KEY POINTS:
Electricity prices have recently been reported to be likely to rise by as much as 40 to 50 per cent in inflation-adjusted real terms within two decades if the Government pursues climate-change mitigation measures recently introduced.
These include a ban on new coal- or gas-fired power stations and a target of 90 per cent renewable electricity generation by 2025.
Such a large price increase would cause financial hardship to many electricity consumers including manufacturers, farmers and householders on low incomes.
The Prime Minister, Helen Clark, has said people on low incomes will be compensated for price increases inflicted upon them as a result of the climate-change policies. But she has not said how that will be done.
These recently introduced measures are designed to reduce carbon dioxide emissions, but at the same time will significantly benefit the Government's coffers through its ownership of a large proportion of the electricity generation system.
More immediately, significant power price rises will occur as a result of the proposed emissions trading scheme. These will cover all electricity generation from 2010, even though around 70 per cent of our power comes from renewable energy sources which do not produce carbon dioxide emissions.
It is ridiculous that this price rise should be applied to all electricity generation rather than just to thermal generation.
People must wonder why our electricity generation companies continue to be extremely profitable even in difficult economic times and in what is supposed to be a competitive electricity market.
The answer lies in the method by which electricity prices are set in the wholesale electricity market, established in the mid-1990s and basically unchanged since.
For many years until about 15 years ago, our electricity, under Government control, was priced on the basis of the average cost of producing it from various sources, including hydro and geothermal energy projects and coal- and gas-fired thermal power stations.
This has always been regarded as a fair way of determining prices, bearing in mind that some sources of electricity generation will always be more expensive than others.
In the early 1990s the state-owned enterprise ECNZ suggested that in order to encourage the building of new generating capacity, the pricing system should be changed to make all electricity generation the same price per unit as that from new power stations required to meet growing demand.
The National Government of the day firmly rejected the idea, especially since ECNZ was then virtually a monopoly provider, producing about 90 per cent of the total electricity output. The idea was seen as a bid by ECNZ to greatly increase its profits.
Subsequently, Contact Energy was split off ECNZ in 1997 and later privatised to create the illusion of price competition.
ECNZ was later again split into three smaller SOE generation companies in 1999, apparently for the same reason.
In this period the wholesale electricity market was established and a pricing system chosen based on the cost per unit of providing additional generation. It was known that this pricing system would maximise wholesale electricity prices in order to facilitate investment in new generation, but it has also created windfall profits ever since for hydro and other low-cost electricity generators.
New Zealand does not necessarily need large future electricity price rises to implement climate-change policies. Instead there must be an independent review of the way electricity is now priced.
One option would be for the Government, owning more than 60 per cent of total generation capacity and main beneficiary of windfall profits, to insist artificial distortions in the pricing system be eliminated.
Or keep the present system but require that part of windfall profits be managed by an independent trust that would focus on measures that reduce electricity cost.
* John Blakeley is a research fellow in the School of the Built Environment at Unitec, Auckland and editor of EnergyWatch, the journal of the Sustainable Energy Forum.
