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Electricity Authority brief based on flawed economic model

The Electricity Authority’s stakeholder briefing of February 5 shows that wholesale electricity prices have fallen from 9 cents to 7 cents per kilowatt-hour since mid-2012. Yet the residential prices reported by Government have risen by 3%. Why aren’t they falling?

The Authority doesn’t worry much about prices so long as their statistics prove there’s a lot of competition. Their figures indicate that competition can drive commercial and industrial prices their prices down by 17%. Residential consumers that can play the competitive market can cut their prices by 7%.

What the briefing failed to say is that if consumers can’t play the competitive game, their prices will be correspondingly higher than average.

The briefing document reads like an apology for residential price rises, and blame this mostly on the peaky demand of householders; But the analysis that lies behind the briefing, “Analysis of historical electricity industry costs”, shows that the differences are small. New power stations to meet residential demand would cost 12% more than the average cost of new power stations, and supplying new industrial demand would cost 11% less than average. Yet heavy industry actually pays only a little over half what average residential consumers pay.

So the numbers in the Analysis document do not actually support the Authority’s message, that residential price rises were needed to meet the cost of peaky demand.

The Authority’s position is basically flawed. Its economic model assumes that electricity demand will return to the growth of past years. It is in denial of the actual trend, which is also shown in overseas markets - Australia, the UK, and some American states. High prices are simply turning people off using electricity.

Overseas, the industry is worried about “the death spiral”, where people are switching off so fast that remaining consumers have to be charged more to keep the industry viable. Solar electricity is cheaper every year, home insulation means less heating, and electricity demand is falling, not only in New Zealand.

Unless the industry transforms itself to adapt to new technology, its investors face decreasing dividends and asset values. Only if it does transform can both consumers and companies look forward a brighter future.

ENDS

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