Stability today vital for bright tomorrow

By CHRISTIAN JUDGE*

As a visitor to New Zealand, I'm concerned to hear yet more calls for fragmentation and restructuring in the energy market.

What is needed is not more tinkering and change, but a period of stability that can promote investment and growth.

New Zealand is fortunate to have its energy market structured as it is.

It has enough companies, structured in the right way with generation and retail, to provide a sensible level of competition and investment without undue risk to the industry's future and that of its customers and the wider New Zealand economy.

The key here is that they are vertically integrated and largely balanced in terms of being on the demand and supply sides of the market.

In dry years, the margin is in generation and in wet years it is in retail.

Overall though, the same amount of value is captured by these companies irrespective of lake levels.

This is good for the industry's stability and enables sensible returns to allow for investment.

To split generation from retail would lead to a crisis in one side of the industry in a wet or a dry year.

Over-fragmentation encourages pricing at marginal cost, leaving nothing for investment in new plant.

Such an extreme of competition can be maintained only when prices are abnormally high.

This is ultimately destructive and, as the UK experience has proven, is not sustainable.

Such fragmentation would also change the investment profile of market participants and be reflected in higher costs of capital.

What New Zealand has now, especially through Government ownership, is essentially a benign oligopoly operating with the discipline of a competitive market.

This gives the Government a steady income stream through dividends and taxes, which could be used for developing alternative and renewable energy sources and to invest in domestic energy efficiency schemes beyond the scope of individual companies.

Why shouldn't New Zealand lead the world in energy-efficient plant, renewable technologies such as wind, or biofuel technology such as that for burning forestry waste in coal-fired plants?

New Zealand has also proved that in the long run, low input prices, such as those for fuel, keep power prices low.

Aggregate power prices also show that the current level of competition is passing these low prices on to users.

For such an essential service, this is a very pragmatic approach which should not be destroyed by too much competition.

But whatever the market structure, these fuel costs - and therefore power prices - will rise as the cost of new hydro and gas exploration go up.

Market participants should respond to price signals.

New capacity is needed, but the capital markets are understandably shy of punting hundreds of millions of dollars on an industry that might be restructured.

Uncertainty over gas prices is also restraining new building, especially that needed to meet winter peaks.

So, while structural stability will encourage longer-term investment, in the short term pressure is on the demand side.

Large industrial users have a responsibility to manage price risk for power in the same way they do for all other factors affecting their business.

Interruptable contracts with the generators would enable them to effectively sell power back to the generators and so make money out of not taking power.



The Finnish market, another dominated by hydro generation, is a model for large industrial users, especially in forestry and paper. Energy price risk is managed though collective ownership of generating capacity.

The Finns have long-term price stability for their manufacturing activities and the ability to cash in on high spot prices though electricity sales to the spot market.

While no structure is perfect, especially when operating in extreme circumstances, I'm convinced the one New Zealand has now is right for the longer term.

That this is a dry year and Maui is running low is in no way the fault of the market or its participants.

What is needed is not a knee-jerk reaction but pragmatism and a steady hand to enable energy companies to be profitable so they, and the Government, can invest in the longer term.

* TXU Europe which, until its collapse late last year, served around six million retail energy customers across Europe, was the continent's largest energy trader and had significant generation assets.

* Christian Judge is a former manager with TXU Europe.