Our electricity market is short-circuited. Can it be fixed?

Small retailers say we pay way too much for electricity. Big ones say the system works great. Who should we believe?

It’s been a strange few weeks for our electricity market. First came the news that retailer Electric Kiwi would be refusing to accept new customers, citing rising wholesale costs that meant they would be making losses on every new account opened.

Last week, there was an even bigger bombshell – electricity prices also mean that Winstone’s huge central pulp and timber mills on the North Island are being temporarily closed, putting hundreds of jobs at risk. A few days later, news emerged that a paper recycling plant in Penrose is also considering a temporary closure.

Finally, the chairman of New Zealand’s second-largest dairy collective spoke of New Zealand as “sleepwalking towards an energy crisis”. Open Country Dairy is in many ways an example of low-emission farming, having converted its boilers to burn waste or wool pellets and set a 2025 target to switch from coal – but the supply risk, which it described as essentially certain, means it will keep its coal-fired boilers on standby for a long time into the future.

A company refusing to accept new customers. Another is halting production, risking the loss of important jobs in the region. A third is having to maintain expensive, high-emission equipment. For a country in economic crisis, with GDP per capita down almost 5%, this shows that the cost and reliability of electricity is becoming a serious issue.

The events prompted Shane Jones, the Minister for Regional Development and Minister for Energy, to give an extraordinary interview to RNZ last Thursday. In the interview, he called the regulator, the Electricity Authority, a “chocolate kettle” and said that the major energy companies, known as “gentailers,” were “probably the most powerful economic institutions in New Zealand, outside of supermarkets and Australian banks.” He pointedly drew attention to “speculation”a serious accusation that could have legal consequences.

Winstone said wholesale prices of up to $700 per megawatt-hour (MWh) were the reason for the closure, up from around $100 per MWh a few years ago. Australia experienced its own price spikethis winter, but still kept prices well below that level. Winstone says energy as a percentage of costs has risen from 10% to 40%, making it unsustainable and making it impossible to compete with producers in other countries with cheaper electricity.

How could this happen? It is part of our national myth that New Zealand generates the vast majority of its electricity from cheap, renewable sources – mostly hydroelectric projects built in the 1970s. But a relatively dry winter means that hydroelectric lakes are running at less than 60% efficiency, hence high prices – and the flows are devastating to business.

But that’s not a problem for everyone. Jones said some people in the electricity market are making more money than ever. Those in the electricity generation business AND The retail trade (so-called “gentailers”) is dominated by four large companies – Meridian, Contact, Genesis and Mercury – three of which are majority-owned by the government. Far from suffering, high wholesale prices will lead to huge profits for gentailers.

“The market is just exploding”

Perhaps that explains why we agonise over bank profits or supermarket prices, but electricity prices don’t seem to generate the same political fury. Electric Kiwi’s Luke Blincoe is remarkably candid about the issue. He keeps the price stable for his customers through hedging contracts, essentially rights to buy power at a set price. These have become so expensive that he can’t buy them and still make a profit margin from new customers. He draws a straight line between political inaction and the government being “the single biggest beneficiary (of the situation), in the form of dividends”.

According to Blincoe, “the lack of supply is a fundamental factor. New Zealand relies on a market that delivers efficient outcomes for a basic service. So if you’re going to bet, you better have a functioning market that delivers efficient outcomes. And we don’t have that because we have the market power to really keep the generators in balance with the supply, which keeps the market in a stable state.”

Blincoe says maintaining a tight margin between supply and demand almost guarantees huge price spikes. “When something unexpected or unusual happens in our hydrology or gas prospects, the market just explodes.”

The fundamental issue, Blincoe says, is that our largest generators of electricity are also our largest retailers of electricity. Even at very high prices, he says, “generators are reaping monopoly profits from the generation market while subsidizing hopelessly inefficient retail companies.” He says that gentailers are winning even if their retail divisions are losing.

Electric Kiwi is not the only electricity retailer that has had to take drastic action due to rising prices in recent years. Nau Mai Rā, which aims to help people that other retailers won’t serve, in 2021 we had to relieve 500 customers. Flick spent five months rejecting new connections also in the second half of 2021. Three companies recognized for their innovation or customer-centric approach, all rejecting new customers – is this really a sign of a dysfunctional market?

