Partial privatisation stymies market changes

BRYAN LEYLAND
Last updated 05:00 07/07/2012

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OPINION: Many people claim that the partial privatisation of the state-owned energy generators will make electricity even more expensive.

The problem is that they are shooting at the wrong target. Our electricity market has been driving up prices for the last 10 years and this will continue regardless of ownership.

The state-owned enterprises are instructed to operate commercially and that is exactly what they do. Much of the time they have market power and use this to extract high prices.

It is quite possible that having some independent directors rather than ones chosen by the Government will lead to more efficiencies, reduce costs and, one hopes, prices.

The debate we must have is on the electricity market. Why has it driven up prices at a steady rate that is well in excess of inflation? Why are the hydropower generators making huge windfall profits?

Why is it uneconomic for generators to hold on to the reserve generation we need for a dry year?

Why is it that demand-side management – what we used to call peak load control – is virtually non-existent compared to the situation 20 and more years ago when we had the best load management system in the world?

The problem is that we have an electricity market designed largely by economists who did not understand the complexities of electricity generation.

The market is now controlled by the power generators – who make huge windfall profits – and regulated by the Commerce Commission and the Electricity Authority who know more about traditional economics than they do about power systems.

Compared with alternatives, the electricity market has cost New Zealand consumers and the economy billions of dollars.

Hydro generators make huge windfall profits because they get paid the same price as the most expensive generator selected to generate.

Because generators only get paid if a power station actually generates, it is uneconomic for them to hold on to the reserve generation that we need in a dry year.

So Genesis will shut down one of the Huntly units at the end of this year – a unit that, right now, is generating flat out.

But don't blame Genesis: blame the people who did not understand that providing for dry year generation is fundamental to the security of the system and the generators need a guaranteed annual income in return for keeping reserve plant available in wet years.

New Zealand's load management system once controlled water heaters and other loads to the extent that the system load could be held steady from 8am until 9pm.

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Now we have morning and evening peaks hundreds of megawatts higher than they need to be.

Consumers pay and generators profit. For some strange reason the electricity market removed the incentives for the lines companies to manage peak demand. So, with one exception – the upper South Island – they don't.

Many of the problems can be solved quite easily. If the lines companies are not allowed to pass Transpower charges straight through to consumers, they will immediately have a strong inducement to limit peak demand. If they do so, generation costs will be reduced, and transmission and distribution investment will be deferred. The consumer will benefit.

If load control takes full advantage of modern technology, the amount of expensive reserve generation needed to cover for the loss of the DC link or a major generating plant will be substantially reduced.

The saving will be millions, and the consumer will not even notice that his water heater was off for a few minutes to save the situation.

In addition, retailers will be able to manage the water heaters of their own consumers and, by shedding them when the price is high, save them a lot of money.

If the regulators could be persuaded to make the small changes needed, consumers would be better off by millions of dollars.

Stopping the generators making windfall profits and manipulating the market would require that the Government accepts that there are serious problems with the market and looks at alternative market designs.

The potential benefit would be hundreds of millions of dollars a year. Sadly, I think there is little chance this will happen.

It is all these problems, not the partial privatisation, that people should be lobbying about. But one thing is certain: once the partial privatisation goes through, it will be virtually impossible to make the much needed changes to the electricity market.

Bryan Leyland is a power industry consultant.

- BusinessDay.co.nz

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