Government review shows two-tier retail electricity market between households that shop around and those that don't

A Government-appointed panel has found residential electricity prices have risen by 79% in the past 28 years (after inflation), with those who don’t or can’t shop for better deals hit disproportionately hard.

The panel, chaired by Miriam Dean QC, has released its first report on the state of the electricity market. It is seeking feedback on its findings, before making recommendations to the Government on improvements.

The review is part of the coalition agreement between Labour and New Zealand First.

It has found that since 2000, New Zealand’s residential prices have risen faster than most other OECD countries.

About 103,000 households spent more than 10% of their income on domestic energy in 2015-16. Children were over represented among these households.

“A two-tier retail market appears to be developing: those who actively shop around enjoy the benefits of competition, and those who don’t pay higher prices,” the report says.

“The average gap between the cheapest retailer’s price and the incumbent retailer’s price has increased by about 50% since 2002, after accounting for inflation.

“Some households struggle to understand the various plans and how to choose the one that’s best for them, and low-income consumers miss out more often on prompt payment discounts - which can be as high as 26% of the bill, and which budgeting and advocacy groups say are really late-payment penalties.”

The report says electricity retailers don’t make it easy to compare prices and contracts.

“Despite so many new retailers, the big five generator-retailers still have more than 90% of the market, suggesting it is still hard for independent retailers to expand,” it says.

“New entrants are unhappy with ‘winback’ discounts aimed at drawing back departing customers.

“The lack of an effective wholesale contract market is another barrier to competition, they say.

“We found nothing to suggest grid operator Transpower or distributors are making excessive profits.

“Nor, based on our analysis to date, have we found evidence to indicate generator-retailer profits are excessive (though we note the lack of sufficiently detailed data means this is not a definitive assessment).”

While households have been hit, commercial prices have fallen by 24% since 1990. Industrial prices have risen by 18%.

The panel attributes this divergence to distribution charges shifting from businesses to households; generation and retailing-related charges shooting up for households; and GST, which only residential consumers ultimately pay, rising from 10% to 15%.

The report says: “A more ‘joined-up’ approach is especially needed between regulators and government agencies to address energy hardship - a task in which the industry also has a role to play. Extending the benefits of competition to all consumers would be a good starting point.

“Low fixed charge tariff regulations help some households but raise costs for others and push some further into energy hardship. We think they are poorly targeted at only one type of household in need of help.”

Electrification of the economy

The report also recognises the uptake of electric vehicles and the replacement of coal and gas-fired boilers with electric technologies will see demand for power sky-rocket. The Productivity Commission last week put the increase at 65% in the next 30 years.  

Yet it says: “Emerging technologies have the potential to soak up extra demand and contain price rises - which is why it is so important the regulatory framework allows us to fully exploit the opportunities they present.”

The report notes the use of solar panels and batteries turning today’s one-way flow of electricity from supplier to consumer into a two-way flow, for example.

“There is also a risk, as noted, that higher-income households may benefit more at the expense of lower-income households if pricing structures are not changed. But changing price structures will create winners and losers, and this will need careful management…

“All these matters we will examine in more detail in the next stage of our review.”

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?

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42 Comments

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I was at a smart house today, grid-tied solar, things (like washing machines) turned on when the sun appears, all data-logged as an app. Even as far south as Dunedin and as early in the season as now, they're running positive (making more than they use). It's the future.

But this review proves what we all knew - that the Bradford 'reforms' were neoliberal mantra - aimed at advantaging the already-advantaged. As frugal users, we got few shares (a negative reward for conserving) and were promptly told that we had too few, below some threshold, so they were promptly taken off us. It's called cynical disenfranchisement - and I'll never forget who did it.

We should always remember, too, that energy underwrites all money, so in a dwindling-energy, dwindling-quality, dwindling availability-per-head scenario, it's always going to 'cost' more. And it'll get 'worse'.

I recall an energy initiative that the Clark Cullen govt had on the books prior to leaving parliment in 2009, it was going to feature true smart meters and a full sell back system for home generators, it have been a smartgrid. Gerry Brownlee cancelled it immediately on entering parliament.

With smart meters , consumers should be given the option of paying per kwh at the spot price ( + margin) when they use the power. A simple app would tell them when prices are high or low, and they could save money by not using the bulk of their electricity when the price is high. This benefits the retailer as well , as they are adding their margin to what they calculate the average price to be. In this case they would have a set margin, so would be able to make more or charge less.

You can, one of the power companies does that. Flick or flip i think it's called. Might pay to check spot prices tho, you'd think 4am has noone awake to generate a load so is cheap, but it can be rather expensive at times.

