Editorial: Energy report contains some surprises

One of the first words used in the ministerial report on the electricity market released yesterday is "perception". It notes that "although there have been no blackouts or brownouts since the early 1970s, there is a public perception that our electricity supply system is fragile and vulnerable to frequent crises". When commentators refer to perception, it means the perception is wrong. If it was right they would not call it perception, they would call it a problem.

The report, by an electricity technical advisory group and the Ministry of Economic Development, says much that may surprise most people. It finds, for example, that the country has made, and is making, sufficient investment in new generation. It makes no criticism of the wholesale spot market's bidding system. It notes criticism of the assumptions and methods of a study for the Commerce Commission that concluded the generating companies were making excessive profits in dry years.

It also explains why the misconception persists that the market is not working properly. "Perceptions about unreliability are in part attributable to the very obvious draw-down of hydro lake levels in a dry year and to high spot prices that accompany low lake levels."

It notes that ordinary residential consumers are not significantly exposed to the spot market and blames those who may be exposed - retail power companies and big industrial consumers - for the public apprehension. They have an incentive, it says, "to talk up the risk of a hydro shortage in dry years and persuade the media, Government, the Electricity Commission and market participants of the need for a public conservation campaign".

If the public can be persuaded to go without some power, the spot price will come down, relieving power companies from having to buy on the spot market and supply at a loss on their hedge contracts, and large consumers who do not want to hedge all their supply.

In other words, the costs of conservation campaigns fall on small consumers, in the form of hardships and inconvenience, and the benefits flow to market players who have gambled on the weather. It is to offset this inequity that the report suggests a floor price for power on the spot market during a declared conservation campaign, and obligatory payments to consumers who save power.

But nobody should count on a weekly cheque yet. The payment is proposed as a disincentive for big players to call for public conservation campaigns. There is seldom a need for them. Left alone, spot prices will normally wring some conservation measures from the retailers and industries that have more consumption options than the average household.

The review team's main concern lies with the Electricity Commission, set up by the previous Government to second-guess the market on reserve capacity and security of supply. The report suggests the commission has reduced the attention that power companies pay to their supply risk, and that it was too quick to release supply from the Whirinaki station last winter, suppressing the spot price.

It suggests Whirinaki be sold as part of a reallocation of generating assets between the state-owned bulk suppliers. It believes the system would be more balanced if Genesis Energy had more hydro capacity and Meridian more thermal reserves. The simplest option is to transfer Manapouri station to Genesis and Huntly to Meridian.

That swap may capture the most attention but there are many more important proposals in the report that now invite discussion. None, though, is more valuable than the methods suggested to discourage conservation campaigns drummed up by those who stand to gain.