National's Steven Joyce dismisses Labour-Greens power policy as 'bumper sticker politics at its most destructive'; Greens' Russel Norman pledges more competition and lower prices

National's Steven Joyce dismisses Labour-Greens power policy as 'bumper sticker politics at its most destructive'; Greens' Russel Norman pledges more competition and lower prices

Government and opposition politicians are continuing to spar over Labour and the Greens' plans for electricity.

Economic Development Minister Steven Joyce says their "threat" to nationalise the electricity industry has wiped hundreds of millions of dollars off New Zealanders’ savings. And Greens co-leader Russel Norman says the National-led government wants to keep a failed electricity system where there's no real competition and prices rise.

The Labour and Green parties yesterday jointly announced they will dismantle New Zealand's electricity markets if they win next year's election. They say they will create a new Pharmac-style agency called NZ Power that would act as a single buyer of wholesale electricity. They maintain this move would cut household power prices by up to 14%, create 5,000 jobs and boost Gross Domestic Product by NZ$450 million.

The two parties estimate the Crown would lose between NZ$260 million and NZ$365 million in dividends and taxes from power generation companies, while power generators, both private and public, would lose revenue of between NZ$500 million to NZ$700 million.

Joyce today described the Labour and Green policies as "reckless threats" and "Soviet-style 1970s policies".

“The more than two million New Zealanders in KiwiSaver will have watched with great concern yesterday as the value of their retirement nest-eggs fell sharply within hours of the opposition parties announcing their half-baked nationalisation plan,” Joyce says.

“The sharemarket value of Contact Energy, Trust Power and Infratil shares alone fell by more than NZ$300 million yesterday afternoon. That value was taken out of the pockets of hard-working KiwiSavers, the New Zealand Super Fund and small shareholders across New Zealand. If Labour and the Greens could do that in just a few hours, imagine what they would do if they ever got near being in government," says Joyce.

'Chilling effect' on mobile capital

Joyce also questioned why anyone would want to invest in New Zealand in the days of mobile capital if a government can "turn up on a whim tomorrow" and nationalise an industry.

“These guys have completely lost the plot if they think what they announced yesterday wouldn't have a completely chilling effect on investment in New Zealand," says Joyce.

Even if the Labour-Greens plan did create the cost reductions they say it will, which Joyce says it won't, these would be "more than eaten up" by their plans for a "much more aggressive" Emissions Trading Scheme.

“Their power price savings estimates are totally made up. What we do know is that having politicians running the electricity market will lead to a shortage of investment, a mismatch of supply and power blackouts. It makes as much sense as politicians running the food market. Labour and the Greens are economically naive and untrustworthy if they believe any of this would be good for New Zealanders. It is bumper sticker politics at its most destructive," Joyce says.

In contrast Norman says whilst National wants to stick with a failed electricity system where there is no real competition and prices rise, the Labour-Green plan will create more competition and lower prices.

“The Greens’ electricity plan will open the door to new competition and innovation in electricity generation and retailing, leading to lower prices," says Norman.

“In National’s failed model, 93% of the generation market and 95% of the retail market are controlled by the five big electricity companies. NZ Power will change that by breaking the market power of those five big operators. Currently, the electricity companies share risk across their generation and retail wings, and ensure that their generation meets their retail needs first."

"That has allowed them to lock out new competitors. The proof is in the pudding: 20 years after reforms that were supposed to create a competitive market, not a single new significant generator or retailer has emerged," Norman adds.

An end to the vertical integration between power generation & power retailing 'will create a more equal playing field for newcomers'

Norman says NZ Power will "sit" between the generation and retail markets. He says the effective end of vertical integration between power generation and power retailing will create a more equal playing field for new entities to enter both markets. When NZ Power tenders for new generation, it'll accept bids from whichever companies can offer the best price to build the new power plants at the lowest cost, while at the same time meeting sustainability and reliance requirements.

"That will foster innovation. We expect to see more community and micro-generation and, potentially, new operators for large-scale plants," says Norman. "There will be more competition in the retail market. Rather than being squeezed out by the current big five, new, innovative retailers will enter the market offering new, smarter, and greener products than the old companies do."

Earlier this week the Electricity Authority published its Electricity market performance, - A review of 2012. The report says 18% of retail customers switched provider during 2012, down from the record high of 19.5% in 2011, but still a 'strong" level of movement.

"The retail market in 2012 was characterised by sustained high levels of switching, reducing retailers’ concentration in various regional markets and retailers aggressively chasing customers," the Electricity Authority says.

"The overall level of competition in the retail market is one of reducing regional market concentration with some new independent retailer entry and growth slowly having an effect on the dominance of the main retailers. Generally, the retail market continues to head towards a more competitive market structure."

Prices are rising

However, the Electricity Authority, described as an independent Crown entity responsible for the efficient operation of the New Zealand electricity market, also says while more consumers are getting relatively better deals, absolute prices are rising.

Figure 29, below, from the Electricity Authority's report, shows the change in average price - including GST - paid by residential consumers per kilowatt hour (kWh). The Electricity Authority says this is a measure of absolute price and includes transmission and distribution charges as well as energy charges.

