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  • Writer's pictureGrant McLachlan - Stuff - Column

Let's rethink our electricity industry

If farming is New Zealand's backbone, then the energy sector is our lifeblood. And New Zealanders have allowed its competitive advantage to be eroded unnecessarily by some idiotic ideology that pursued a path of misguided goals.

New Zealand produced amongst the cheapest electricity in the world. Thermal power stations like the one at Huntly were backup generators to our world-class network of hydro and geothermal generators. Cheap electricity brought big employers here. As an exporting economy, it provided a cushion to keep jobs here.

South Island and North Island river flows are different and the Cook Strait cable could offset electricity supply fluctuations between islands. The government nationalised electricity generation to ensure effective investment in larger generators through public works. As a state monopoly, prices and generation could be set at an optimal level.

The supposed reason for the electricity reforms was because the government was broke and lost its nerve to invest in electricity infrastructure. Apparently, New Zealand faced a shortage in generation within a decade.

The government decided to introduce competition to encourage new entrants to the market. It decided to break up the state monopoly in to 'competitors' and introduce a market that would deliver choice and value to consumers.

Contact Energy - a mixture of the Clutha hydro dams, North Island geothermal, and smaller North Island backup thermal generators - was first flogged off cheap on the share market. The Clyde Dam was amongst the Think Big projects. All the Think Big projects, including petroleum projects, that were flogged off cheap are now worth billions to those who own them.

The government then split up Electricity Corporation of New Zealand (ECNZ) in to geographically-based generators. Meridian was the rest of the South Island hydro generators, Mighty River the Waikato hydros, and Genesis Energy was the Huntly thermal and Tongariro schemes. Many of the smaller and older hydro dams were sold to local trusts.

Effectively, the government carved up an efficient company in to companies that could not and would not compete with one another. Instead of being a backup generator, Huntly thermal would run most of the time in order to achieve a profit. Mighty River was given old dams that needed upgrading. Meridian suffered from droughts.

Any teenage economics student could have predicted what would happen to electricity prices. After all, there was little incentive to build new generation. Why would you? It's like a stadium. Why increase capacity when you can charge higher prices instead?

The biggest flaw with the competitive model is that any market needs surplus supply so there is downward pressure on prices.

The way prices are set in the electricity market is farcical. Instead of electricity suppliers receiving the price that they are offered, they receive the higher price of its least efficient competitor. For example, if a hydro or geothermal generator (with its lower running costs) offers 80 percent of the demand for 10 cents a unit and a thermal generator (with its ongoing coal or gas costs) offers the remaining 20 percent of demand for 20 cents, the price that both the thermal and hydro generator receives is 20 cents.

Under this scenario, what is the incentive to build a new dam or geothermal plant - the types of renewable energy that we led the world with?

Instead, the countryside has been peppered with windfarms. The highest demand for electricity is when there are frosts - when there is no wind, rain, or cloud. Hydro dams at least store water. For every windfarm, there needs to be a backup generator.

Since the electricity reforms, retail electricity prices have skyrocketed. In the meantime, private investment in new generation has been pathetic. Contact Energy has only built a couple of windfarms and plants to replace its ageing Wairakei geothermal plant. It is the government-owned generators that have built new geothermal and windfarms and proposes new hydros.

While the government now plans to partially privatise the government-owned electricity generators, it needs to recognise three crucial elements:

1. That cheap and efficient electricity is the lifeblood to our value-added manufacturing economy;

2. That large-scale investment in our infrastructure will deliver a strong future;

3. That infrastructure in the strongest economies is funded by superannuation schemes.

Superannuation schemes look for safe investments with consistent and reliable returns. That is why transport, energy, and communications are so core to any superfund.

The New Zealand share market lacks a diverse mix of infrastructure companies to invest in. That is why many KiwiSaver funds invest offshore.

Since the skyrocketing electricity prices, the manufacturing economy has suffered. We are exporting logs to China while factories close here. China can't get enough of Australia's iron while we sit on huge ironsand resources and a steel industry that splutters along. Our skilled workers flood to Australia to where our KiwiSaver funds are invested. Meanwhile, our government racks up huge debt as the economy stagnates.

We need to take a breath and think about our strategic assets - because that is precisely what they are. Do we want to be servants to our own demise?

There should be no ideological argument about our electricity assets. It is not a matter of 'the private sector runs business better.' It is purely a matter of ensuring that, if there is a market, that it operates effectively.

New Zealand's natural resources dictate that the most optimal solution would be for the merging of all generation companies in to a monopoly and transferring ownership to the New Zealand Superannuation Fund. That way, all New Zealanders own it, can invest in it, and have a stake in ensuring that it returns to New Zealand a prosperous future.

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