The Minister of Energy is gradually drip feeding results of the Electricity Market Review,  which is to be considered by Cabinet this morning. It seems it will abolish the Electricity Commission, set up by the Labour government to ensure security of supply and oversee the performance of the electricity industry against the goals of the Government Policy Statement.

That may be no huge loss. When the Commission tried to do its job under its first chair, Roy Hemmingway, and ensure that all more cost-effective alternatives to the new 400 kV line through the Waikato were properly considered it was embroiled in a stand off with the chair of Transpower, Ralph Craven. The Minister sacked the wrong one, and it was established that “build and be damned” still reigns, as it always has.

The Minister is saying he will not interfere in the commercial imperatives of the SOE generators (well, he can’t, given that the government wants to privatise them after the next election) but that he will also bring prices down. That is the push-me-pull-you that has bedevilled the power industry ever since Max Bradford’s reforms of 1998, which promised the same and did the opposite.

Electricity is unique among industries. With shoes or toothpaste, increased demand gives economies of scale and tends to bring prices down. With electricity, which cannot effectively be stored on any scale, and where the cheapest sites for hydro and wind and geothermal are always built first, and the price of fossil fuels is rising, increased demand raises prices. The next power station to be built will cost more than the last; and if it is fossil it will cost more to run than the average.

We will never be able to rely on competition to keep prices under control in the NZ market, as some of us repeatedly told Max Bradford and his government in 1998. Our market is closed and small. We cannot import or export electricity. There are few players – in most parts of NZ there are only three substantial players in the retail market. Generator-retailers have an advantage in the area where their generation is based.

There is little price competition because the market structure dictates that every generator whose plant is run at any given time gets the same price, which is the price bid into the market by the marginal generator. This creates all kinds of perverse incentives for gaming to keep the price high at the margin even by holding back cheaper generation at off peak times when the price is lower. It is virtually impossible to prove the extent to which this behaviour happens.

The message has been clear for several decades, but for some reason people just don’t want to accept it. There is a direct trade off between electricity prices and the degree of security we demand. If we demand no need for energy conservation in a 100 year drought, it will cost more on daily power prices than if we demand no  conservation in a 60 year drought.

The more security we demand, the more power plants will have to be built and stand idle most of the time, waiting for that rare combination of dry winter, unexpected plant outage and record level of demand. Idle plant costs money. Consumers have never really been asked how much they are prepared to pay for this level of security, or whether they would rather turn off a few things they aren’t really using when the lakes are very low, and how often they are prepared to do this. Instead successive governments have pretended we can have it both ways.

In a market system, prices have to be high to incentivise power companies to build more plant, and low to satisfy consumer and  political demands, particularly when so many people are existing on such low incomes. Prices can’t be both high and low – except under a progressive pricing tariff system, which the Greens have advocated for some 30 years, where a basic allocation per household is made available at a basic rate and above that increasing demand faces a rising stepped tariff. The higher price at the margin would provide the signal to build new plant. That is harder, but not impossible, to achieve under the system we have now.

The cheapest way to ensure security of supply would be to agree a series of conservation steps and a series of trigger points to implement them. These would be well publicised, and invoked early in what seemed to be shaping up as a dry winter. In March or April consumers would be told, “we are bringing in step one on the conservation plan, to avoid taking stronger action later. It’s time to do a simple check – make sure the towel rails are off when the towels are dry; that the computer and screen are off when you’ve finished for the day; that you turn off the TV at the wall and that you don’t leave lights and heaters on when you aren’t in the room”. This is much more agreeable than being told in July “everyone needs to save 10% immediately”.

Skimming the top off the load in Autumn would usually prevent a winter crisis but in a particularly bad year we could move to steps two and three as we needed to. Foyer lighting in commercial buildings could be reduced, as could street lighting in areas where there are no pedestrians. There are heaps of other opportunities that are not onerous. This would keep power prices affordable for everyone without power cuts. But successive governments have been made aware of the idea and rejected it out of hand.

So once again the government of the day will tweak the electricity system, promising both security of supply and low prices, and once again we will get neither.

First, let me say that back in the day, we had the second most efficient electricity system in the world. Power was cheap and abundant. We got away with being one of the least energy efficient economies in the OECD because of this wealth. Not long after the market reforms, prices rose sharply and Jeanette explained what was happening. Her words are just as valid today as they were in May 1996, when she wrote:

“That act corporatised power companies, required them to make a profit, forced them to compete … and required them to charge separately for the use of their lines”, Fitzsimons said.

“The government has deliberately unleashed a pack of wild dogs into a fenced paddock. No-one should be surprised that they are now eating the lambs.

“The issue is not whether prices have gone up or down overall, but who is paying more, for what and to whom. Domestic users are paying too much because they are the only captive market, and companies are forced to use them to subsidise competitive business consumers.”

