Why electricity prices keep rising

The relentless rise of domestic electricity prices is a direct result of a dysfunctional market, which permits ever-increasing profits by gentailers. The new Electricity Bill offers few solutions and may make things worse.

The dominant generator-retailers' – Meridian, Genesis, Mighty River Power, Contact, and Trustpower – excess profits come from retail customers least able to afford them.

The Government's Electricity Industry Bill brings only minor reforms. See our What We're Saying for more information. These changes are wrongly focused, and benefit suppliers at the expense of consumers. DEUN has a plan of action that can slow the price rises.   

Successive Ministers of Energy have failed to act to prevent excessive price rises. Government supports and enables the gentailers, saying that average wholesale prices must be high enough to ensure new power stations are profitable.

Domestic price rises are paying disproportionately for new power stations, because the increase in power demand is not coming mainly from them, but from commercial and industrial consumers.

New Zealand’s electricity market design has failed its promise of being good for consumers. The spot market was designed to drive wholesale prices down, not up. They should reflect the cost of running existing power stations, not building new ones.

Creating shortage

Each gentailer has market power at times. Whenever it is profitable to do so, they hold back generating capacity to drive spot prices up to very high “shortage prices” 

Market power generated $4.3 billion of excess profit between 2001 and 2007. The Electricity Commission figures another $2 billion excess profit was raised in 2008.

An industry report says this market power is necessary. We question this report – it was commissioned by the industry as a strategic response to the Wolak report to the Commerce Commission, which identified the $4.3 billion excess profit.

Cartel

Gentailers are acting as a cartel. Any one of them could undercut their competitors to secure more business, but none of them have done so.

Electricity market rules prevent effective competition from “fringe” retailers and generators. A new retailer has to pay the whole cost, including excess profit, of generation by the gentailers. Most fringe players are soon squeezed out of the market by the wild fluctuations in spot prices driven by market power of gentailers.

New Zealand’s retail market is increasingly complex and costly. Retail businesses make excessive margins, typically $150 per customer per year, and up to $300, compared to the $75 typical in Australia.   Underlying costs are very high because the retail market is not only small, but fragmented amongst five large and several small retailers. Smart metering will increase these costs further.

A new approach is needed

New Zealand is out of step with the rest of the world, in the extent to which it favours supplier interests over consumer interests.

Electricity supply is an essential service in fact, and should be so in law. The Commerce Act extinguished the concept of “essential service”, which required prices to be fair and reasonable. It is silent on the charging of very high prices, despite the damaging social and economic effects of this behaviour 

The Electricity Industry Bill removed the concepts “fair” and “sustainable” from the concern of the new Electricity Authority. Electricity market design is decided by Industry Participants, a group dominated by suppliers, leaving the interests of mass-market consumers and sustainable energy providers to be clawed back in other forums.

DEUN recommends

1. Reject the Electricity Industry Bill.

2. Amend the Commerce Act to restore the principle of “essential service”, so electricity businesses are cost-minimising not profit-maximising.

3. Retain the Electricity Commission, and require it to regulate for the benefit of consumers, not to preserve industry profitability.

4. Improve domestic consumer representation on the Commission’s Board and advisory groups. Either: 

• Regulate gentailers for the explicit purpose of promoting competition, as is done now in telecommunications regulation. Or

• Regulate the gentailer cartel in the same way as network monopolies, under Part IV of the Commerce Act.

5. Study overseas examples of restructuring before making changes.

6. Design a new market structure and regulatory structure which will be suitable for New Zealand's small market size and unique conditions, and which will give fuller opportunities to invest in energy alternatives including energy efficiency.

Resource

>DOWNLOAD Age Concern's Submission on the Electricity Industry Bill [small PDF file]