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 www.businessnz.org.nz.
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