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Ideology causes power price spike

Written By: - Date published: 7:16 am, December 18th, 2010 - 26 comments
Categories: energy - Tags: , ,

Gerry Brownlee was warned his electricity reforms would increase power prices, not lower them as intended. He ignored the advice.

Wholesale power prices have spiked from $50 to $300 per MWH. Exporters have cut production as a result. Residential prices are next.

Brownlee’s Electricity Authority’s first job is to investigate why its own creation has caused a power price spike.

With power up and petrol breaking $2 a litre, energy is a handbrake on this supposed economic recovery. The price of oil is beyond New Zealand’s control, but the electricity price shock is entirely a result of National’s outdated neoliberal ideology.

26 comments on “Ideology causes power price spike”

  1. I think these reforms have little to do with ideology, and much to do with the fact that the power companies kept mismanaging their hydro-generation causing power-shortages in the middle of winter and denting the previous government’s popularity, and Brownlee doesn’t want that to happen under his watch.

    • Draco T Bastard 1.1

      The “more competition” mantra is pure ideology. Power is a natural monopoly and should be state owned so that their isn’t any competition to drive up prices.

      • Tigger 1.1.1

        Agreed DTB and Marty – more of the ‘choice’ crap that doesn’t work or doesn’t matter in certain areas – such as power. How about this NZ – state owned power that’s job is to produce power at zero cost to the taxpayer (ie. it must be fully self supporting and pay for its running costs, investment, infrastructure etc) and deliver costs as low as possible to the consumer. The only problem with this for the right is that no one is making a buck off someone…

        • jcuknz

          ‘Choice’ is not crap but has to be exercised with thought and care and not artificially created where it doesn’t really exist or can exist … that is what exercising choice is all about if you think about it :-)
          edit–I may have fallen into the trap of selecting two words to comment on rather than the whole sentence .. sorry Trigger :-(

      • Vicky32 1.1.2

        Absolutely right, DTB!

  2. the fact is, dry years will happen, you can’t eliminate the cost associated with that risk.

    What I’m hearing from people who are actually in the electricity trading sector is that this pushes up price because its a clumsy attempt to punish hydro dependent generators for events beyond their control and they’re effectively adding an expensive layer of insurance to their pricing.

    And Brownlee’s stupid division of the Waitaki dams between Genesis and Meridian will actually make optimal water use more difficult and even encourage Genesis to bypass Meridian’s dams, wasting water.

    The idea that you can have cost-saving competition in electricity is pure ideology.

  3. the fact is, dry years will happen, you can’t eliminate the cost associated with that risk.

    No, but you can incentivise the power companies to manage the risks responsibly. This seems like a fairly left-wing policy to me.

    • ghostwhowalksnz 3.1

      The first thing Contact energy did when privatised was to sell off the Gas turbines it had at Stratford, a power station located at a choke point in the distribution system.
      Its called market power, no pun intended, any you see it in petrol giants owning the tanks in independent service stations( early NZ petrol stations had competing brands next to each other).
      This time with the power generators they probably had ‘scheduled maintenance’ to create an advanatge for them

    • lprent 3.2

      …seems like a fairly left-wing policy to me.

      So? This is a left-wing site – thanks for the compliment to Marty

      The existing right wing policy already meant to have strong incentives in it – those of the market. According to the ideological idiots on the right that should provide all of the incentives required. But that also must explain why we have kept having these perverse ‘market’ problems with limited capacity to cover the ‘exceptions’.

      Of course there is that perverse market dynamic that is present for effective natural monopolies running under market condition. The supply goes down thereby increasing prices, and therefore the profit. Why would they take that profit and invest it into increasing supply to cover the exceptions? It would cut their ability to make those profits in the future. The costs to the people buying the power don’t matter to them because where are they going to go to….

      The power generation system in NZ shows all of the standard market behaviors of natural monopolies. So I’d say that the ideological drive towards pushing the generation system into the market has clearly failed.

      That means you should either regulate their pricing and business practices or bring them under state control.

      • NickS 3.2.1

        Too hot to break this down, but another possibly way of getting across the concept of natural monopolies could be to use ecology and evolution stuff to do with niche space and how in certain environments the biomass of photosynthetic organisms becomes found primarily in only one or two species due to local conditions. Such as homogeneity of the terrain matrix (soil chemistry, moisture), local climates (temp ranges, microclimates), sunlight intensity.

        There’s also some thermodynamics stuff as well, but the thesis idea is that monopolies in terms of biomass occur as emergent functions and represent a stable valley point. Governed by energy availability + temperature ranges + soil moisture, and less governed by soil chemistry in term of nutrient availability. Per examples of tropical jungles and reef ecosystems, where energy input (and soil moisture in terms of jungles) allows for massive biological diversity in the face of low levels of essential mineral nutrients.

        So leaping over to power generation, it’s not hard to see the above can be used to think of analogous processes, say for example in a city, power distribution and generation opportunities at the micro level (wind, solar, heat recovery) become very dense, but at low levels. While power generation and distribution at the macro level is restricted. Though I’d really need to flesh this out to really see if it works, but the basic idea is that power generation & distribution at macro levels, due to limiting factors, has a stable valley in monopolies. i.e. over time power gen+distro companies will naturally drop into monopolies due to fitness costs of competition or diverge into niche power generation/distro areas.