"Figure 29 shows that the total average cost of electricity increased over the last three years by about 5% per year. The GST increase from 12.5% to 15% in October 2010 impacted price. However, inflation over this period had been about 2.14%," says the Electricity Authority.

'Profits v prices'

National, says Norman, ought to decide whether it cares more about protecting power company profits or cutting power prices for New Zealand families and businesses. He maintains the proposed NZ Power would save families NZ$300 a year by reducing wholesale electricity prices and passing those savings on to households and businesses.

Energy and Resources Minister Simon Bridges, meanwhile, says Labour's finance spokesman David Parker, when Minister of Energy in 2006, effectively advised the Cabinet against an NZ Power type scenario.

“As Minister of Energy he (Parker) said that 'a single buyer would likely result in higher capital and operating costs.' He went on to say that: 'The risks involved in changing arrangements could be significant. The resulting uncertainty could lead to investment proposals being put on hold. Direct implementation costs could be large.' And, he admitted that 'The single buyer would be relatively poor at sustaining pressure on operational costs'," says Bridges.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

We welcome your comments below. If you are not already registered, please register to comment.

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.

20 Comments

The fact that Norman and Shearer will promise whatever it takes to park their &^%$ in the Beehive is neither here nor there....the issue here is, will it cost National the election.
The Kiwi peasant has become conditioned to vote for promises...Shearer knows this.
Even without those two morons playing stupid games, there was always the issue of govt control over the size of dividends, least a voter backlash blow them away.
The shares will pay a dividend...but don't expect fat capital gains....and learn to live with a falling value as the market moves on.
 

When Russell Norman is the one looking for more competition and the National party is the one defending the cosy system that rorts the consumer  -- We have to know that National has lost it's way.
True.  The Greens / Labour proposal doesn't look much of a competitive operation.  But it's a response to a system that has produced 70% price rises, in the face of static demand, and static costs.
New Zealand inhabitants pay hugely for many things.  Because we live in a system of protectionism for big operations by our supposedly right wing parties.  Protectionism that seems worse even than a left wing government would offer the power bases of old -- such as unions.

Very true KH. Just recently Key said when talking about the rejection of the Commerce Commission's recomendations for telecommunications that National didn't want to do anything that detrimentally affected Telecom/Chorus shareholders. Bold as brass and unabashed. They don't want to do anything that affects power companies profits. For all their half hearted jaw boning about the property market ,they don't want to do anything that affects the banks either. Corporate welfare I think its called. True competition's for the little guys.

(a)  Russell Norman is not proposing more competition.  He is proposing central planning.  Now while it is true that in theory a central planner can replicate the outcome of a competitive market, and while it is also true that in practice markets don't deliver perfect results -  it is also true that central planning has never delivered even halfway decent results in practice.
 
(b)  you say that the present system has produced 70% power price rises.  Have you actually checked what power prices did under the old system?    And what they did immediately fter the introduction of the Bradford reforms?

Norman and Parker reasonably point out that the 70% plus inflation price increases of the current model demonstrate very clearly that it is not working. The logic to support it not working, they explain relatively well in that under the current paradigm a new generator would struggle as they had no retail customer base to leverage, so would have to sell on a discounted wholesale market.
A retailer has a different problem of no surety of supply at fair prices, so really cannot establish in the current model. The gentailers know that for 90% of their business they get both margins; and will not significantly compete beyond their generating capacity.
Under  the Labour Greens policy, if there is any shortage of generating, expect multiple tenderers for new plant; while there would be little to stop say Telecom, or New World or Countdown, or any business with a significant customer base, becoming a retailer if they so chose. (In the UK we used Sainsbury's electricity; Sainsbury's being a grocer).
I actually expect price drops of greater than 10-15%, but who knows.
The model is working well in the US; not in North Korea or Albania as Mr Joyce would have you believe.

Yes, I'm not firm on this question but I frequently cross the mackenzie basin and can recall visiting a cousin working at otemata.... What a time, what an achievement: of the people, by the people, for the people. [Nowdays I think... with a policy of population growth how will newcomers assist with electricity generation.. given limited sites?]

Gareth, being as how it's Friday, wot abart a little Competition?
 
Prize - a Powershop credit (pour encourageur les autres), $ value to be nominated.
Second prize - a put option on 1000 MRP shares for, say, November 30, 2014
 
 
Job Advertisements for NZPower Executives, divsions, and other Org Chart Chunks.
 
I'll kick off:
 
Electricity Capital Expenditure Coordinator:  this is expected to be mainly concerned with fleet, tools and office equipment replacements for the first 15 years, as the newly nationalised NZPower entity will have no significant capex on actual generation for approximately this period.  Accordingly, the position will be full-time, with full benefits including an employer-subsidised cafeteria, creche, guaranteed entrance for teenage children to the nearest Decile 9 or 10 school, mandatory cultural awareness training (six weeks in Pahia), a minimum of four offshore trips per three-year period to benchmark and strengthen professional relationships, and six weeks annual leave plus four weeks sick leave (both able to be accumulated over a rigorously enforced maximum of twenty years), along with long service leave after two (2) years provided the employee has not:

  • been mentioned in a PQ, or
  • been convicted of an offence carrying a jail term of more than 15 years

Salary is expected to be in the $80-120K band, and the applicant will be restricted as to outside and pecuniary interests:  no more than 20 hours per week may be devoted to personal businesses, investments or other such activities, and may hold no more than 10% of the total shares at any time in any non-electricity industry company.
 