The sad drama is still playing out, despite the efforts of successive National and Labour governments tweaking around the edges of the market, both hounded by a fear of the free market ideologues. (For the record, if we had a truly free electricity market, it might work better than the horrible hybrid we have today. But I do not believe that with its size and isolation that NZ could ever have a proper free electricity market.) A BNZ economist wrote last year:

Figures showing the cost of domestic electricity has gone up five percent faster than inflation come as no surprise to a leading economist.

The Government’s Energy Data File shows residential users have had to fork out for an average 4.8% price increase, every year since 2000.’

That’s well ahead of the 1.4% increase for commercial users each year, and 2.8% for industrial users.

The reasons for the continued price rises were the same ones that Jeanette outlined above. So has anything really changed since the reforms, except that we are paying more?

I contend that there is one more significant change. Reliability. It’s gone to the dogs. Ever since we “deliberately unleashed a pack of wild dogs into a fenced paddock”, as Jeanette said, the corporate hierarchies that replaced the ECNZ bureaucracy have been eating up the lambs of our infrastructure investment.

Instead of one government department, staffed mainly with engineers with a mandate to provide safe and secure electricity to all, (paid at public service salaries), we now have five boards, CEO’s and corporate bureaucrats, mostly overpaid business people with a mandate to wring as much cash as they can out of our public assets, customers be damned.  At the risk of high-jacking my own thread, is this any way to run a railroad?

Ever since the so called reforms we have had virtually no investment in our infrastructure; neither transmission nor generation. The overpaid corporocrats were too busy stripping the gold plate off of all our existing assets, admittedly giving most of it back to the taxpayer in the form of dividends, but much of it lining the pockets of the bloated management structure of the electricity market.

The stripping out of our public assets has had a devastating affect on the reliability of our electricity system, as evidenced by the failures we have experienced continually since the reforms took place. The Herald’s article on Auckland’s current power crisis catalogues just a few of the problems we’ve had over time. There have been many more.

Isn’t it time we admit that the market reforms of the 1990s were not reforms at all but were a complete, unadulterated cock-up? I would need to see a proper case made before I call for the reconstitution of ECNZ, but I will say that further tinkering just won’t do.

Some good honest engineering, not ideologically driven reform, is definitely in order.

It’s time to put the gold plate back into our electricity system.

The efficiency with which the financial markets (and now the real economy) are fleecing the taxpayers to pay for their own excesses is astounding. Now our government is saying that in order to prevent collapse, we need more of the same policies that got us here in the first place.

I am convinced. The “free” market really is efficient! 

Researchers at Oak Ridge National Laboratory concluded that supporting a 25% market share of light-duty (cars and SUVs) plug-in hybrid electric cars and trucks in 2030 could require either up to 162 new power generation plants (if recharged during the day) or no new power plants at all, if recharged after 10 p.m.

In aggregate, the model predicts an increase in demand, generation, electricity prices, and emissions from the utilities created by the introduction of PHEVs. It also suggests that by 2030 almost all regions (10 out of 13) will need to add capacity to provide for charging PHEVs, mostly in the scenario where PHEVs are charged at 6 kW in the evenings. In all likelihood, to avoid these problems the utilities in the regions would expand their capacity, increase their imports, or establish demand response programs beyond the level that NEMS had calculated, but these factors were not modelled in the scenarios.

Some assessments of the impact of electric vehicles assume owners will charge them only at night, said Stan Hadley of ORNL’s Cooling, Heating and Power Technologies Program.
That assumption doesn’t necessarily take into account human nature. Consumers’ inclination will be to plug in when convenient, rather than when utilities would prefer. Utilities will need to create incentives to encourage people to wait. There are also technologies such as smart chargers that know the price of power, the demands on the system and the time when the car will be needed next to optimize charging for both the owner and the utility that can help too. (Peak Oil News, March 14 2008)

Will New Zealanders be any different than Americans when it comes to plugging in at convenient times? I doubt it. We are going to need some serious demand side incentives to keep people from plugging in at will. Does our government have the courage to dictate to the market or will simple price mechanisms be enough? I don’t have an answer or a strong view either way. I just think that we should be discussing this now rather than waiting for the cars to roll off the ship from Japan.

Never in human affairs have so few been allowed to make so much money by so many for so little wider benefit. Across the globe, societies and governments have been hoodwinked by a collection of self-confident chancers in the guise of investment bankers, hedge and private equity fund partners and bankers who, in the cause of their monumental self-enrichment, have taken the world to the brink of a major recession. It has been economic history’s most one-sided bargain.

Thirteen years ago, I tried to blow the whistle on financial market liberalisation in my book The State We’re In. It was obvious then what is even more obvious now: financial market freedom embeds short-termism, guarantees lower investment, works against business building and innovation, generates booms and busts, inflates house prices, creates system-wide risk and excessively rewards those who work in them.

We don’t have any of those pressing finance related issues in this country, do we? I’ll ask what I asked yesterday. Do we want investment bankers, who Will Hutton has just called ‘self-confident chancers’, running the country a year from now? (More than they do already?)