The NZ Initiative's Jason Krupp says the Huntly power station decision endorses the current market-based electricity structure by showing that prices are the best means to determine the allocation of resources

The NZ Initiative's Jason Krupp says the Huntly power station decision endorses the current market-based electricity structure by showing that prices are the best means to determine the allocation of resources

By Jason Krupp*

Earlier this month Genesis Energy announced it was mothballing New Zealand’s only large scale coal fired electricity plant. The move, effective as of late 2018, will reduce the country’s total CO2 emissions by about 2.5%, setting the sector on course to produce 90% of the country’s electricity from renewable sources.

Green Party co-leader James Shaw hailed the announcement as welcome news. He then quickly used it as a stick to beat the government for not doing enough on climate change, saying the “Government’s failure to take action on climate change means that it’s up to companies like Genesis to make real change”.

That may seem a principled stand to take, particularly as the Greens view the Key government’s latest commitment to reduce greenhouse gas emission by 11% on 1990 levels over the next 15 years as an overly easy target.

Targets aside, this correspondent wonders if the Greens’ are not a little bitter over the Huntly announcement on a policy level. The reason is because Huntly was closed for purely commercial reasons, not because government fiat declared coal bad.

This announcement pours cold water on New Zealand Power, a policy launched by the Greens and Labour in 2013 to lower household power prices by restructuring the electricity sector under a single buyer model.  Under this scheme the government would act as a middleman, buying electricity from producers based on the costs of production, and then on-selling it to retailers.

The move would strip investment signals from the market by constraining demand-based pricing. The Greens and Labour hoped to overcome this by tasking government with the job of deciding when new generation plants would be needed. The building and operating of these plants would be outsourced to the private sector, with the plant type weighted in favour of renewables (of course).

Both parties continue to endorse this policy, but it was only the Greens who saw the Huntly decision as a repudiation of the current government’s policies.

The problem for the Greens (and Labour) is that the Huntly decision endorses the current market-based electricity structure by showing that prices are the best means to determine the allocation of resources. Electricity demand has been largely stagnant since the 2007/8 recession and firms have been responding by taking old and inefficient plants off line. In addition to Huntly, Mighty River Power announced earlier this year that it planned to close the gas-fired Southdown power station by the end the year. And just last week Contact Energy said it would scrap its Otahuhu power station, having effectively replaced it with the new Te Mihi plant.

These firms have been able to do this because of significant investments in renewable generation capacity in the early 2000s, specifically baseload geothermal but also windfarms. Those investments were made on the back of high prices at the time, again reinforcing the role of price signals in the market. That the government has set rules that allow the electricity sector to shift to a more cost efficient low-carbon production method without the intervention of bureaucrats is a good thing, not a failure as the Greens are attempting to suggest.

The last thing New Zealand needs is for government to continue meddling in the sector further, especially where the intervention is based on the most inefficient of resource allocation models: central planning. German government intervention along these lines via price guarantees and compulsory purchase rules for renewables has seen wholesale electricity prices collapse even as consumer bills have skyrocketed. Worse still, the country’s greenhouse gas emissions have risen even as the renewables generation base expanded. This is because relatively clean but expensive gas plants are uneconomical in the current environment, and dirty but cheap coal plants have had to pick up the slack. To quote the Economist: “It has in effect turned the entire German energy industry into a quasi-planned economy with perverse outcomes”.

New Zealand does not need government to play a more active role in the electricity sector than it does now. With nearly all of the country’s electricity coming from renewable sources, and more projected to come on stream in the future, it is fair to say that the generation and retailing side of the sector is far from broken. So why try to fix it?

This does not mean that New Zealand’s electricity sector is without its challenges. The Tiwai aluminium smelter contract keeps lurking in the background, as well as the potential for an undersupply of power, plus disruptive production technologies like home solar have yet to be addressed within the current 20th century business model. Nor should it be suggested that opposition parties or the government should remain out of matters of national significance like anthropogenic climate change and greenhouse gas emissions, be it in electricity or milk processing. But New Zealand will be best served by tackling these challenges through a market-based model rather than by letting politicians meddle in the primary functioning of a sector, especially where there is no evidence of market failure.

-----------------------------

*Jason Krupp is a Research Fellow at the New Zealand Initiative. This is its weekly column for interest.co.nz.

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.

21 Comments

Comment Filter

Highlight new comments in the last hr(s).

