Why are spot electricity prices at crisis levels?

Friday, 17th March 2006

Media release by the Major Electricity Users’ Group (MEUG)

The risks of blackout are minimal so why are spot electricity prices at crisis levels?

“Three wise men have stated publicly that we are unlikely to face any electricity shortages this winter so why are spot prices at crisis levels?” said the Chair of the Major Electricity Users’ Group (MEUG) Terrence Currie.

The Chairman of the Electricity Commission Roy Hemmingway and the Minister of Energy Hon David Parker have repeatedly advised that blackouts are unlikely. Yesterday the Chief Executive Officer of Mighty River Power Dr Doug Heffernan advised a Select Committee of Parliament that “electricity shortages this winter” were not likely.

Mr Currie said, “Every one is being assured that although hydro storage is well below average for this time of year there is sufficient generation, even if inflows were the worst ever, to ensure there are no blackouts this year. The Electricity Commission Riskmeter has been steady on “medium” notwithstanding that spot prices started rising in the 4th quarter of last year.

If the risks of shortages are minimal the Electricity Commission and the Government need to explain to consumers exposed to electricity spot prices why they have to pay unjustifiably high prices. Why should prices be so high if the risk of a shortage is remote?”

“Energy intensive users have faced high prices in 2001, 2003 and now in 2006. These high prices are destroying the credibility of New Zealand for investment. It is doubly ironic when the electricity generating companies continue to make record profits.

The inescapable conclusion one must reach is that there is little competition in the New Zealand generation sector and that must be addressed as a matter of urgency. The high prices and the record profits will also have flow through impacts on households.”

“Households are not immune to the current extreme spot prices because retail tariffs when reset by retailers should reflect the large increase in wholesale costs. The difference is households will see this as a lagged increase over the next few months to a year whereas large industrial and commercial consumers see the price impact immediately. Households are likely to see the impact as higher retail tariffs later this year.”

“This loss of economic viability and production from large industrial and commercial power users and the flow through later to household tariffs does not appear to be warranted when the risk of blackouts is very low. Manufacturers are not impressed that New Zealand is losing production and in some cases significant export sales simply because SOE generators can set prices in a poorly performing market to make super profits. That does nothing for the balance of payments problems the country faces.”

Mr Currie said that late last year MEUG suggested that in the interest of the economy as a whole all electricity customers including households use electricity wisely and if possible make any quick and easy conservation savings.

Those companies and households who followed that advice must feel disappointed that the spot prices have continued to climb and that generators have been making higher profits. The conundrum for consumers is ……. if the risk of blackouts is very low …. why are prices getting higher day by day? One of the three wise men needs to answer that question.

ENDS

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