Is it really that simple?

Bridget Abernathy is the chief executive of the Electricity Retailers Association of New Zealand, which represents major retailers. She says the criticism, while understandable, is overblown. She characterises recent research by the Electricity Authority, which regulates the sector, saying that “overall, the market has served consumers well, that structural reforms were not justified and that any major changes to the market would increase uncertainty at a time of major transformation in the energy sector and chill much-needed investment.”

The current market design, she said, has spared households the volatility of wholesale markets. “The average household electricity bill has risen by about 6.5% over the past five years, against the backdrop of a 20% rise in inflation, with the cost of food rising by 26%, transport by 22% and housing by 36% over the same period.”

She says this shows that households are largely sheltered from spot market volatility. Abernathy says Electric Kiwi Blincoe is part-owned by a British hedge fund and could easily enter the generation market itself if it felt the high prices justified it. She also believes that the prices are partly a reflection of the reality that the country is in the midst of a huge energy transition.

“We need to make a huge investment in this country by 2050. New Zealand’s energy from electricity needs to go from about 40% now to 60% by 2050. It needs to be 95% renewable and available 100% of the time. These are huge investments that are needed. And you know, it’s the retailers who are doing the hard work.”

Electricity recipients

Given that rising prices have forced many major energy users to idle their plants, you might expect the Major Electricity Users Group (MEUG) to support Blincoe’s theory of our market problems. This is true to some extent – ​​its chairman John Harbord agrees with the idea that our market design has an impact, and that extremely profitable power generation companies may end up stifling innovation by masking losses on the retail side.

But asked to point to the biggest reason for the staggering rises in wholesale prices, Harbord said it was “the nature of our energy mix”. This means that while we are rightly happy with the total amount of renewable energy in our system, renewables are always supplemented by what are known as “boosting” sources of electricity. At present, this often means coal and gas – gas is preferred both because of its lower emissions profile and because we have domestic sources.

Harbord says the three fundamental elements of electricity are reliability, affordability and sustainability, and over the past five years there has been too much emphasis on sustainability at the expense of other building blocks. As the graph above shows, the amount of gas in our energy mix has been falling for several years – something Harbord attributes to the previous government’s decision to ban new drilling. As a result, the current government is looking at importing liquefied natural gas (LNG) to deal with the crisis.

He believes the lack of domestic gas is driving the steady rise in wholesale electricity costs, from $65 to $80 per megawatt-hour (mw/h) six years ago to more than $300 per mw/h for months this year. And because large power users use hedging contracts that lock in prices for years into the future, elements of the current crisis will linger long after wholesale prices have fallen. While there is a strong push to boost renewables, sometimes it’s dry, cloudy and windless, which means you need a backup plan.

Who should we believe?

The truth is that the electricity market is phenomenally complex. As Harbord says, moving electrons around a long, thin, hilly, sparsely populated pair of islands is inherently complex. It is deeply tempting to think that it can be solved with one big regulatory move. Most tempting is the prospect of a break-up, like the one that Helen Clark’s Labor government forced upon Telecom to become Chorus and Spark.

Blincoe believes the time is ripe. “New Zealand’s telecoms reforms already provide a clear blueprint for effective, well-targeted regulation that delivers benefits to consumers,” he says. But that also carries risks. It’s a huge measure, and both Abernathy and Harbord believe it’s going too far.

Mike Casey of Rewiring Aotearoa, who I recently saw talking about his all-electric cherry farm on the South Island, is loved by everyone from Groundswell to the Greens. He believes there is a financial case for a huge increase in roof-mounted solar panels connected to electric vehicle batteries, which will help meet the demand for more and more electricity in the future, from transport to data centers for generative artificial intelligence.

It’s a consumer revolution – and it really could happen, given time. But for now, all eyes are on the government, the biggest winner of high wholesale prices, but also the one furious about them. The next few weeks will show how serious it is about finally doing something about this problem – one of the key to solving climate change, but also a frustratingly complex one.