Smart electricity sets a complex regulatory challenge

OPINION: Here are two views about the electricity industry: it charges consumers too much; and the large government-owned parts don't deliver big enough dividends to the Government. The Government holds both views.

Here are two more views: there must be security of supply, regardless of droughts; and consumers must not be required to reduce their demand through, for example, efficient light bulbs. The Government holds both views.

And here are two more views: the right smart meters could reduce demand and save consumers money; retailers, who are installing half-smart meters at great speed, are not to be told before the end of the year (if at all) to install the fully smart ones. The Government holds both views.

Here are two contradictory forces: New Zealand is a small country which can innovate, move fast and be a world leader; New Zealand is a small country which has to fit in with technology and standards decided in big countries. Making the wrong call too early can be costly.

The argument last week over smart meters is a case in point.

The parliamentary commissioner for the environment noted that there was now a rush by all big retailers (mostly owned by generators) to put in half-smart meters. Meridian started some years back. Its meters make money for Meridian but only indirectly, at best, for their customers.

The commissioner's brief is not the health of the Government's books or householders' cashflow. Its brief is the health of the physical environment. Smart meters which enable consumers to better manage their consumption (and lower their bills) would reduce pressure on the environment by reducing the need for new generating plants.

Energy Minister Gerry Brownlee agrees: "I personally believe the next generation in electricity innovation will revolve around smart meters, smart grids and smart appliances. Smart meters have to be genuinely smart and not just revenue tools for the retailers."

So he is rushing through regulations to sort out the retailers? Well, no. He will patiently wait six months for a report from the Electricity Commission. (That's the outfit that held up Transpower from getting on with fixing up the ageing grid that threatens blackouts.)

Mr Brownlee's problem is Adam Smith's second law: that businesses will fix prices if they can. Telecom played hard according to that law for more than a decade before the Government got out the sledgehammer.

The electricity oligopoly has weak incentives to make life better for consumers and strong incentives to fatten profits. The previous government eventually started to impose regulations on them.

Regulation is not this government's instinct. Simon Power demonstrated that this month by deciding not to regulate franchising, despite some recent ripoffs.

Moreover, Rodney Hide is minister for regulatory reform and his support agreement with the National Party commits both parties to the principle of "limited government". He will take a paper to the Cabinet today to set up a commission to monitor progress toward closing the wealth gap with Australia and assessing whether government policies are the right ones to do that.

Mr Brownlee scotched some energy regulations, including on biofuels and light bulbs, when he came to office and he changed the Electricity Commission's riding instructions. He now has to work out where, when, how and how intrusively he should regulate and when and on what he should leave the industry to get on with the job. The previous government couldn't find that golden mean. Some supposedly sophisticated jurisdictions haven't either: electricity failures are a fact of life in rich, super- smart California.

Part of Mr Brownlee's conundrum is that industry players need a reasonable assurance that if they invest in large, long-lasting assets the prices they get will cover their costs and make a reasonable return.

Another complication, noted in passing by the parliamentary commissioner, is "distributed generation": businesses and households generating electricity (out of waste or by windmills or solar panels) and feeding that into the grid when they have a surplus.

In Germany, the law sets a minimum tariff for such generation and requires the industry to accept the power. The consequence is rapidly expanding solar generation. Here such initiatives are off the radar. So New Zealand will plod along behind the game, as it did with wind.

Electricity is not a simple matter. It requires hard decisions that owe nothing to ideology (of left or right or green) and everything to high-quality fact-based analysis and supple, future-focused policymaking. That is Mr Brownlee's challenge. He will need every ounce of the energy coiled up in his impressive frame.

ColinJames@synapsis.co.nz

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