Monday 9 August 2021

Reader mailbag: electricity edition

An informed reader provided a heads-up about problems in a recent daft Dom Post piece on power markets

Our reader writes:

What a great idea! Let’s set up a government agency to pay existing suppliers of electricity what the agency believes to be their SRMC plus depreciated historic construction costs and to sell power to all retailers at what it pays. It’s such a good idea, why not apply this in other markets and have government agencies determine all prices? What could go wrong?

Max Bradford’s main role was to force the separation of retailing electricity and generation from owning lines. He had nothing to do with designing the market in the 1990s. The Ministers during the time the market was designed were John Luxton and Doug Kidd. The market started operating on 1 October 1996. Bradford became Minister in mid-December 1996, after the 1996 election. Easily checked on wikipedia). Why did the journalist not check what he was told on this, probably by Geoff Bertram?

The core issue at present is that some smaller retailers think the retail price of electricity is too low relative to the wholesale price or the wholesale price is too high relative to the retail. Their obvious solution is to build some generation or operate a long-term hedge policy, but that requires taking on risk. Better to moan and get a political hedge. The HHI of the generation market is around 2000. At least workably competitive and there are few instances of generators being net pivotal; their supply needed to meet demand and they win by jacking up prices, after you take into account all their forward sales. 

The “natural” situation of Meridian is to lose truck loads of money when a dry year forces up wholesale prices. Most of its generation is hydro, and so its output capacity falls in dry years. It also has a big commitment to Tiwai and to its own retail customer base, which do not go away in dry years (although it does have some ability to get Tiwai to scale back in dry years). Meridian would be short in dry years, if it did not properly hedge, and be burnt badly by the higher wholesale prices. Trustpower are similarly short in dry years without hedging. The journalist seems to think all generators inevitably make bucket loads when prices in the wholesale market are high. Rubbish.

Market separation is used where you have a monopoly combined with a competitive supplier. Retailing and generation are both competitive, so the parallel of Spark and Chorus is not relevant. The monopoly/competitive split was actually what Bradford forced through, long before this was done in the telco space. The journalist does not realise this. 

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