As you know, thermal generators set the market price at which surplus power is sold. If a power company can supply its own customers 100% of the time, there is no need to buy power at that price. It supplies its customers with power generated by itself at whatever price that might be.
All large generators now have some renewables. In many cases this is in the hope that they can sell surplus power on the wholsale market at the prices which have been set by the thermals. With the thermals being gradually retired, slightly lower prices may be evident in future making the business case for renewables less compelling.

Since when has the private sector let investors determine the price discovery process? In fact, Debt-Financed Buybacks Have Quietly Placed Investors On Margin Read more

Apple Inc. raised A$2.25 billion ($1.6 billion) with a debut Australian debt sale that’s the largest bond deal ever Down Under by a non-financial company.

The iPhone maker sold A$1.15 billion of seven-year notes at a yield of 110 basis points more than swap rates and A$1.1 billion of four-year securities at a 65 basis point spread.

The proceeds of Apple’s Kangaroo bond sale may be used to return capital to shareholders through stock buybacks and dividends, sale managers said in an earlier statement announcing plans to do an Aussie transaction. The Cupertino, California-based company announced in April it was boosting its capital-return program by $70 billion through March 2017 and would be accessing both U.S. and international debt markets to help pay for it. Read more

Oops, what Fed Regs.?

Earlier today, as AAPL stock was plummeting and had lost a whopping $75 billion in market cap, dropping as low as $92/share, CNBC's Jim Cramer pulled a rabit out of a hat, or in this case a previously undisclosed email out of his inbox. An email from AAPL CEO Tim Cook which said the following (as subsequently conveyed by Cramer to CNBC viewers): Read more

It is unclear why Labour or the Greens should feel aggrieved. Much of the investment in renewables was initiated when Labour was in power, whether due to price signals or political influence I suppose you could argue, but it doesn't really matter. There is an implied argument in the article that the disastrous giving away of half the hydro power assets in the recent power company sell off, is somehow now justified by the closing of thermal power stations. Given the power companies were already commercial, and given they have the same directors they had before, there is no reason to think the outcomes would have been different. Except that a major share of the profits would not otherwise have been heading offshore, but would have been shared among all taxpayers. I will personally not miss the thermal stations for climate change reasons, but given very low coal prices, you have to assume that Huntly is closing not because it couldn't produce power below the wholesale price, but because some stations needed to close to keep power prices very high.
Separately, will the current model keep NZ from having an electricity shortage? It seems to me for any one electricity company to maximise profits, they would want the highest prices possible, and to sell as much of their capacity as practical. Why on earth would they invest in spare capacity to cope with say a dry winter, when for most of the time that capacity will suppress prices and or be unsold?

Yet more neo-liberal faulty dogma. Prices are not the best means as they do not reflect the future costs and time to market for replacements and does not offer resilience and price guarantee to us as a nation. So as an example it takes on average 8 years to build a new nuclear plant (not in NZ ever I know, but I dont have data to for a conventional plant build) that means a decade before it is needed it has to be started and there has to be a price high enough to build it if not no one will build it. Second example peak oil has seen incredible volatility in place since we passed it, on the one hand crazy investment in shale then not as the price collapsed making drilling un-economic. What about if we have dry years and we run out of hydro? burn coal? yet coal will cause more and more such climate extremes.

What pray does such volatility and possible non-availability of power do for SMEs and other businesses?

Short answer is I see nothing that gives me confidence that past peak oil neo-liberal / capitalism will work and keep our economy going and our social structures.

Our country will rue this day, that a tight cartel gets to bin coal powered generation. There will be a real drought (not one these neurotic annual events ye moderns dream up each summer) eventually - NZ will be on its knees. So called renewables can't do baseload. Our Fathers knew this: built the coal and hydro plants and banned private monopolies.

So geothermal, which most people regard as a 'so called renewable', can't do baseload?

Really?

There is a huge amount of extra deeper geothermal energy we could tap if there was the political will to (just ask the guys at GNS Science).

As for the reason there might be what you call 'a real drought'. Well we know that NIWA predicts increasing incidence of drought as a consequence of climate change, so continuing to rely on fossil fuels (which fuel climate change) doesn't help much there either, does it?

Talk about muddled thinking.

If you dont accept climate change, and that climate change will cause more severe droughts the running plant that makes it worse amkes no sense. Such an event as a drought is kind of a perverse outcome, ie we'd need more coal plant (or alternatives) to replace hydro in a dry year caused by the coal plant in the first place.

Yes i agree on droughts and yes it is a mistake to not have resiliance in an essential system like the electricity network but no one is prepared to pay for such a standby plant sitting there costing millions but doing nothing. What happens to the coal plant btw if there is no coal left? or at a price that ppl and businesses cannot afford to pay? same result as a dry year, blackouts.

