Brian Fallow: Policies driven by haste

The Government may be feeling the political pressure of cold showers, or the threat of them, but that is the worst environment in which to dream up big changes to the electricity market.

Restructure in haste, repent at leisure.

It is to release its preferred policy option by the end of the month, after talks behind closed doors with the industry but no public consultation.

Then the question will be reduced to "Why shouldn't we do this?" rather than "What should we do?"

Speaking to Canterbury manufacturers yesterday, Finance Minister Michael Cullen raised, with tantalising brevity, the possibility of underwriting returns on new generating capacity.


"It is always risky building reserve plant," said Cullen. "If there is a lot of rain and the hydro stations operate close to capacity, the new plant will not be competitive."

He talked of the need to balance risk and reward, incentives and the possibility of underwriting returns on new capacity.

So the Government is grappling with whether and how to limit the downside risk of building new thermal generation.

But if it limits the risk of losing money, should it not also limit the upside, the potential to make money in dry years? Apparently not.

Imposing pricing restrictions on the returns that new stations might generate - possibly a reference to calls for price caps in the volatile spot market - would not be helpful, Cullen said. Nor would decreeing that power stations be built.

"But a more active role within the governance structures, to ensure a greater reserve margin of capacity, is under active consideration," Cullen said.

With the failure of the industry to agree on a rulebook for self-regulation, a state regulator is in the offing.

But how would the underwriting of reserve (or margin of safety) generation capacity work, if that is what policymakers have in mind?

One option already flagged by Energy Minister Pete Hodgson is a requirement for electricity retailers to contract with generators for more than 100 per cent of forecast demand (as a way of ensuring there is always more supply capacity than demand); another is a levy added to the wholesale price to subsidise the cost of reserve generation.

All we have so far is hints of the possible outcome of a secretive policymaking process carried out against a background of looming crisis.

How ironic that Cullen should deliver these hints in a speech congratulating himself on the transparency and predictability of today's no-surprises Budgets.