Powercos to cash in on carbon

Consumers continue to be concerned about power companies' ability to game the system. In this story from April, Garry Sheeran explains how.

Windfall profits are on the way for power companies already flush with cash, experts say, as consumers bear the brunt of higher power prices from plans to penalise carbon emissions.

The perverse outcome is a result of the electricity market delivering consumers the most expensive power available to meet demand, not the cheapest.

Add tradeable permits into the mix and some generators will get a chance to double dip - earning extra profits on higher prices and on-selling carbon permits.

Energy experts and business leaders were sounding alarm bells as the deadline closed this weekend for submissions on the government's draft energy strategy.

Released in December, the document makes it clear the government wants to introduce financial disincentives on power generators that emit greenhouse gases.

But energy experts say the document completely under- plays the opportunity for the new forms of monopolistic behaviour that an emissions trading regime will present to power companies.

"Already we are starting to see some gamesmanship - it will only get worse," said one. "There's an awful lot of self interest out there."

Business NZ chief executive Phil O'Reilly said he was concerned Meridian was now saying its Makara windfarm project was only marginally viable.

"You get the impression they are calculating how much they are going to try to get out of the system to make the project pay for itself," he said.

Contact Energy has called on the government to introduce a carbon dioxide emissions charge of at least $20 a tonne, which would make it uneconomic for competitor Genesis Energy to run the coal-fired Huntly Power Station.

"Are we seeing anything more than generators touting for how much money they would like to maintain their profits and investments?" asked on energy industry source. Genesis spokesman Richard Gordon said Contact were playing a "dangerous game".

Huntly last year produced 15% of the national power output, he said.

"There are not renewables around now, or likely to come on stream soon, that would replace that contribution."

All an emissions trading charge on Huntly would achieve would be a further lift in power prices, Gordon said.

And, thanks to the curious way the wholesale electricity market works, the result will be more easy profits for generators who run hydro dams, wind farms and geothermal plants.

In other markets, the cheapest price usually wins the day.

But it is a different story when the national electricity grid operator bids every half hour for electricity from various generators to meet demand.

The operator must accept the highest price to fulfil that demand. To accept a lower price would mean demand was not met and lights would go out.

That highest price is then paid to all generators who bid to meet (the required level of) demand.

Most days it is the cost of thermal fuel - coal and gas - which determines the price of electricity. Genesis is the biggest thermal generator by far.

Generators like Mighty River, Meridian and TrustPower, who run mainly windfarms and hydro-stations, have no fuel costs to consider, but they piggy-back to higher prices (and windfall profits) on the back of what thermal operators must bid. Energy experts are worried such opportunities for windfall profits (and racked prices) will only increase with an emissions trading regime.

The government is a long way from deciding just what that trading regime will look like.

One possibility is generators will either be issued with or have to buy allowances to cover the amount of carbon dioxide they emit.

Thermal generators may need to buy more allowances off generators running windfarms.

Those generators could demand a high price, or simply withhold them. Then the thermal generators would be forced to pay penalties to the government for exceeding its emissions allowance.

In every event, the costs of such gamesmanship will be passed on to electricity consumers in the form of higher prices, and non-thermal generators will piggy-back to yet more windfall profits.

Linking a New Zealand emissions market into a bigger overseas market would increase liquidity and curb monopolist tactics, but would come at a price.

Gordon said Genesis accepted there would be charges for carbon dioxide emissions, which would impact on how hard the company ran Huntly.

"But to believe you can take Huntly out of the equation in seven years is a recipe for `brown-outs' at best," he said.

Some submissions to the government's draft energy plan are known to be calling for a carbon charge of up to $36 a tonne, higher than Contact's $20-$30 a tonne.

What impact that would have on domestic power bills is hard to calculate, although earlier government documents calculated a $15-a-tonne carbon charge would add $14 (or 15%) to a wholesale industrial electricity price of $65-a-megawatt hour.

- © Fairfax NZ News