Why, I might even apply for That one, myself!

All right I'll play....
The position.
 Electricity Supply Regulatory Negotiator : experienced hard line negotiator required to interface with potential State owned regulatory bodies.
 Experience must include  having dealt  with Govt. officials on infrastructure projects of note, preferably at Senior Ministerial level.
 The successful applicant would be required to present a case to the Regulators on behalf of  Mighty River Power to maintain adequate profits to service Executive staffing requirements  and their associated remuneratory packages, while remaining sensitive to market driven pricing.
A sound depth of knowledge in political speak  would be an advantage along with connectivity within the Ministerial heirarchy.
The position would be full time given  the necessary paperwork required.
 Remuneration is expected to be in the region of 160K dependant on level of experience .
 Bonus incentives including share incentives additional to salary based on the applicants success in retaining Senior Executive bonuses along with a generous holiday allowance and full medical cover.  
Replies directed to Don Heffernan C/O Mighty River Power.

I got one, I got one.
 
Top leadership position. Not particularly well paid, but many benefits. Gongs and/or cushy numbers negotiable post-tenure.
Must have winning smile, ability to wear a mask for long periods, and remain silent when instructed. Must have a working knowledge of the ins and outs of  Bare Sterns.
Experience of bulk firing (potters need not apply) an advantage. Must be comfortable muzzling public debate on important issues, ability to lead linguishtic change, an advantage.
 
 
 
 

Here's a job for a journalist: uncover a government assesment of the effectc on hydro generation (long-term) of the next great quake on the Alpine fault.

I am not sure if the greens have really thought this through.  Higher power prices makes it more economic to invest in alternative energy projects.
Lower power will increase comsumption and ultimately require more power over time. This will lead to more pressure on our rivers. 
As a conservationbased party, the greens have departed from their conservation roots on this one.
 
 

Rastus, nice double bluff. and shame on Ed for picking (but we realise thats not your fault)....
Its logic like this that sounds simple but completely misses the/all points.
 
1. Higher power prices are the friend of NO ONE. Electricity must be avaliable to all at the lowest possible price, we can not have residential folk freezing cold in winter, nor un necessary costs layered upon business..
As an aside we have HYDRO, what don't you like about that. What Alternative energy do you want. We suspect you mean off grid....
Re wind do you appreciate the problems wind gen has for the transmission networks... Google Texas, or the costs once the turbines come off warranty...
 
2. Lower power price Does not increase consumption. Please google power elasticity of demand........... Economic acticvity is more a key to volumes/load used rather than price.
 
3. If more power were demanded, what makes you think rivers would come under pressure and if they were, what or how would rivers be pressured. And for instance do you think our present hydro rivers are under pressure. What do you feel about Clyde..
 
4. Who do really think are the Greens, or do you mean watermelon, or activisim.... Sounds like you prefer the Greens not to be in parliament...
 
Are you concerned by energy and alternative forms or ,or have issue with carbon.
If we err, please show use where with associated 3rd p references........
 

It's an interesting one because if NZers cared so much about staying warm in the winter and the associated heating costs, surely we would build housing with better insulation?
 
 

Remember the market dismantled Otahuhu peakers and built Whirinaki - Not a good outcome.
We don't have capacity charges - why should a wind generator expect someone else to provide backup for them when the wind doesn't blow at no cost ?
NZ is the only country I am aware of that allows a return on current asset values.
All mature markets offer a regulated return on Book Value.
These are not pure markets - they require a degree of regulation.
Why not force bids from all participants and pay them what they bid - You don't all buy cabbages at the highest bid price - Crazy.
There is a lot wrong with our electricity market.
It has delivered very poor outcomes for retail customers over time.

Joyce is an idiot. Not once can he provide a shred of evidence saying how the current power market is working for the general populace. WMD's, commies, whats next, aliens? 

Aliens! Don't give Key any more ideas. I'm sure his spin doctors are working them into another WMD bogeyman fairytale as we speak. Apparently Dick Smith sells electrical switches that could possibly be used to make a WMD bomb out of a F&P dish drawer hence the feverish attempts to hack their websites. Thank god for the GCSB

T'is a fact that those who indulge in lightweight denigration
 
Tend to have the weaker case.

The CEO of Vector seems to think the Labour/ Greens policy not unreasonable, but Contact are not impressed.
http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=1087...

hmmmmm yeah but Contact  are a gentailer dh....big difference in outcomes for them in comparison.

VECTOR  is not an electricity retailer ......... they own the power lines , their prices are fixed by Government and increases limited to CPI ,  so they dont care either way