Thanks , I'll check it out.

“Nor, based on our analysis to date, have we found evidence to indicate generator-retailer profits are excessive (though we note the lack of sufficiently detailed data means this is not a definitive assessment).”
Keh?

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The report is merely stating the bleedingly obvious. Of course there are customers who don't understand their power plans. These may be a sub-set of those who:

  • Cannot understand their phone plan
  • Cannot read a bus timetable
  • Use truck-shop clothing and appliance sales channels
  • Cannot understand their credit card T&C's and end up paying 25%+ interest on missed or minimum payments

There is always gonna be a less-abled segment of the population and the fabled 'two-tier' label applies to everything from parenting ability to life prospects.

But the notion, implicit in reports like this, that the Gubmint's Gotta Do Sumpfink is one to be examined closely.....unintended consequences abound.

Not often we agree waymad.. but this is one of them.

On the other hand, perhaps some extra tax from waymad could be used to protect them from themselves before they engage in rape and pillage of his mansion.

:-)

I think I have spotted the flaw in this report, and therefore the flawed conclusion. It comes down to asset price inflation. They are using the full cost of an asset, which relates to excess credit in the economy, and relating the price to CPI, which doesn't count asset prices.

Jenee you may want to confirm my theory on this, I could not find their specific measure of inflation in the report.

Inflation is always and everywhere a monetary phenomenon - Milton Friedman

Try and define "excessive profits"

The standard practice of financial deception is to re-value the asset every year and then calculate the ROI on the up-valued asset-values. The lines companies are known to gold-plate the lines-and-wires which they can automatically use to up their charges as they will claim the right to an ROI on the excessive investment

Remember a few years ago Kumbel explaining the annual re-valuation of assets

Exactly what I am talking about, and exactly the manner in which I learnt about this practice. Thank you to interest.co for providing the learning experience, thanks to Kumbel for taking the time to post (I had forgetten who had made that contribution, so thanks for the reminder). Hopefully some in turn can learn from the discoveries I make about things, such as the excess of credit in the economy and how it comes about.

Peanuts compared to house prices, where talking hundreds of thousands, people can't afford a home let alone electricity.

Max Bradford, 1998. Ex banker aspiring PM. Has everybody forgotten. Twenty years after, with apologies to Dumas. All that has been achieved is the increase of corpulent corporate hierarchy tenfold which the easy target sucker consumers of NZ are funding whether they like it or not.

Sadly just another example of the deep and worsening societal crisis our nation is in due to blindly following neo liberal mantra ahead of common sense. The core aim of neoliberalism is to remove protection, be it trade tarrifs, government regulation or social guarantees protecting the vulnerable in our society so that business calls all the shots. It is not in the consumers interest at all, that is for certain. With power bills, if you are living in a precarious manner you will struggle to pay early so lose your discounts and may even pay late incurring fees. You may be semi illiterate or under educated so can't access the technology or understand how to get a better deal or even pluck up the courage to ask. I think this is where the big money bills are coming from. Some might call it exploitation or gouging...

Some might call your post a load of Marxist twaddle... We do not want to go back to the bloody 70s again with protected industries and import licences. Competition, kept in check with a regulator with a big stick to knock bullies back into line is far better.

You need to reexamine your knowledge on schools of thought etc I'm simply suggesting better protection for consumers, I don't know how on earth you came to the conclusion any of my suggestions were marxist, but You do appear ignorant...

I think your anti-trade position in this and the other post I read directly before this are evidence enough.

Nothing wrong with prompt payment discounts, it's simply a reflection of the fact that cash flow is what keeps companies alive.. Cash now is always better than the same amount of cash later, so whether you call it prompt payment discounts or late payment penalty is just spin.

Pining for tariffs and some airy-fairy social guarantees when we have a good open competitive electricity retail market.. no bloody way.

Forget about electricity prices ............. the elephant in the room is the fuel price

Petrol in Brisbane is $1,33 a litre

Its an eye -watering 77% more expensive in Auckland .

Its much the same for diesel which is used to farm, mine , dig ditches , and carry food and other goods

Now how can we compete on input costs with Australia under these circumstances ?

We are going to price ourselves out of any level of competition with Australia at this rate .

Huh? Just checked this out https://petrolspy.com.au/map/latlng/-27.4710107/153.02344889999995 seems according to it 91 is around $1.60 give or take and diesel is much the same. Clearly no RUCs built into petrol prices. I don't know where they make that up as I expect they need it as much as we do.

