing affordable power bills

Martin Hunter

Electricity prices rose 72% from 2002-08.

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Rob Jager, Shell's New Zealand Country chairman, purrs contentedly to journalists at a briefing in the tiny control room in downtown New Plymouth of the unmanned Pohokura gas production facility, 8km away and out at sea.

"Am I pleased with Pohokura? You could say I'm ecstatic," says Jager. "If only we had another two or three Pohokuras."

Pohokura is a sophisticated facility which began producing gas two years ago and now provides 40% of all the gas used for electricity generation.

Already it's pumping nearly half of what the giant Maui gas field did in its hey-day, says Jager, and its gas reserves were officially upgraded last year by 24%. Future drilling at Pohokura could mean a substantial growth in those reserves, he says.

An hour's drive away, and inland, at Todd Energy's McKee/Mangahewa gas field, chief executive Richard Tweedie says the death of gas-fired electricity stations has been greatly exaggerated. "The assumption that gas is in decline is wrong," says Tweedie. New Zealand was supposed to run out of gas by next year.

He believes known gas reserves will last New Zealand "well beyond 2030". Tweedie also announces that Todd Energy will build a new gas-fired 200 megawatt power station, probably in Taranaki.

With the new Government's axing of the ban on base-load thermal generation, the local natural gas exploration and production industry is standing tall and sounding optimistic.

So, too, are big electricity users who say the greater recognition of the place of gas in producing electricity may spell good news on the price front.

Ralph Mathes, of the Major Electricity Users Group, says the previous government's preference for getting ahead of the rest of the world in pricing carbon into the economy meant the country was heading down the path of higher-cost renewables.

He says a much lower exchange rate may also be altering the economic argument in favour of non-renewables such as gas.

"Windfarms are more capital intensive and the machinery is all imported," he says. "So maybe you are better to build a gas station and pay for local gas in local dollars."

If "getting things in perspective on climate change" has implications for electricity pricing, so too does the ministerial review of the electricity market.

Besides covering security of supply and electricity sector governance, the review will also look at the affordability of electricity to consumers.

The fact that the review was announced only days after consumers were warned of retail price rises was not the only irony. For two weeks previously, the wholesale price of power had been heading significantly down. In fact, forward wholesale prices have been on a downward trend since November last year.

At that time, after a dry winter and with lake levels still low before melting snows kicked in, the market was predicting prices of 9c/kwh in the third quarter in 2009. By mid-March that had fallen to 6.6c, and last week was at 7c.

Summer and early autumn rains have meant current lake levels are above average full, the opposite of this time last year. At the same time demand is low, mainly because a potline at the Bluff aluminium smelter is out of action. And thermal generators have got planned outages behind them, and are prepared to run hard all winter if needed.

But once again, while the benefit of lower prices may be flowing through to the wholesale market, retail customers must cope with continued rises. What is driving power bills ever higher is the cost of building new power stations and, even more significantly, the huge cost of upgrading the transmission network.

Energy minister Gerry Brownlee says the government is looking for ways "to get off the escalator of power price rises", but energy consumer advocate Molly Melhuish is not expecting the review to do much for power affordability, especially for low-income consumers.

"While Brownlee and other government ministers insist on their share of dividends and profits from SOE generators, they are putting their own revenues above consumers."

While sounding tough on power price rises, Brownlee has also indicated that the review would not result in a radical shakeup in the market or a return to a more centrally-controlled approach.

Melhuish says the current market structure meant it was perfectly legal for generators to use their market power to maximise their profits and charge what the market could bear.

Mathes says big generators such as Meridian have the market power to set prices as it sees fit "and everyone else follows".

He also believes SOEs have been able to work the electricity system to reap excess profits by revaluing their assets as justification. Meridian had made two revaluations of assets of around $1b each, which allowed it to argue a modest rate of return.

PRICES & PROFITS

Electricity prices rose 72% from 2002-08. CPI increased 29% during the same time.

Profits for the Big Five generators rose from $287m to $760m from 2002-07.

The three SOE generators made nearly $4b of profits from 1999-2008. They handed $2.6b of that back to the government.

The value of the Big Five generators' assets rose from $8.5b to $16.8b during 2003-08.