Electricity supply crisis
”The country is facing another electricity crisis,” according to the Major Electricity Users’ Group (MEUG). The Chairman
of MEUG Terrence Currie said that this week wholesale electricity spot prices were already as high as they were in the
Winter 2001 crisis.
He advised that MEUG would be writing to Government today to ask that it urgently consider taking action on: A public
appeal to all classes of consumers to conserve electricity consumption immediately; An examination of other forms of
intervention to more effectively manage the “uncertain supply situation”; and An inquiry by Parliament’s Commerce Select
Committee into the three SOE generators and whether they have been making excess profits this quarter as a result of the
high spot prices.
“These actions are needed because the structural problems in the wholesale market have yet to be properly addressed …
notwithstanding that the last supply crisis was only 20 months ago. Because those problems have not been fixed, we are
seeing exorbitant spot prices.
For example yesterday spot prices averaged 23 c/kWh at Haywards.
This morning prices climbed to over 80 c/kWh.
“These high prices are having a major impact on a number of export industries and if they continue will start affecting
light industrial and commercial consumers with spot exposure. Over the last few weeks several large manufacturers have
ceased production at various times in response to ever increasing spot prices. We expect several of those companies will
be making public statements once they have advised appropriate stock exchanges of production cuts.
“The structural problems arise because of the concentrated market power of a few vertically integrated oligopolies
either exercising market power or stifling innovative developments to manage increased supply risk. Until the next
significant generation units are built, which is unlikely until 2005 or 2006, New Zealand will have increased stress in
the wholesale market. This is being exacerbated by inflows to date being as low as those recorded in 2001 and
uncertainty over gas and coal supplies. However even given those factors daily prices of 23 c/kWh are far above any
reasonable estimate of the opportunity cost of using higher priced fuels to substitute for scarce water. “It is too
early to know whether New Zealand faces another dry year like we experienced in 2001 or like 1992; but the reality is
that prices being offered by generators reflect that we already have a supply crisis. “A lack of competition among
generators coupled with the uncertain supply conditions over the next few years (including gas, coal and water) has lead
us to the conclusion that the wholesale market structure at present in New Zealand cannot be sustained in its current
form. “We had hoped that the generators would have learned from 2001 and have commenced innovative risk management
products and conservation campaigns in response to the ever rising spot prices. There is little evidence of that and as
a result the burden of rising spot prices has fallen on large users’ just as it did at the beginning of winter 2001.
Part of the reason why some generators don’t care is that they have a natural hedge with household and small commercial
tariff based consumers and as net generators will simply be making more profit in these periods.
“The Winter 2001 inquiry also recommended an investigation into a mandatory hedge mechanism and possibly separation of
retail from generation to solve the market concentration problem. A preliminary report on a mandatory hedge arrangement
was undertaken but a definitive report was never completed. Those interventions and other options need to be seriously
considered by Government because we cannot afford to have these structural problems undermine the economy for the next
four to five years. The separation of the three SOEs into retailers and generators needs to be investigated as a matter
or urgency. “In winter 2001 the Minister began a campaign in July to appeal to the public to conserve electricity to
avoid a supply crisis. MEUG believes we have reached that point again, this time in March, where spot prices cannot, in
our view be justified and as a result a relatively small number of manufacturers are bearing the full cost. The impact
on GDP of a significant part of New Zealand’s manufacturing base reducing its output cannot be ignored. The impact on
international competitiveness and the credibility of New Zealand as a location for investment are also critical factors.
“An inquiry by the Government, or possibly Parliament’s Commerce Select Committee, into possible super-profits being
earned by the SOEs is needed. If there is evidence of super-profits having been earned then this will assist design the
interventions needed to remedy the market concentration problem,” concluded Mr Currie.