Boatman, don't forget the fact that in Australia we have to pay a massive amount of hard earned cash to register a car. Take VIC as example, it could be nearly $1000 a year to register a V6 Camry.
The difference is: in NZ, costs of ACC and road development are built into petrol price. In Australia: they are part of the yearly registration cost and the Compulsory Third Party insurance for injury doesn't cover as much as ACC in NZ.

Free markets were well described, before any of us were born, as free foxes in free henhouses. There's always a tendency to monopoly, that tendency has to be overruled.

And it's nothing to do with the tax rate in Australia, Boatman.

This is a case of energy being the underwrite of money, and the relationship is changing. Megan Woods tried to point this out (home insulation comments, Morning Report 7.45ish) but the interviewer ignorantly overspoke her. (RNZ have an increasing problem with lack of intelligent journalism). Energy efficiencies like insulation, passive-solar and non-car transport, pay back forever. It's the better way, trying to get 'richer' so we can 'spend more' is not the answer, nor is denigrating the companies - who are doing what they were set up to do. And we've got an aging-infrastructure issue.

https://www.transpower.co.nz/about-us/our-purpose-values-and-people/plan...

Look, all of you saying this is a neo-liberal agenda etc. , how come electricity prices have gone up just as much when Labour is in power as it does when National is in power?

The reason is that until a few years ago, the government (taxpayer) owned all of the major generators of power. And the all gave a large dividend to the government, which totalled about $1B per annum.

This went into the consolidated fund. It was another form of taxation. Easier to raise electricity prices a bit than increase income taxes.

The dividends are still being paid, but now the government only gets half because roughly half of each generation company was sold off.

actually that's clearly not the reason. Since that time the retail part of the bill (the parts that were sold off) have been flat. The price rises have been coming from the distribution and transmission companies. So the parts with competitive markets (generation, retail) have kept prices flat and the monopoly parts (generation, retail) have put prices up consistently.

At the same time those companies sold of have increased returns to their taxpayer shareholders.

The actual data tells us that the opposite conclusion was true. Selling them off was the best thing for everyone.

All this was entirely intentional of course - the consumer was never the intended winner of Max Bradford's "reforms" of the late 1990's.

ECNZ did a fine job of balancing grid supply and maintenance for the public good but no - we needed more "competition" (down a single set of lines?) and we needed to have hydro compete with geothermal (why?).

It's all here re price impacts for the residential, commercial & industrial sectors - search google for "Analysis-of-historical-electricity-industry-costs-final-published-Jan2014" - Electricity Authority.

Rehashing debates (lost) about changes over 20 years ago seems kind of pointless to me - which is what this coallition agreement 'review' is all about - settling old scores held deep in WP's mind.

I think you can easily make the case that the current competitive structure is delivering for consumers, generally, and the best evidence is here. Sure, there are lazy consumers who won't shop around who are not getting some benefits. And there are late-payers who can't/won't get some key discounts on offer. Some say the state should force the benefits gained by active shoppers and on-time payers to everyone. I say, big moral hazard.

Well said that man. As the owner of a mini-power-station meself, I like the idea that competition will bring out clever and efficient solutions. Always remembering that certain aspects of the grid configuration are natural monopolies (lines companies....) and the old saw applies - 'Monopolies are Very Bad Thangs. Unless ya happen to Own one...' Trade happens in a context of regulation (weights and measures, trust-busting, enforceable contracts etc) so the phrase 'free market' has always to be accompanied by the qualifier 'under x/y/z regulatory environment'.

But my point upthread is that the undoubted existence of market segments is what this report purports to 'discover'. And that's no discovery.

Assistance to the chronically disabled or completely clueless consumer of complex services is really what, at base, our social welfare system is designed to deliver. But, as DC so rightly points out, there is always a fine line between rounding the sharpest edges of a market-based system, specifically for that hopefully small segment of the population, and creating yet more of 'em.......or further entrenching the ones already in that segment - 'welfare traps'....

Maybe the Government (not just this one) "needs" the revenue from its 51% holdings and so is not inclined to force profits in to line.
However the costs to the other side of the ledger may make it worthwhile to act.

80% after inflation. I didn’t get this from the news coverage last night. This is outrageous. I can’t believe the government sold half our shares in the power companies, at least when we owned it the money was coming back to the public.

Petrol was $1.10 in 1990 and milk was $2.42 for a 2L bottle. House prices are up something like 450%. The electricity rises have been the smallest of all of these at only 79%.

How is this outrageous exactly?