        Bork. It’s already hit 32 C here in christchurch, and me without any money to spare for some cider…

      • Swampy 3.2.2

        How do you stop price rises forced by the Government asking for bigger dividends?

        Cullen got over a billion dollars of special dividends from Meridian, used to finance 2005 and 2008 campaign promises.

    • Bored 3.3

      Answer to how you can incentivise power companies to manage risks responsibly? By not leaving it to companies at all. A properly run supply electricity department worked very well for NZ for most of the last century. It was never SOEd / made into companies because it was not efficient, or effective, and proved a very good risk manaager. The current structure is wholy an ideological construct, and it does not work as well. Time to revert.

  4. RedLogix 4

    And Gerry’s solution this morning? Is to sell Whirinaki!!! Like that will help somehow.

    Ah the powers of the magical market.

    PS. This last Thursday the spot market price was actually around $450/MWhr for a good part of the day. For many users a short 30min peak or two at that price is not too bad, you can often re-schedule around it. But when it holds at these kinds of high prices for many hours….

    • Roger 4.1

      “Ah the powers of the magical market.”

      That really is the ideological theory behind this move. If we allow the market to determine electricity output we will always have short supply because backup stations (like Whirinaki) have to recover both fixed and marginal costs during the few times that they operate a full capacity. Gerry’s decision will see either rolling blackouts or as Crosby Textor would prefer, electricity conservation campaigns targeted at residential users to keep the spot price down for businesses.

  5. Bored 5

    I have always thought that the whole market concept to the generation of electricity in NZ to be a load of old bollocks to ideologically please some whilst allowing others (usually the same people) to suck at the trough at the expense of others (the rest of us).

    I have heard absolutely nothing to convince me that the whole supply is not most effectively and efficiently run, distributed and sold on a cost plus model in which the capital costs, and opex are known, with supply managed across th whole grid to meet demand. What more can an artificial market add?

  6. Dan 6

    Bradford, Brownlee… they are interchangeable. Remember the promises of Bradford. They should have taken the omen from Muldoon who opened the TEPB Ruahihi power scheme near Tauranga and it collapsed the next day. Power is a natural monopoly, as others have said, and Labour would win back a lot of votes by renationalising the service. The efficiencies are not there in the private sector. Once again it has been a case of privatising the profits, but blaming climatic events, whatever, for the poor record of new infrastructure.

    • Swampy 6.1

      Power is not a natural monopoly as there is not a single point of supply. The state already owns the majority of generation in NZ

      • Dan 6.1.1

        Sorry Swampy, I disagree on your definition of a natural monopoly. From Wikipedia, the following: A natural monopoly arises where the largest supplier in an industry, often the first supplier in a market, has an overwhelming cost advantage over other actual and potential competitors. This tends to be the case in industries where capital costs predominate, creating economies of scale that are large in relation to the size of the market, and hence high barriers to entry; examples include public utilities such as water services and electricity. It is very expensive to build transmission networks (water/gas pipelines, electricity and telephone lines); therefore, it is unlikely that a potential competitor would be willing to make the capital investment needed to even enter the monopolist’s market.
        Thanks for your steer on ownership. I guess its the notion of profits from Genesis, Meridian, etc going to shareholders instead of new infrastructure that bugs me.

  7. KJT 7

    Entirely predictable. As is the inefficiency of many other private and publically owned entities run under the managerial cult.

  8. stevo 8

    While anything that Gerry touches generally turns to pus… what we are seeing now is the effect of very low levels in Manapouri and Te Anau, which supplies Tewai, and under the contract to supply that glutton for gigawatts with guaranteed cheap power, it means that Benmore and the other Meridian Waitaki generators are called on to supply Tewai with energy that would otherwise be destined for the rest of the country (even though Pukaki and Tekapo are more than 50% above minimum and there is spare capacity in the cook straight cable), hence the price spikes…thanks Max.

    Without Tewai point (how many jobs there?),with some serious cables to the North Island, electric cars and cheap energy would be available to everyone, particularly the manufacturing exporters and dammit, those irrigated farms.

    But cheap energy, that thing that built NZ, where did it go?….. FCUK you Max…FCUK you.

  9. Swampy 9

    Power pricing is under pressure because of the high likelihood of an energy crisis this year.

  10. Smoko Joe 10

    Hang on a mo – how many of you “right-on” readers of The Standard think the emissions trading scheme is a good idea, that peak oil and the rise of energy prices will bring about technoloogical transformation to a clean energy future? Yep, pretty much all of you.

    At the same time, through this thread is an endless expectation that power prices should somehow be kept lower than their real cost of production. Crap. The reason power prices are rising over the long term – forget the gyrations and oddities of short term wholesale prices – is that wind, hydro, geothermal and new gas (and coal once carbon is priced properly), and particularly solar and tidal power, all cost more than current generation sources. From an environmental perspective, that’s actually positive, surely. Cars didn’t get smaller and more fuel-efficient because someone thought that would be a nice thing to do. Rather, the price of fuel went up and so people bent their minds to using less fuel better. That’s a good thing, isn’t it? What am I missing?

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