LabourGreen power play will cost us all

24/04/2014

Who are you going to believe – politicians trying to win votes or the director of the Programme on Energy and Sustainable Development and Holbrook working professor of commodity price studies with the department of economics at Stanford University?

Frank Wolak is the latter and he’s not impressed with the LabourGreen power plan:

This desire to “reboot” the electricity supply industry is understandable, but it is almost certainly not the best course of action. As a participant in many electricity industry restructuring processes around the world, one important lesson that I have learned is that all reforms start with significant unintended defects that can only be eliminated through a rigorous ongoing analysis of market outcomes and targeted regulatory reforms.

Many features of the current industry structure are consistent with international best-practice and a number of positive changes have been implemented since I completed my report for the Commerce Commission in 2009.

Continuing these efforts to identify and fix flaws in the existing market is likely to provide greater long-term benefits than undertaking a major restructuring of the industry. . .

He thinks major change is needed, but not the LabourGreen one.

His suggestion is to establish a regulator for the industry with a statutory mandate to protect electricity consumers from economic harm.

There are a number of legal rights that a regulator must have.

First, the regulator must have the ability to request any information from market participants necessary to carry out its statutory mandate, receive this information in a timely manner, and have the authority to impose financial penalties on market participants that fail to provide the requested information in a timely manner.

The regulator should also be allowed to require that all of the firms that it regulates prepare balance sheets and income statements using a standardised accounting system designed by the regulator. These accounting systems will allow the regulator to carry out the very important task of setting prices for monopoly services such as transmission access and distribution network access.

The regulator should be required to set prospectively the price of these monopoly services to allow the firm the opportunity to recover the prudently incurred cost of providing these services.

This does not mean that the firm is guaranteed full cost recovery regardless of how it incurs these costs. Because its price is prospectively set by the regulator, the firm’s revenues are independent of any actions it takes, so it has the opportunity to recover these costs if it incurs them in a manner consistent with what the regulator deemed to be reasonable when the price was set.

The final right of the regulator is to set the market rules governing the operation of the wholesale and retail markets.

Rather than allowing market participants to determine the terms and conditions governing participation in these markets, the regulator must set these market rules to protect the electricity consumers from economic harm. Market participants and other interested parties can provide input to this process, but ultimately the regulator must set these market rules because of the enormous impact they have on wholesale and retail electricity prices paid by consumers.

An essential feature of this redesigned regulatory process is an ongoing market monitoring process where the regulator uses data compiled from market participants and data submitted to and produced by the market operator to undertake market performance analyses. Although this market monitoring process is extremely data and human resource intensive, it is necessary for the regulator to anticipate significant market performance problems and take action to ensure a small problem does not become a large problem that harms consumers.

Another role of the regulator is to provide transparent information to customers on the components of retail electricity prices. . .

This is very different from the LabourGreen plan which Wolak described as:

“a sham that might make me feel a bit better”, but was the wrong weapon to attack “runaway” retail electricity tariffs, which he says are the real problem in current market arrangements. . .

Wolak says the NZ Power policy, which would unpick a 25-year-old experiment in electricity market design in favour of a centrally planned model, “may not even solve the problem, which is runaway retail prices.” . . .

“It may look good, but it’s got lots of challenges,” said Wolak of the Labour-Greens policy. “You’re throwing the entire baby out just to get rid of the bathwater and you’re going to start over, as if you have all these problems.

“My argument is that some of the changes since 2009 are pushing in the right direction,” said Wolak, whose 2009 report for the commission found evidence of electricity generators wielding market power at different times, to maximise the value of their generation efforts.

From that, officials calculated $4.3 billion of “excess charges”, which then Energy Minister Gerry Brownlee acted on by shaking up the national retail market, which is now more competitive, with high levels of customer churn. . .

However, Wolak believes moving to a cost-based, single buyer model could be a disaster.

“If what they are going to try and do is say ‘we are recovering costs and allowing you a fair return’, then oh my god, it’s just a can of worms that you wouldn’t believe that’s going to get opened,” Wolak said of Labour’s plan to calculate rates at every power station in the country on a cost-plus return basis.