That petrol price is before inflation. Petrol is based on international scarcity and taxes and not some domestic price racket like power. I mean don’t get me wrong, I don’t like OPEC either but our government can’t legislate them.

I do suspect Fonterra is milking us... that should be looked at.

Gentailers were developed by one ideology. Then discovered by another ideology as a way to back door tax the nation. Therefore we now have the NZ super fund. Then the other ideology got back in and thought it would be a great idea to sell the rights to tax the nation for a few pieces of silver. Of course they kept a chunk for themselves. What good is being a shareholder/owner of a cartel if you don't have the government on your side to back you up.

Another thing I was struck by was the solar panel situation. Apparently only 7000. We need to look at how we can increase that. Lots of solar should go well with hydros ability to store. The government should legislate a minimum price - say 9c a kilowatt for buying from households. And, they should look at an incentive say a 0.25 cent subsidy for every extra 0.50 cents paid up to a max 1 cent subsidy. So if a company paid 11 cents pkwh they would get 1 cent back from government. If they paid 10 cents they’d get 0.5 cents back. If people are able to get 11 cents versus 8 cents that would presumably increase solar uptake which has a couple of benefits. First it boost generation capacity and reduces consumption. Second, installation is labour intensive and will create jobs.

The other thing we need to look at is whether there are any good candidates for pumped hydro.

solar doesn't help at all with the winter evening peak problem NZ has. It also doesn't help with shifting energy from summer into winter or supporting dry years. It actually makes a lot of those problems worse.

Why on earth would we want solar, which is more expensive than grid scale wind or geothermal?

Because we have hydro. We should be able to store power. If we can’t maybe we need more hydro. Also see my comment regarding pumped hydro.

Because we can own it ourselves.

Which makes us immune to price, besides being very satisfying.

Incorrect. Solar plus batteries stores daytime peak El Sol and releases it into the very hours when, otherwise, generators need to be running already-synchronised gear capable of very high ramp rates, to cope with that evening surge. The combination softens the grid demand, lessens those ramp rates, and is generally kinder on the entire system.

Our own modest little set-up (4.8kW of panel capacity, a 9.8kWh battery) is, as I write, at 100% battery, is cooking our evening meal, powering my electron-torturing, and will only run the battery down in the wee smalls. It is configured with an essential-supply capability which assures lights and a couple of power circuits in the absence of grid input.

As PDK points out, outfits like this cannot be OBR'ed. They have the net effect of time-shifting most residual power consumption into the off-peak rate period. This directly negates your assertion that 'it doesn't help'.

Even non-battery solar is somewhat useful - an electron pumped In from solar is an electron Less to draw down from a lake somewhere. The downside is that it tends to lead to the dreaded 'duck-curve' as El Sol sets, with the attendant high-ramp-rate exacerbation that generators have to be ready to cope with.

But solar+battery is currently (sorry...) expensive, so economically you do have a point. But, as with children, dogs, sport and recreation, it's better not to over-emphasize the ROI aspects....there are other compensations.

Batteries will keep getting cheaper and power is getting more expensive it seems so the lines will cross at some point.

According to the report, in 2016 households spent about $5 a day on electricity. Probably works out at $2 a day per person for lighting, heating, cooking, hot-water, powering appliances etc. We spend slightly more per person as our all electric household like to keep the house in the 20s in winter and we are in the frosty deep south. To me it seems like an absolute bargain. The issue appears to be more one of income/budgeting than the value of electricity.

Given that energy is everything - and one of the key inputs, if not the key input into gdp, one has to wonder whether NZ.Inc would still be better off with ECNZ as a system monopoly provider:
1) as an SOE to avoid government interference
2) with a corporate statement of intent to minimize electricity costs to NZ.Inc, provide network resilience, move towards zero carbon etc
3) the need to make zero profit (i.e. no dividend), but must cover all costs like depreciation & infrastructure upgrades etc (one has to ask why take a dividend out of electricity supply when it is fundamental to NZ productivity and efficiency? The government is only likely to spend that dividend on something less productive)

We clearly have a case in NZ where the private providers have gold plated asset prices and pushed up costs excessively, and we barely have a functioning competitive market with 5 near oligopoly generator/retailers having 90% of the market & the distribution companies still monopolies. Is the innovation (additional productivity) provided by the competitive market so large that it justifies the profits? Electricity is simply moving electrons about.

I agree totally. Although I would have the SOE return some kind of profit otherwise they have no incentive to minimise costs.
The current system is full of unnecessary costs - like retailers having to advertise, pay cash backs, profit margins, etc.
but too late now really. I guess the government could compete more - create some new low profit SOEs in generation for example.