Jim Eagles: No room for error in power market

There can be no doubt in anyone's mind by now that there is an electricity supply problem.

Increasing numbers of firms are cutting production because prices on the spot market have made it uneconomic for them to keep making things.

The trouble, put simply, is that the electricity market is not sufficiently liquid. There isn't enough spare electricity for sale, so those chasing it have to pay ever higher prices.

It is also practically impossible for a company wanting to switch from the spot market to contracted supply, to reach agreement with a generator.

As we head into winter, when demand peaks, the amount of electricity available for the spot market is likely to drop even further.

What that confirms is that there is little margin for error between electricity production and usage, so any hiccup, a dry winter or a rundown in gas supplies, leads to a crisis.

Restructuring the market may smooth the price peaks, but on its own would just move the burden of any shortfall somewhere else.

There should also be benefits from improved co-ordination between generators. For instance, ensuring that if hydro prospects look grim, coal stockpiles are built up - if the long-awaited Electricity Governance Board ever gets established.

But any real solution will require reducing electricity consumption, increasing production, or both.

On the consumption side, there has to be an ongoing official campaign to encourage businesses and households to reduce their electricity usage. The present approach, of encouraging efficiency only when a crisis looms, is ridiculous.

On the production side, we clearly need to increase generation so the country does not run short of power every time there is a hiccup.

The simplest answer would be for the Government to make it easier to build generating capacity by, for instance, freeing up gas and geothermal resources, something the Cabinet belatedly started this week. Other options are reviewing the Resource Management Act, rethinking our Kyoto obligations and the incentives for oil and gas exploration.

Alternatively, the Government could take on the task of providing uneconomic back-up generating capacity, possibly via transmission company Transpower.

In a way it matters less which of those solutions the Government adopts, than if it just does something. Last time this happened, only two years ago, the need for change was forgotten as soon as the crisis disappeared.

The already huge loss of production, estimated by the Major Electricity Users Group to total $12.4 million, shows this cannot be allowed to happen again.