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Electricity market competitive

Media release
10 February 201

Electricity market competitive

The electricity market in New Zealand is extremely competitive, with consumers able to switch retailers to gain lower prices, and more consumers using metering and home energy management systems to save more. But the electricity proposals of the Labour and Greens parties would be less able than the current market to meet consumer needs.

These are among the key findings of an analysis of the electricity market commissioned by BusinessNZ and undertaken by Sapere Research Group.

BusinessNZ Chief Executive Phil O’Reilly says it is valuable to get rigorous analysis on a sector that is complex and sometimes poorly understood.

“The electricity market was established in 1996 and has operated under changing rules since then. The research makes it clear that under the current 2010 rules, the electricity market is developing towards a highly competitive, well-functioning market.

“The electricity market’s greatest problem has been a lack of transparency around prices. Energy companies have not explained price changes clearly enough, and this has led to doubts about whether prices have been unnecessarily high in the past. BusinessNZ is recommending that energy companies ensure that the reasons for future price changes are meticulously itemised. We also recommend investigating whether we should have rules for information disclosure around price setting.

“The Sapere research also notes that a segment of the market may be experiencing energy hardship in having to spend too great a proportion of their income on house heating. BusinessNZ recommends investigating options for policies within the market and the social welfare system to help alleviate this,” Mr O’Reilly said.

Sapere found the electricity market is achieving positive outcomes against five key criteria:
1. Secure supply of electricity
2. Efficient operation and market transactions
3. Efficient investment in assets
4. Social requirements
5. Environmental requirements

Sapere also analysed NZ Power proposals (Labour and Greens policies) against the same criteria. Sapere concluded that these policies would be less able than the current market to meet the five criteria, and would not resolve transparency or energy hardship problems.

A summary of the research is below. The report Achieving policy goals for the electricity industry is on

Summary of Sapere report: Achieving policy goals for the electricity industry

New Zealand’s electricity market has been developing as a market since 1996 and has been operating under a new Act of Parliament since 2010. Recent media and public discussion on the performance of the electricity market has been critical of rising electricity prices. There appears to be a lack of public understanding of what makes up the retail tariff and the reasons for the increases, and of the relevance of structural issues to the price increases.

BusinessNZ commissioned a report from Kieran Murray, Toby Stevenson and Joanna Smith at Sapere Research Group (‘Sapere’) to explore how effectively the market is working and what we can expect in future. Sapere considered the performance of the electricity sector, including market arrangements, since 2010 against five enduring public policy goals:

1. Secure supply of electricity
2. Efficient operation and market transactions
3. Efficient investment in assets
4. Social requirements
5. Environmental requirements

Key findings:
• Outcomes under all of the public policy goals are for the most part positive but there are some areas where more effort should be applied
• Security of supply has improved under the market, and investment in generation, transmission, and distribution assets is keeping ahead of demand without government subsidy or direction
• Retail electricity price increases have not been transparent enough
• There appears to be insufficient action to address energy hardship experienced by some consumers who live in houses that are too cold and damp
• The NZ Power proposal would be less able than the current market to deliver against the five goals, and would not resolve transparency or energy hardship problems

BusinessNZ recommendations:
• Retain current electricity market framework as superior to the alternatives across a range of desirable policy objectives

• Aggressively pursue net-benefit positive improvements to the efficiency of the current market arrangements by improving price transparency:
i. Investigate rules for information disclosure around price setting
ii. Fast-track Electricity Authority and MBIE workstreams on price transparency

• Confirm the nature and size of the issue of energy hardship, acknowledging that efforts by the electricity market will benefit those affected only marginally

• Implement options to aid those experiencing energy hardship, in a systematic, whole of-government way (including the appointment of a lead agency), such as:
i. Requiring landlords who receive state money to make their houses available for social housing to submit their houses to a ‘warrant of fitness’
ii. Replacing the poorly targeted Low Fixed User Charge with a better initiative
iii. Reviewing initiatives in health and welfare that can help address energy hardship

Key Issue One: Improving transparency and understanding of prices

The electricity market is now more competitive than at any time in the past. Substantial gains have been made and continue to be made.

The majority of consumers are benefiting from competition with the ability to switch retailers to gain lower prices. An increasing number of consumers can also take advantage of metering and home energy management systems to make further savings. These competitive settings can be expected to apply greater downward pressure on prices.

