Speech: Parker - Energising New Zealand

The need for action
The relentless rise in electricity prices has to be brought under control.

The evidence is clear.

This graph shows how since National’s Bradford reforms in the late 90s, bills for residential customers have been increasing much faster than for other users. In fact, residential bills have gone up more than twice as fast as inflation since the Bradford reforms.

This chart shows that the runaway prices have opened up an enormous gulf between what industry and homeowners pay.

According to the International Energy Agency that gap is the second highest in the developed world.

There’s no logical reason for the gap to be this big.

In fact prices have been growing faster than in many overseas countries - despite the fact that we have an abundance of low-cost renewable generation.

Look at the comparison with USA, UK and Canada. New Zealand prices have tripled since 1990, the others did not rise by even 50%.
What is happening is unfair to consumers and undermines the competitiveness of our economy.

Why are prices out of control?
When markets are not truly competitive, excessive profits are extracted from consumers. There is no moral authority for relying upon markets to control price when they are not competitive. They misallocate resources within the economy, and are predatory of consumers.

There is considerable evidence that the electricity market is not competitive, especially for residential customers.

1. The huge gap between industrial and residential prices – lines charges do not explain the difference.
2. In 2009 a report from internationally recognised expert Frank Wolak concluded that the four big generators were able to make an 18% super profit, totalling $4.3 billion.
3. Consumers in centres close to generation sometimes pay higher prices than those more distant
4. The forced sale of half of the Waitaki dams from Meridian to Genesis. Using the physical resources less efficiently in an attempt to achieve a competitive market was ridiculed by many and showed how uncompetitive the market is.
5. Carbon pricing was used as a reason to increase electricity prices, but the collapse of carbon prices to close to zero saw no corresponding decrease.
6. Retailing is concentrated in companies owned by major generators.
7. The lack of restraint shown in million dollar salaries and directors’ fee hikes is further evidence.

Despite NZ being rich in low-cost renewable electricity, consumers benefit less and less.

It’s not just inadequate competition.

The actual cost of generating most of our electricity isn’t what drives the price.

Currently, electricity is traded in a spot market where every half an hour the price is set by the generator who supplies the most expensive electricity.
That price is then paid to every generator who supplies electricity during that period, no matter how much it actually cost to generate it.

In most cases electricity sells for many times more than it cost the company to generate.

The current system has led to huge profits from older hydro plant using a public resource – water. The value of that has been captured by the generators and capitalised into their revalued balance sheets.

What Labour will do

It is time to call a halt to National’s so-called Bradford reforms. They have failed.

The answer does not lie in increasing industrial tariffs or fiddling with market rules.

We have to break the pricing model. That’s what Labour will do.

We’ll dump the current model and introduce a fairer pricing system where each generator will be paid the actual cost of generation and a fair return on their capital.

A new independent Crown entity – NZ Power – will act as a single buyer of wholesale electricity with the power to set prices.

Many states in the USA, as well as large economies like Brazil, and South Africa operate similar systems.

NZ Power will keep prices at fair and predictable levels.

There will still be a wholesale pool for electricity and the price will still vary regionally, reflecting transmission costs and line losses.

NZ Power will on-sell electricity to retailers on the basis of long-term contracts.

Large users will be able to contract directly with NZ Power.

NZ Power or Transpower will decide on what generation should be despatched.
It will also be able to direct generators to use available capacity. This removes the ability of generators to maximise short-term profits by withholding low-cost generation.

NZ Power will cover all of its costs, including its electricity trading operations, over the long term.

Finally, NZ Power will take on the majority of all current regulatory functions and powers.

It will play a key planning role, including for new generation.

NZ Power will ensure the long-term interests of consumers and our economy prevail. It will not just supervise the market, it will be actively involved.
NZ Power will determine future investment needs for both generation and transmission.

It will run a tender process for new generation and can sign long-term contracts with successful bidders so they receive a fair return on their investment. The World Bank report shows how common place this method is overseas.

Generators and retailers will be structurally separated to encourage competition.

Regulation of lines companies will be simplified
This will include a simple CPI-X pricing regime and a requirement to submit asset management plans for approval.

Benefits

These changes will achieve a low cost, secure and sustainable energy system for New Zealand.

Prices

Power bills will come down by $230 to $330 per annum for an average residential customer. Commercial and industrial prices will also drop. Future increases from new generation will also be lower than currently because the cost will be averaged into the market
With more stable prices businesses can also have more confidence to invest.

We’ll see this flow through to more jobs and export earnings.

Efficiency

This model will also incentivise energy efficiency because NZ Power will consider energy efficiency alternatives that save energy, or move demand peaks, as alternatives to new generation.

Economic advantages
We’re all familiar with the disadvantages that come with being a small country distant from others, which make it all the more important that we use our advantages well - like our abundant cheap renewable energy.

Fairer electricity prices will bring economic development advantages. These have been modelled by BERL at over 5000 additional jobs and $450m additional economic activity. Their report is included in the material released.

Conclusion

In a country which produces low cost electricity, the businesses and residents who use it should see those low production costs reflected in what they pay.
Under this policy, they will.

© Scoop Media