Alarm grows over electricity outlook

Business anxiety is growing that no new substantial power generating capacity is being built, the Employers and Manufacturers Association (Northern) says.

While significant new capacity has been scheduled, no new electricity projects are underway because gas supply contracts are stalled, or resource consents have not been obtained, said EMA's chief executive Alasdair Thompson.

"Government has acknowledged electricity demand is outstripping supply but says power prices will have to go up further yet before new generation plants are commissioned," Mr Thompson said.

"But generators are already commanding a premium to the long run marginal cost of power generation (LRMC) and no generator wants to be the first to break the present constrained supply arrangements and push prices back down toward the short run marginal cost (SRMC) of electricity.

"While business accepts power prices will ultimately rise, increases must occur within a competitive framework.

"Business is deeply concerned that power prices may go far higher than Energy Minister Pete Hodgson indicated just weeks ago. He advised us then that power prices may rise by about 15 to 20 per cent within 18 months to attract new investment in electricity generation.

"The fear is that prices could increase by up to 60 per cent for large power users in five years time in the absence of the completion of any big new generation stations in time to meet growing demand.

"Concern about higher electricity prices and security of supply beyond five years will impact on industrial investment decisions which must be made soon.

"Access to competitively priced gas has caused Genesis to put its proposed gas fired 400MW station at Huntly on hold.

"Government does not appear to appreciate the seriousness of the situation, or know what to do to create a competitive market to achieve best prices on the one hand, and rapid new investment on the other.

"For a start, government should begin actively promoting gas exploration and development, ensure the extraction of residual Maui gas is maximized, sort out access issues to gas pipelines, reduce RMA consent barriers, give Transpower a strategic planning and market information role to complement its functions under Part F of the Transmission Rules, identify key projects necessary to meet projected shortfalls, and assist with reducing the barriers likely to cause delay in the construction of generation capacity.

"Business power consumers should also be aware of the possibility of more spot power price rises and price spikes as hydro storage dropped recently to 89 per cent of its average for the time of year. "Projected prices for coal are unattractive to power generators since Government's ill advised ratification of the Kyoto protocol will ultimately raise its costs further.

"The lack of significant new investment in generation, exposure to uncertain hydro storage levels, the illiquidity of the wholesale electricity market, and rapid growth in demand are all combining into a cocktail of power crisis proportions.

"The scenario could not be worse for attracting new foreign business investment as we seek to promote New Zealand's competitive advantages to international investors.

"Not only is the competitiveness of our production sector under threat but costly brown outs are a possibility if significant new investment in generation is not scheduled soon. Our economic growth is on notice.

"With all this, we're concerned Government may seek to re-regulate the industry. Business does not want that. It requires security of supply in a competitive environment."

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