Rain eases energy woes in 2001

By CHRIS DANIELS, energy writer

It is a new year, the weather is warm and the hydro-electric storage lakes are overflowing.

Our electricity is once again dirt cheap, the kind of low-cost power other countries dream of being able to generate.

But oh, how quickly things can change.

A month of storms, rain and melting snow has also melted away the memories of the past winter of electricity turmoil and trouble.

Government ministers and energy agencies no one had ever heard of were issuing public notices, urging people to save power.

Companies lost millions of dollars a week, shutting down production and squealing about the state of the new, deregulated electricity market that meant prices on the wholesale market soared dramatically.

The past 12 months seemed to provide backing for every preconceived opinion of the state of the New Zealand electricity market.

But before the debate can begin, facts are needed.

The rival parties agree on very little when it comes to the year just gone, but here is some of the agreed evidence:

* It was a cold, dry winter.

* The amount of water heading into the important hydro-storage lakes fell dramatically, leaving hydro-electric generators concerned about their ability to produce large amounts of cheap power.

* Then, once demand for power increased (because of the early cold snap), the price on the wholesale market went through the roof.

For the proponents of the past five years of restructuring, everything was according to plan.

Water, that essential fuel of generation, was scarce, so the wholesale price of electricity went up.

Those companies which had taken a punt and decided to buy some of their power on the spot market were forced to pay sky-high prices.

Some thought the winter provided evidence of an insane free-market experiment gone wrong. These lobbyists argued for a return to more state planning.

The fact that three of the big four power companies - Genesis, Meridian and Mighty River Power - were all state-owned seemed to make no difference.

Others felt the electricity market was not yet free enough, that if only the pensioners and small business consumers had been "exposed to the market signals" - in layman's terms, forced to pay very high power bills because of the drought - the market would have worked properly.

These consumers could have conserved electricity when it became expensive, then gone back to their normal use when the price dropped.

But what has changed from January 9 last year to today?

In charge of the whole business is one of the ministers labelled as a safe pair of hands - Pete Hodgson.

He is now armed with an impressive legislative arsenal that effectively allows him to impose price controls and regulations over the whole electricity industry.

On December 12, he announced the Government's reaction to its "Winter Review", an inquiry into whether the electricity market had worked properly during the winter.

Submissions complained of the emergence of a new regional market dominance by the big four power retail companies, and Mr Hodgson issued another warning, once again threatening further regulation.

"I am also advising the electricity industry that the Government expects effective retail competition - and if this does not eventuate, the Government will consider further measures, including mandatory tendering of hedges and separation of retail and generation business," he said.

Officials would "keep under review" the option of requiring electricity generators to tender hedges for a percentage of their dry-year capacity.

Chris Russell, chief executive of M-Co, the company that manages the wholesale electricity market, said he did not think there were any significant differences in the structure of the electricity market now and 12 months ago.

"You have a market that has, by going through that winter, matured. If you look at lake levels, they are almost exactly what they were at the same time last year.

"Regardless of your view on whether the market worked or did not work, what was pretty evident was that it was a young market. It's only two and bit years old.

"If you think back to when interest rates and the currency markets were formed in the 80s, it took a while for those markets to develop and for there to be a full suite of instruments available for people to manage their exposure."

Mr Russell interprets many of Mr Hodgson's comments to the companies as "strong encouragement" rather than threats.

He hopes the Government will recognise the youth and immaturity of the electricity market and give it time to settle down, rather than rush in with new regulation.

He thinks the Government should ensure a level of regulation that does not impose onerous costs or barriers to the entry of new players to the electricity business.

One thing M-Co and people like Mr Russell are looking forward to is new, small operators coming into the retailing side.

"There was still the potential for niche operators to come into the retail side of the market, which has taken a blow in the past year," he says.

A niche operator might specialise in selling electricity to small businesses or "high net worth individuals" that can be sold a variety of other products along with their power.

One thing that can be predicted with certainty for this winter is that electricity retailers, along with big companies who got burned buying power on the spot market, will be more careful.

One company that learned the consequences of entering a dry winter without adequate protection was Natural Gas Corporation.

On August 21 it revealed the full horror of what a cold, dry winter could do, when it announced that it had been losing more than $1.4 million a day for two straight months.

In its first full year as an electricity retailer, it lost $301.6 million, a sharp reversal from its previous year's profit of $43.5 million.

It lost $48.7 million in June, then $40 million in July, on electricity sales.

It also had to write down $255.1 million in goodwill from the sale of its electricity customer base to state-owned rivals Meridian and Genesis.

Explaining the results, NGC's former managing director, John Barton, criticised the structure of the electricity market, saying there was no way a net retailer could remain competitive because it had to buy power from its competitors.

The three state-owned power companies, Meridian, Mighty River Power and Genesis, had a combined profit drop of 15 per cent from the previous year over the winter months.

Keep looking at those lakes, though, for just 12 short months ago they were just as full as they are now - and no one was concerned.

2001 – The year in review