Electricity prices can broadly be broken into two components: energy and lines. The energy component is the generation and retail part of the supply chain.
Generation and retail are competitive and operate in a relatively open (unregulated) market.
The lines component is made up of transmission and distribution, both of which are uncompetitive and earn regulated revenues set by the Commerce Commission.
The energy (unregulated) component of residential electricity prices has fallen in recent years. Over the same period, the lines (regulated) component has increased.
It would therefore appear that if there are efficiencies to be had in the sector, they most likely lie in the uncompetitive and regulated lines component.
Transpower, a state-owned enterprise, operates all electricity transmission through the national grid. Distribution is made up of 29 operators across the country.
There is an argument that these 29 distributors should consolidate on the basis that there are economies of scale to be had, which would result in a reduction in the price of electricity for consumers.
Victoria, an Australian state with a population comparable to New Zealand (about 6 million), has only five distribution companies.
The majority of lines businesses in New Zealand, however, are owned by community trusts or local government, which raises the question as to whether the current ownership structure is an obstacle to rationalisation and evolution of the enterprises.
Overall, New Zealand appears to have a fairly stable and consumer-friendly electricity market. In a 2017 review, the International Energy Agency described New Zealand as being "a world leading example of a well-functioning electricity market, which continues to work effectively".
Despite the rise in residential prices, New Zealand still has the 11th lowest residential electricity prices among the 32-country OECD, and the seventh lowest industrial prices.
Australia and the United Kingdom are in the midst of large-scale market reviews in the wake of repeated increases in electricity prices.
The price increases in these countries are largely driven by the push to meet renewable energy targets. New Zealand already has one of the highest rates of renewable electricity in the world at around 85 per cent.
There is certainly concern about the impacts of increasing residential electricity price on low-income households. Retailers are required to provide a low fixed-charge option but this has had the effect of reducing the cost of electricity for low-use, rather than low-income, households.
The result is a subsidy for people with second houses (ie, a holiday home or bach) and smaller households that use less electricity.
A more targeted approach, such as Labour's campaign policy of granting a $450 winter energy payment to people on superannuation and main benefits, would be a more effective measure of assisting low-income households than the blunt regulation of electricity prices.
A review into electricity prices will be fruitful if it focuses on the right areas. Such a review should include whether the current regulation of lines companies is working well, what barriers there are to competition (eg, as a result of local authority planning and consenting), whether the current ownership structures for the lines businesses are imposing obstacles to lower costs and prices for consumers, and whether the market is in a position to adapt rapidly enough to technological change.
Such change is coming rapidly with the increasing viability of technologies like solar energy, electric vehicles, cheaper battery storage and smart metering.
In brief, the review will serve the country best if it focuses on ways that ensure the system is fit for the future rather than attempting to address perceived problems of the past.
• Philip Barry is a director of the corporate finance and economic consultancy, TDB Advisory Ltd.