Base load, well our fathers did not have access to the modern controllers and distributed effect capability that we now do have. Consider that the huntley plant is being moth balled so in effect it isnt needed as a base load right now, so it sort of proves it isnt needed as a base load, in the future either which pretty much shoots out the argument that renewables cannot do base load.

Our fathers I think understood resiliance very well as they understood the risk of starving etc, these days many ppl and neo-liberals in particular it seems have no concept of doing without if there is a failure. We are cotton wool'd from our environment too much IMHO.

Agree with on resilience but this this case there no evidence to suggest there will be more severe droughts - even the IPCC can admit this.

WG1 AR5 Ch 2 page 215:

"In SUMMARY, the current assessment concludes that there is not enough
evidence at present to suggest more than low confidence in a global-
scale observed trend in drought or dryness (lack of rainfall) since the
middle of the 20th century, owing to lack of direct observations, geographical
inconsistencies in the trends, and dependencies of inferred
trends on the index choice."

oh and in terms of price signals we are in a recession so our demand increase is flat where it was 2~4% before. So if you believe in growth for ever on a finite planet then when we come out of recession we will start demanding more electricity.

On top of that if you accept peak oil will drive petrol and deisel oil prices higher and quickly then that will push the purchase of EVs and the demand for electricity up. All this is a case of "all else being equal" and considerable iteration between factors, mind bogglingly so. If this occurs then energy that becomes too expensive for a business to function even of it is short term will drive that business out of business.

There is also such a concept as ability to pay this as much if not more of a social concept and not a free market one.

I don't know why anyone gives any credence to anything that originates from this neoliberal think tank.
.
I'm quite disappointed in this site that it even seeks a weekly contribution from it.
Where's the counterbalance from the left?
Or is this not deemed necessary?
Plenty of articles from TheDailyBlog would suit this purpose.

To be fair to David Chaston, any article by the NZ Initiative gets fairly quickly dumped on by most commentators here, so balance seems reasonable. I try not to be negative on their views merely as a default, but usually they give you new reasons to very easily challenge their arguments.

They get dumped on because they're such poor quality writing, and riddled with bad logic and blatant propaganda.

Give us something this stupid and dishonest with a more central-left slant, and we'll rip that to shreds too.

In my opinion, this article is one of the better ones emanating out of this body - mostly economics laced with a bit of political taint - but doesn't stray too far

The one area I would take this tome to task on is it's silence on the following:-

After selling off the 49% of the power-assets for $5 billion the government achieved a lot loot, from which it could have and should have done was install solar-panels on every state house and school. Electricity at current levels is expensive in anyone's language and a heavyweight anchor on any beneficiary's financial status - and it would also have gone some way to meeting improved renewable goals. Such an initiative would have cost a bit less than $½ billion out of that $5 billion

The government has actively discouraged the home-solar-power industry, and in doing so, it has effectively provided a protective pricing umbrella for the power companies. In effect the government, during the lead up to the sell-off, and since, has been subsiding the incumbent electricity power industry - and still is

How does a market-based pricing mechanism cope with a subsidised industry.
Bear in mind the decision to shut the station is an internal decision within a cabal, therefore it hardly stands the sniff-test of a true free-market pricing mechanism

I read their articles for 'LOLZ'.

It can be a fun trying to spot the 'straw men', 'logical fallacies' and other techniques employed to twist reality to fit in with their neoliberal world view. Heaven forbid their 'research' finds anything that doesn't fit the 'free market' neoliberal view!

Savor the anticipation of seeing how they will try spin things. They never disappoint!

The reasoning's so half-arsed that I'm usually surprised the articles don't just trail off mid-sentence.

Who says there is an electricity market. You only need to look at it to see it is a cartel with good price control, with some minor competition around the edges, just to make it look good.

The interesting thing with this is that my biomass combustion technology has emissions lower than the natural gas units at Huntly. I could increase the efficiency of their coal units by about 80% and have them cleaner than the natural gas units, but no one in New Zealand is interested in this technology. Should be in the USA in a month or so to sign up a deal for it over there.

I am mildly intrigued. In simple layman's terms how does your technology work?

...time for some crowd funding scarfie..

"The last thing New Zealand needs is the government to keep meddling..." I would consider selling off state electricity assets as meddling. It's really about perspective isn't it - and yours is more neo-liberal dogma courtesy of the New Zealand Initiative...

An entire column to justify state asset sell-offs and put a boot into left wing parties. Predictable as always.