Dialogue: Consumers are the loser in dog-eat-dog power market

Is electricity supply too important to be left to the
profit motive? Soaring power prices and lack of ultimate responsibility suggest so, writes JOHN BLAKELEY.

Three years ago, Max Bradford, then the Minister of Energy, pushed his Electricity Industry Reform Bill through Parliament. He claimed it would lower power prices. It didn't.

In the first half of June, spot prices on the wholesale electricity market which were averaging about 4c a kWh suddenly jumped more than fivefold to average more than 21c in the first 13 days of June.

This led the company selling the most electricity to New Zealand customers to raise its prices by an average of 15 per cent from next Sunday.

In response, the present Minister of Energy, Pete Hodgson, said he thought this was an example of the electricity market working as it should.

But he was looking further into the matter and waiting for the results of an inquiry.

Until 10 years ago, New Zealand had a fully integrated electricity generation and transmission system.

It had a merit order of bringing in power stations as required by demand according to their efficiency, with the capacity to shift as much power around the country as was needed to meet that objective.

The system was capable of balancing outputs from thermal, geothermal and hydro stations and from North and South Island generating stations.

As has become apparent during the recent situation of low storage levels and low inflows into the South Island hydro lakes, we now have a disintegrated electricity system.

There are major constraints in the delivery transmission system. The industry is still arguing over who should pay to remove these constraints, especially the one near Tokaanu, and also the difficulty in getting available power out of Taranaki and power southward across Cook Strait.

There has also been a major recent court battle between two Government agencies over the pricing of power transmission northwards across Cook Strait.

At the same time, there are proposals for three new 400MW combined-cycle gas-fired power stations in the upper half of the North Island, at Otahuhu, Huntly and Stratford.

If these three power stations all proceed, they are likely to crowd out many promising potential renewable energy power projects, especially wind farms and hydro-electric projects.

There is no real evidence that any of those power stations would be necessary for at least five years if the electricity generation and transmission system was being operated in an integrated manner.

Finally, we now have a situation in the South Island where, during the hearings of Parliament's commerce select committee on the Electricity Industry Bill, Meridian Energy admitted a substantial loss of potential electricity generation because of hydro spill.

Meridian said that while intense weather and reservoir storage limitations were the main reason for this, transmission constraints had prevented it sending some of this power north.

This year there have been problems with electricity supply in Australia and major problems with supply in California, where in recent years similar market systems to our own have been introduced.

The Californian situation has bankrupted the two major suppliers of electricity and led to power cuts for many consumers.

The Australian situation, while not nearly so serious, has led to significant price rises across most of South Australia, Victoria and New South Wales.

A recent article in the magazine of the Institution of Engineers Australia noted that we had been promised that electricity deregulation would bring greater choice, lower prices, increased efficiency and savings for all.

But this is far from the reality. The article gives four major reasons for this:

* The relevance of normal laws of supply and demand are held to apply to the electricity market, but do these laws apply to an essential service where prices are so inelastic?

To make matters worse, most consumers do not have access to real-time signals, nor do they have the capacity to respond to them.

* Reliability and security of supply imply a comfortable supply-demand balance with adequate levels of reserve plant and spare plant to cover load growth and unexpected events.

But the presence of this additional plant is likely to force prices down. This creates an environment where the removal of risk to system reliability erodes generator profit, which becomes inversely proportional to the levels of reserve plant with no incentive for system reliability.

* Historically, governments have ultimately been responsible for the performance of electricity utilities. Now each section of the industry has its own performance criteria, and nobody has ultimate responsibility for system augmentation.

Investment in new plant is the prerogative of the market, the investment decisions of which will be based on likely economic returns, not desirable levels of system security.

* Initial market design has assumed that as electricity prices increased, consumers would reduce their consumption. With the exception of some major industrial loads, this has turned out to be not the case.

Most users, including large industrial users, do not have access to real-time pricing which would allow them to set up plans to respond to changes in electricity prices.

Like it or not, the community expects the Government to create an environment where the reliable supply of electricity at competitive rates is assured.

If deregulation does not work, we have every right to demand that the Government steps in and regulates to achieve outcomes in line with community expectation.

Is electricity supply just too important to be left to the profit motive?

* John Blakeley, the convener of the Sustainable Energy Forum, is a research fellow at Unitec.