Imperfect market and risk of black-outs

MAJOR ELECTRICITY USERS' GROUP

Wednesday, 29th May 2008

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

Imperfect market and risk of black-outs

“The increasing risks of black-outs and ever rising spot prices have highlighted two market imperfections”, said Ralph Matthes, Executive Director of the Major Electricity Users’ Group (MEUG).

“Firstly there are inadequate price signals to most consumers to save power. Second, unnecessarily high spot prices derived from the cost of diesel used as fuel at the government’s Whirinaki power station.
Lack of price signals to households

“Most of the meters for New Zealand households do not allow consumers to see the current extreme spot prices that large commercial and industrial consumers face every half hour. If households did see those prices, we are sure these dramatically increased prices would be an incentive to conserve power. In the absence of strong price signals MEUG suggest retailers should immediately commence advertising campaigns seeking voluntary savings or providing financial invectives for communities to save power.

“All consumers are wary of the ability of electricity suppliers simply to recover any shortfalls they may incur now by raising retail prices later in the year. Nevertheless we think it prudent for households to conserve power use whenever sensible to do so because:

- It will reduce the risk households will have to endure blackouts later;
- It will reduce the risk that their place of employment might not be open because they cannot afford power or are affected by rolling blackouts; and
- It will reduce the need for increases in retail tariffs later.

“Improving price signals to individual households will take time and hence seeking voluntary savings or electricity retailers offering community incentives to save is appropriate. The sooner retailers start these campaigns the better.

“MEUG suggest that the Minister of Energy and the Electricity Commission support the immediate initiation of a savings campaign. The Government and Electricity Commission have previously acknowledged the market isn’t perfect and therefore they have a role to assist educate and communicate to households that prudent savings now will help them and the economy as a whole.
Distortion to spot prices due to Whirinaki using diesel

“The second distortion to the market is that spot prices are being set just high enough to ensure governments Whirinaki power station is dispatched. In 2003/04 the market was about to build additional gas fired back-up plant to manage dry year risk. Instead Government proceeded to build Whirinaki and choose to fuel it with diesel. It is worth noting that a gas pipeline passes the Whirinaki site.

“The marginal cost of running gas fired back up plant would be far lower than the average daily spot price at Haywards yesterday of 40 c/kWh. Forty cents is more than four times the value of the energy component in an average household power bill (note the average retail price to households is approximately 20 c/kWh. Netting off distribution costs, meter costs and transmission costs leaves approximately 10 c/kWh to cover wholesale cost and retailer margin).
“The current high spot prices linked to burning diesel at Whirinaki exacerbates the concerns users have with this imperfect market”, concluded Mr Matthes.

ENDS

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