Editorial: Hodgson's power plan a forlorn hope

On the face of it, the Government's intervention in the electricity market may appear to be minimal. Announcing the establishment of an Electricity Commission which will buy reserve generating capacity and sell power in dry years, Energy Minister Peter Hodgson says, "This solution has been carefully designed to ensure the wholesale electricity market will continue to deliver the price signals and opportunities it is designed to deliver."

It is hard to see how that could be. The market was designed to see that investment in electricity finds its proper economic level. That is to say, the country's resources are not wasted by too much investment in electricity generation, or the wrong kind of investment, or too little. It has become an article of faith among big industrial consumers of electricity that the market set up seven years ago has not generated sufficient additional investment in supply capacity, hence the high prices they face when hydro lakes run low.

But it may be that the market has been telling us it inherited too much investment from the state's administration. That was also the view of environmentalists at the time. If so, then it is perfectly healthy that prices should rise to reduce demand, encourage more efficient use and invite the use of alternatives, until the point is reached that generating companies find it economic to build more capacity.

Those are the signals Mr Hodgson hopes to preserve but it looks to be a forlorn hope. What company is going to invest in new power generation once a state commission is holding capacity in reserve? Already generating companies have projects on the drawing boards that may go back on the shelf after yesterday's announcement.

Instead of investing a portion of their profits in new plant, the generating companies will probably now vie for the commission's patronage. With levies on the industry and ultimately consumers, the commission will contract with the generating companies to provide a range of stations to be fired up in dry years.

The levies, Mr Hodgson estimates, will add about $40 to the average consumer's annual power bill. That is more or less the price we will pay individually for the comfort of living without occasional power shortages and conservation campaigns. Is it better to pay an extra $40 a year, every year, than to pay a higher power bill for a few months after an el Nino summer such as we have just seen?

To most people $40 a year is nothing to fear and they would opt for the security of supply. The Government, too, finds it easier to institute another small tax than to face continuing criticism in years of shortage. New Zealanders are accustomed to an uninterrupted supply of electricity at a relatively stable price and they have little patience with the teething problems of a market. Yet, unless industry and consumers are convinced the Government will stand firm against calls to intervene, the market will never develop to maturity.

Many of the tasks of the seven-person commission are to regulate the market in place of the self-regulation regime that was rejected by organised industrial consumers last week. The new regulatory body will have the power to order generators to offer more long-term fixed-price contracts and even to order retailers and big industrial consumers to obtain a certain proportion of their demand on those contracts.

Electricity market arrangements are still developing in countries such as ours. Much remains experimental. Despite some of its rhetoric the Government has tried to minimise its interference. But investment in reserve capacity is not a sideline activity. For good or ill, it will powerfully influence the pattern of all investment in a sector that underpins the whole economy.