“They are going about it in a kind of bass-ackwards (sic) way and saying ‘we’re going to say what each guy’s price can be in terms of generators selling’. That’s just a nightmare.”

“What’s simplest is to say we’re going to make this thing as competitive as possible.” . . .

The Labour-Greens' 1970s power policy won’t reduce your power bill, but it could cost millions to taxpayers.</p> <p>www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=11241830


LabGreen power plan would be worse

11/02/2014

The LabourGreen power plan would be worse for consumers than the current system.

The electricity market in New Zealand is extremely competitive, with consumers able to switch retailers to gain lower prices, and more consumers using metering and home energy management systems to save more. But the electricity proposals of the Labour and Greens parties would be less able than the current market to meet consumer needs.

These are among the key findings of an analysis of the electricity market commissioned by BusinessNZ and undertaken by Sapere Research Group.

BusinessNZ Chief Executive Phil O’Reilly says it is valuable to get rigorous analysis on a sector that is complex and sometimes poorly understood.

“The electricity market was established in 1996 and has operated under changing rules since then. The research makes it clear that under the current 2010 rules, the electricity market is developing towards a highly competitive, well-functioning market.

“The electricity market’s greatest problem has been a lack of transparency around prices. Energy companies have not explained price changes clearly enough, and this has led to doubts about whether prices have been unnecessarily high in the past. BusinessNZ is recommending that energy companies ensure that the reasons for future price changes are meticulously itemised. We also recommend investigating whether we should have rules for information disclosure around price setting.

“The Sapere research also notes that a segment of the market may be experiencing energy hardship in having to spend too great a proportion of their income on house heating. BusinessNZ recommends investigating options for policies within the market and the social welfare system to help alleviate this,” Mr O’Reilly said.

Sapere found the electricity market is achieving positive outcomes against five key criteria:
1. Secure supply of electricity
2. Efficient operation and market transactions
3. Efficient investment in assets
4. Social requirements
5. Environmental requirements

Sapere also analysed NZ Power proposals (Labour and Greens policies) against the same criteria. Sapere concluded that these policies would be less able than the current market to meet the five criteria, and would not resolve transparency or energy hardship problems. . .

The Labour Green power plan would make the electricity supply less secure, lead to less efficiency in operation and market transactions, less efficiency in investment, poorer social requirements and poorer environmental requirements.

Rather than fixing any problems, real or perceived, it would exacerbate them and the people who would be most disadvantaged by the added costs and poorer efficiency would be those least able to afford them.

That isn’t unusual when ideology comes before practical considerations.

Key findings of the report are:

• Outcomes under all of the public policy goals are for the most part positive but there are some areas where more effort should be applied
• Security of supply has improved under the market, and investment in generation, transmission, and distribution assets is keeping ahead of demand without government subsidy or direction
• Retail electricity price increases have not been transparent enough
• There appears to be insufficient action to address energy hardship experienced by some consumers who live in houses that are too cold and damp
• The NZ Power proposal would be less able than the current market to deliver against the five goals, and would not resolve transparency or energy hardship problems

BusinessNZ recommendations:
• Retain current electricity market framework as superior to the alternatives across a range of desirable policy objectives

• Aggressively pursue net-benefit positive improvements to the efficiency of the current market arrangements by improving price transparency:
i. Investigate rules for information disclosure around price setting
ii. Fast-track Electricity Authority and MBIE workstreams on price transparency

• Confirm the nature and size of the issue of energy hardship, acknowledging that efforts by the electricity market will benefit those affected only marginally

• Implement options to aid those experiencing energy hardship, in a systematic, whole of-government way (including the appointment of a lead agency), such as:
i. Requiring landlords who receive state money to make their houses available for social housing to submit their houses to a ‘warrant of fitness’
ii. Replacing the poorly targeted Low Fixed User Charge with a better initiative
iii. Reviewing initiatives in health and welfare that can help address energy hardship

The full report is here.


%d bloggers like this: