Should our largest and most profitable gentailer Meridian be broken up? Photo / Supplied
Should our largest and most profitable gentailer Meridian be broken up? Photo / Supplied
OPINION:
The profits of the large electricity gentailers – Mercury, Meridian, Contact and Genesis – have ballooned since Covid-19. They're making record profits at the expense of energy affordability and the wellbeing of Kiwi households and businesses.
Surely now the time has come for the Government to be bold andadopt the structural reform needed to make sure more cash is kept in the hands of Kiwi families and businesses, not these bloated corporations.
The large incumbents collectively reported record profits this year. Their net profits nearly doubled while ebitdaf – that's what the accountants refer to as earnings before interest, tax, depreciation, amortisation and fair value adjustments – was up 10 per cent.
Genesis reported its highest operating earnings of $440 million since it was established two decades ago. Net profit was up by 600 per cent to $222m compared with $32m last year. Mercury reported it had more than tripled its net profit to $469m.
Both Genesis and Mercury reported increases in ebitdaf of about 25 per cent. Mercury's ebitdaf was a record $581m and it is targeting $800m within the next 3 years.
Contact's ebitdaf was $537m, down slightly from last year but 20 per cent above its earnings in 2020.
Meridian's net profit was $664m, up 55 per cent. Its ebitdaf of $709m was slightly higher than last year but down from its record of $787m in 2020.
Even Meridian's accountant, PwC, noted that based on three different methodologies "we can conclude that all approaches show a positive cumulative economic profit from 2010 to 2021". Economic profits are just a fancy word for monopoly profits above the company's cost of capital.
All up, the big four's ebitdaf was $2.27 billion, up from $2.06b in 2021.
Change is needed: record profits for gentailers, higher bills for consumers. Photo / 123RF
To put these numbers into perspective, that increase amounts to a transfer of $109 for each of their retail customers. That money would be better in the hands of Kiwi families and businesses.
The record profits have nothing to do with providing better value services to consumers. It's all about leveraging their legacy generation assets and record wholesale prices.
Collectively the big four earn over 95 per cent of their ebitdaf from their wholesale businesses. Contact and Mercury's wholesale businesses both earned more than their entire operations, meaning the rest of their business was run at a loss.
Wholesale electricity prices – the price gentailers get paid for generating electricity and supplying it to the national grid – have been at record high levels since 2018.
In the past year, wholesale prices averaged $176/MWh. The average was $166/MWh over the past two years. The industry regulator, the Electricity Authority, has looked at the numbers and couldn't explain the $40/MWh excess. The authority has been somewhat cautious in its views because it has only reached preliminary conclusions, but commented that "we observed some evidence to suggest that prices may not have been determined in a competitive environment".
These prices contrast with an average price of $75/MWh from 2012 to 2018.
While the big gentailers are making record profits, the independent retail sector has all but disappeared, with 12 retailers exiting the market in the past three years, taking with them the prospect of any meaningful retail competition.
That's because there has been a shift, with gentailers now earning most of their profits from their generation businesses.
Luke Blincoe. Photo / Supplied
This is off the back of the generation assets they inherited, built by our great-grandparents for the benefit of all Kiwis. That's why the sector is in a situation where Genesis announces record profits but is still going to increase retail prices for households. Using generation assets to shield profits means new retailers won't be able to compete by offering lower prices for households and businesses. That's good for gentailer profits but bad for competition and bad for consumers.
Up until now, smaller business consumers and households hadn't seen the impact of the record profits and wholesale prices, with these increases being mostly offset by reductions in the regulated prices the Commerce Commission sets for the electricity networks that transport electricity to the consumer's front door.
As an independent retailer, Electric Kiwi has been on the receiving end of these pricing arrangements. Record high wholesale prices have squeezed our margins and forced us to increase prices to our loyal customer base. That's the last thing we want to do. It has also meant we haven't been able to take on as many new customers as we would like.
We have prided ourselves on being a price leader and saving our customers more than $34m in the past seven years.
Electric Kiwi and other independent retailers have been calling for the Electricity Authority to undertake price-squeeze testing common in other jurisdictions. Price-squeeze testing would determine whether the gentailers' retail arms would be profitable if they had to compete on the same basis as the independents and weren't propped up by their generation business profits.
The Government eventually got fed up with Telecom's antics. Wholesale price regulation was introduced, and in 2011 the Government forced Telecom to split its wholesale and retail businesses into Chorus and Spark. We may now see similar intervention in supermarkets. The Government is introducing a new supermarket regulation run by the Commerce Commission. It's also looking at whether to break up the supermarkets to provide more choice for consumers.
Electric Kiwi considers "what is good for the goose, is good for the gander". The telecommunications reforms have been very successful and enabled new entry and stronger competition, driving down prices and resulting in far better service. There is no reason why consumers couldn't benefit from similar reforms for supermarkets and electricity.
If the Government wants to lower the cost of electricity, it needs to be bold and adopt structural reform, starting with the breaking-up of the largest and most profitable gentailer, Meridian.
