Dialogue: Power lessons must be heeded

By RALPH MATTHES*

Nine years ago, New Zealand faced the prospect of blackouts as lake levels declined.

A massive conservation effort across all sectors of the economy, a large reduction in production by Comalco and fortuitous early rains saved the country.

The impact of the 1992 crisis on gross domestic product (GDP) was about $600 million.

Lessons were learned and successive Governments have steered a course towards market mechanisms to manage dry-year risk and to deliver lowest-cost power.

Changes include the break-up and partial sale of the Government's 1992 monopoly on generation, the start of a wholesale market in 1996 and full retail competition beginning in 1999.

This winter was the first dry-year test of the industry since 1992. As in 1992, the Government still needed to intervene to avoid the risk of blackouts. Some commentators have put the GDP impact this year at about $200 million.

On those facts, we have reduced the cost to the economy, but we still need the Government to appeal to the public's goodwill when things get tough.

Is this as good as it can get? Or can the market rules and industry structure be improved?



There is nothing we can do about whether it rains, but there is a lot more we can do to ensure New Zealand manages future dry years at lower cost. The Major Electricty Users Group seeks a wholesale and retail electricity market where suppliers compete on price and innovative products.

Consumers would have a choice of suppliers and products to minimise their electricity costs.

In dry years, all classes of consumer would have cash incentives to conserve power or to trade an existing hedge with a party prepared to pay for that additional price cover to offset higher spot prices.

The market would find the least cost to the economy as a whole of reducing demand.

Underpinning this market would be information on spot, primary and secondary hedge prices and the state of the lakes and inflows.

The electricity market this winter fell far short of this goal.

The market became less competitive when the largest retailer was eliminated from the market.

Consumer choice evaporated and the market has collapsed to a few vertically integrated and regionally dominant suppliers.

A market where suppliers have sufficient market power to eliminate competitors and raise spot prices at will is not in the best long-term interests of consumers and the Government needs to address this.

Mighty River Power in Auckland was the only supplier that offered individual household credits to save power.

Households and small businesses elsewhere voluntarily saved power in response to the Government's appeal or various supplier community saving schemes. Some households and small businesses made no savings at all.

The largest savings relative to their market size were by major users, which bore the brunt of the unprecedentedly high spot prices.

The dislocation between the tariffs paid by most consumers from spot price signals during dry years needs to be solved.

The users group and others have since 1996 called for greater transparency in the market to promote competition, but with little success.

Within days of the minister's announcing the national savings goal, useful information from the market was released daily.

Information flows have since reduced.

When you consider the sort of electricity market we should have with the actual state of the market this winter, it is clear that significant changes are needed.

If changes are not made, then local and overseas investors in energy-intensive industries will remain suspicious that electricity suppliers with excessive market power can exploit them.

Industry should not have to rely on the goodwill of the Government and the public to save power.

New Zealand must have a fully competitive electricity sector.

* Ralph Matthes is executive director of the Major Electricity Users Group.