Blame low lakes and reforms as the lights go out

As we face blackouts, what is going on with the power companies? Consumer reporter CHRIS DANIELS investigates.

Warnings of low hydro lake levels coupled with a controversial power market have been circulating for the past few months.

These warnings now look to be vindicated, with the launch of a widespread public electricity conservation scheme.

Why are we facing a power crisis?

A combination of two factors have prompted fears of impending blackouts - weather and the way the power industry is organised.

North Islanders sometimes need reminding that winter is not only cold in the South Island, it's also a dry time of year.

This winter has been dry and cold, meaning not much rain filling up the southern hydro lakes, and lots of power being used for heaters in the populous North Island.

The lakes won't start filling again until snow starts melting in the Southern Alps, unlikely for another couple of months.

Critics of former Energy Minister Max Bradford's reforms say a flawed market system is running into its first real challenge - and failing badly.

The low lakes mean less power is being generated, so prices on the wholesale "spot"electricity market are extremely high.

Retail companies, buying power on this market, are wary of passing on the high prices to customers, so are losing money hand over fist.

Who are the main players?

The New Zealand electricity business is dominated by state-owned enterprises.

State companies Genesis, Meridian and Mighty River Power have more than half of all New Zealand's electricity customers and generate 63 per cent of all power.

The other big player is Contact Energy, which is listed on the stock exchange and owns 22 per cent of customers and generates a quarter of New Zealand's power.

Private retailers are now leaving the industry in droves, claiming the power business is slowly being re-nationalised, with the odds stacked in favour of the Government-owned companies.

This week, On Energy sold 288,000 North Island customers to its state-owned rival Genesis. Last month it sold 116,000 South Island customers to Meridian.

How can companies buy and sell me as a customer?

Nothing prohibits the companies selling customers to each other - they are treated like any other asset. If you are sold to a company you are not happy with, there is nothing to stop you switching again.

But competition is not what it once was - some power companies such as Meridian are not accepting new customers.

Since prices have gone up, surely someone is doing well out of the whole thing?

This is a bone of some contention. Private power retailers, such as TrustPower and On Energy say the SOEs, are making unfair profits from the high wholesale market.

Retailers who did not organise long-term contracts for electricity have done the worst, losing many hundreds of millions of dollars.

Those with lots of customers but not much generating capacity, such as On Energy and TrustPower, were forced to pay top prices on the "spot" market because their supply contracts were not sufficient to cover demand from their customers.

The SOEs, such as, Genesis and Meridian pay dividends to the Government, so if they make a lot of money, a lot will go back to the New Zealand people, through Government spending.

But the generators deny charges of obscene profit-making from the low lakes - they have to conserve the water, so they are not generating as much electricity as they could.

Is my power bill going to go up?

Probably. If there is no rain and it stays cold, watch out for increased prices. They haven't gone up for most residential consumers though, despite a free market for retail electricity designed to allow competition.

The market was designed to ensure that if one company charged too much customers would go to another, cheaper one.

But when power retailers such as On Energy tried to raise prices in response to the high cost of wholesale electricity, the customer backlash was so great that it cancelled the price rise and sold all its customers to rival companies. Continuing to supply those customers would have driven it out of business.

Some, such as On Energy, have now left the market, while others are not accepting new customers.

This means less competition, so the retailers might now be ready to pass on high prices.

Will there be blackouts?

Without conservation measures and rain, it is looking increasingly likely.

Energy Minister Pete Hodgson warned in June of a "modest chance of supply difficulties".

But yesterday he said: "With no signs or the current weather pattern changing in the near future, there is now a moderate risk of blackouts in September or October if inflows remain low."

Can the Government force companies to offer lower prices?

Meridian, Mighty River and Genesis are SOEs, so must, by law, operate in the same "profitable and efficient" manner as a private company.

Energy Minister Pete Hodgson cannot order them to make more electricity available, thereby dropping the price.

But the Government could ease the SOEs' financial targets when it negotiates the statements of corporate intent with them.

Privately owned Contact Energy, would then squeal, saying it was being forced to compete unfairly against a state electricity generator.

Contact, which generates most of its power with thermal stations, can be expected to come out of the current problems having suffered the least. It has been able to make as much electricity as it can and sell it at a high price.

Do we have enough power stations?

By world standards, New Zealanders enjoy very cheap power. Hydro-electric dams are an extremely cheap way of making electricity. The downside is that they depend on the weather.

The new market system provides no incentive to keep power stations available for emergencies, as was the case in the old Government-controlled days.