Consumers’ perception is that prices in the past have been too high. Sapere finds that competition is increasing; this implies that if the current levels of competition had existed in the past, prices could have been lower.

Prices could also have been better explained. Input cost factors have not generally been well explained, possibly because of their complexity. Transparency is particularly weak in the interface between wholesale and retail pricing.

Although price rises have slowed significantly since 2010, the criticism that they have not been adequately explained is still valid. Energy companies could do a better job of explaining pricing decisions. The industry needs to develop clearer, more consistent and coherent explanations to justify movements in prices.

Sapere recommends the investigation of rules for information disclosure about the relative operation of generation versus retail arms of energy companies. Standardised itemising of price increases would help improve customer understanding.

Key Issue Two: Energy hardship

Some consumers may benefit only marginally from more competition and lower prices. Sapere notes energy hardship is a multi-dimensional problem for a segment of consumers, involving access to energy efficient appliances, income levels, household size and composition, state of housing stock, location, health, and fewer individuals living in aged care or other institutions. Consumers experiencing energy hardship may not be able to keep their homes warm regardless of the price-restraining effects of competition or other improvements in the electricity market. Sapere recommends research to determine the nature and size of the issue of energy hardship, and where the best response to the needs of these consumers lies within the electricity market (e.g. a better targeted low fixed charge regime or other means), or at government level (e.g. electricity supplement similar to accommodation supplement or other means), or other housing or health related areas.

NZ Power proposal

A competing vision for the electricity market, NZ Power, is being advanced by the Labour and Green parties. The NZ Power proposals would introduce government control (central planning and single buyer of wholesale electricity) into parts of the current system.

Sapere compared the NZ Power proposals against the same five enduring public policy goals and concludes that the NZ Power proposal would be less able than the current market to deliver the expected outcomes. Specifically, Sapere found that the NZ Power proposals would put at risk the gains made since the establishment of the electricity market, would not be able to deliver on the commitment to reduce prices and would not address the two key issues it has identified with the current arrangements.

How is the electricity market working (since the 2009 Ministerial review and subsequent reforms) - key points:

• Secure supply, no blackouts or crisis in dry years from energy market failure
• Competition has been restraining retail price increases since 2010
• ‘Discovered’ (rather than mandated) prices are revealing ongoing opportunities for efficiency
• Market approach is gathering information and reducing and dispersing risk
• Investment in generation, transmission and distribution is keeping ahead of demand
• Market power of generators has reduced since 2010
• Wholesale market behaviours have improved since 2010 as the market has learned to better manage risk
• Investment in renewables has substantially exceeded investment in non-renewables
• Metering is bringing more cost-reflective pricing and home energy management systems are enabling more demand side management
• Opportunity cost pricing of water is bringing more efficient use of water and informing the viability of hydro investments

NZ Power - key points:
• Supply security would be underwritten by government and would be costlier than current system
• Reducing consumer prices in the short term by central control of wholesale purchasing would ultimately bring greater burden on taxpayers and higher consumer prices longer term
• Energy hardship experienced by some consumers would not be alleviated by NZ Power policies much if at all
• Centrally planned decision-making would be based on less information than current system, with more risk of error, more concentrated risk and higher costs
• Single buyer would be less transparent with no wholesale price signals
• Single buyer purchasing wholesale energy price at historic cost of generation plant plus operating costs would require an arbitrary line set between older and more recent valuations, with consequential impacts on investment, jobs and NZ’s international reputation as a safe place to invest
• The historic costs in today’s dollars of the major hydro electricity generation schemes is higher than their current value, so that regulating wholesale prices to reflect historic cost would not lead to lower prices
• Centrally planned decisions would face more incentives to optimise political outcomes and fewer economic incentives to optimise investment than the current system
• Pricing water at zero or requiring the single buyer to estimate its value could lead to less efficient use of stored water as it has in other jurisdictions with a single buyer, and potentially incentivise its use for irrigation rather than hydro generation
• Single buyer approach is based on analysis (“generators are earning super profits”) rejected as inaccurate by the independent market regulator, the Electricity Authority, Castalia Strategic Advisors, Frontier Economics, Professor Frank Wolak and others

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