Proposed energy sector reforms likely to increase electricity prices

Media Release - 9 December 2009

There is a high risk the proposed reforms for the energy sector, released today by Minister Gerry Brownlee, will do exactly the opposite of what the Minister intends and actually raise electricity prices and reduce the security of power supply to New Zealanders.

New Zealand's cheapest power retailer, Powershop, believes the reforms, due to be introduced into the House tomorrow through the Electricity Industry Bill, will potentially have a bigger impact than the Bradford reforms of the 1990s, the last major restructure of the energy sector.

Ari Sargent, CEO of Powershop, has grave concerns that the changes proposed in the Ministerial Review will in fact raise electricity prices for all New Zealanders.

"These are poorly thought out recommendations. The lack of competition in the market does need to be addressed, as it leads to Kiwis paying grossly inflated prices for their power. However, there will be unintended consequences associated with many of the proposed reforms, which could lead to prices increasing even further. Indeed the Government's own Regulatory Impact Statement notes that "a more comprehensive review of the risks associated with proposed options" should have been included.

"The security of power supply is another major issue that needs tackling, but some of the suggested reforms could worsen rather than resolve the problem," Mr Sargent says.

Measures to improve prices, costs and competition - Reconfiguring of SOE Assets

Suggested reform:
- Tekapo A and B power stations to be transferred from Meridian Energy to Genesis Energy and the government owned Whirinaki plant to be transferred to Meridian Energy

Tekapo is the first lake in the Waitaki River, which is the lifeblood of New Zealand's electricity supply system. Because of its place in the river system, Tekapo can control the water available to generate electricity throughout the entire Waitaki system, which is made up of eight separate hydro lakes.

"It is illogical to reduce the co-ordination between the Waitaki catchments and completely reckless to provide commercial incentives to a single supplier who has the power to restrict water to the rest of the catchments. This puts the security of supply at risk and will see a change in river operation that will increase wholesale prices and prices to consumers, particularly in the South Island," Mr Sargent says.

Measures to improve security of supply

Suggested reform:
- Require retailers to make payments to consumers in the event of a conservation campaign or dry year power cuts

"Powershop fully supports providing a reliable supply to consumers and compensating them during forced conservation, but retailers have no control over the security of supply. Therefore, it is utterly illogical for retailers to have to fund this. The onus needs to be with generators, to give them the incentive to protect security of supply," Mr Sargent says, "Retailers have no ability to control energy supply and forcing these costs on retailers will create new barriers to entry."

- Put a floor on spot prices during a conservation campaign or dry year power cuts

"There is a high probability this will lead to an increase in wholesale energy costs every year to cover the possibility of occasional dry periods and therefore result in more hikes in prices for consumers," Mr Sargent says.

While there are a number of positives in the proposals, these are far outweighed by major flaws.