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Bryan Leyland

Why electricity prices are too high

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Many people believe that electricity prices are too high. They find it difficult to understand why, when most of our electricity is generated by old hydropower stations, the price has escalated at well above the rate of inflation since about 2002 when the market first started to function as it was designed to do. They would be right.

The electricity reforms that led to the setting up of the Electricity Corporation of New Zealand and the reduction in the number of Electric Power Boards was a move in the right direction. Unfortunately, people who did not understand electricity systems then gained the upper hand and insisted that electricity was “a commodity like any other”. This is far from the truth. If we take a market commodity like baked beans, then, if the price goes up you can switch to spaghetti. So baked beans has the essential market characteristics of price elasticity and the availability of an alternative. Electricity has neither. There is no alternative to it and the value is much greater than the price.

The cost of not having a supply of electricity is enormous – more than $10 per unit! But if we all paid for electricity at this rate, the economy would collapse. In fact, electricity is as vital to our economy as roads, water and sewage and, I argue, should be treated as such. Consumers should be able to purchase it at the cost of production plus a reasonable margin to fund future development and to ensure that there is sufficient capacity for dry years.

On the basis of the mistaken belief that “electricity is a commodity like any other” the Wholesale Electricity Market Development Group (WEMDG) was set up. In the end, they had to choose between two systems. One was a “single buyer” system where each power station would contract to supply electricity at its cost of generation over a period of 20 years or more. With this market option most of our electricity would have been purchased at a very low price because our hydro stations were old heavily depreciated but still very efficient. If new stations were needed, the single buyer would choose the stations that led to the lowest overall cost of electricity. In this way, the single buyer would tap into a genuinely competitive market in the business of building and operating power stations.

WEMDG were advised that this was the lowest risk option. But they chose the other option which was a “market” system based on selling kWh. To an experienced engineer, the shortcomings were obvious. All the stations get paid at the price bid in by the highest bidder. So when an expensive station is called upon to generate, the low-cost stations make huge windfall profits. During a shortage, the generators inevitably have market power and can- and do – push the price up very high. Because stations only earn income if they are actually called upon to generate there is no inducement to build the reserve stations that the system needs for dry years. There are many other similar perverse outcomes.

As a result of this flawed market and the associated “reforms” consumers have paid more than $4 billion more than they needed to for electricity and our once a world leading ripple control system for load management has been strangled so the system peak demand is higher than it needs to be. On many occasions it has been demonstrated that the generators have rorted the market – and the consumer. And it is all done within the “rules”.

I have put a lot of effort into trying to persuade various people in the industry that they need to look at the market from the point of view of the consumer rather than blindly assuming that an efficient market benefits the consumer. and therefore there is no need to look at the market from the point of view of the consumer. They will not contemplate the possibility that the market is seriously flawed and acts against the interests of the consumer.

The Emissions Trading Scheme further complicated the power business. The theory was that increasing the cost of power generated by the Huntly coal-fired station would reduce the amount of electricity it generated. Huntly is the major generating station of last resort and, without it, we would have serious problems in dry years. When it is generating it is often setting the price that all the stations get. The commercial signal that this sends out to all the generators is that they will make more money if Huntly is generating and, in some circumstances, it will pay them to switch off some of their own their own generation to make sure that Huntly continues to generate to boost the price they get for their remaining generation. So, like many regulations brought in by people who do not understand the complexities of the system they are dealing with, the net result is an increase in generation at Huntly and a considerable and totally unnecessary increase in the power price.

The emissions trading scheme inevitably leads us to think about “dangerous man-made global warming” otherwise called “climate change” that, according to unproven computer models is caused by man-made CO2.. But the real news is that the world has not warmed in the last 16 years and the British Met office now predicts no warming this side of 2018. A number of recent research papers point out that the climate models upon which all predictions of disaster depend, seriously overestimate the amount of heating from an increase in carbon dioxide. Others predict sunspot cycle driven cooling. So the whole emissions trading scheme is based on seriously flawed science.

Clearly, the science is far from settled and balance and open debate is needed. Sadly, unlike in many overseas countries, the New Zealand media (with the notable exception of the National Business Review), puts a lot of effort into giving the public the doom and gloom side of the story goes out of its way to suppress any information that could lead to public to conclude that dangerous man-made global warming could be a monstrous myth, and, possibly, the biggest fraud in the history of the world.