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Caveat emptor

Written By: - Date published: 10:32 am, April 3rd, 2013 - 15 comments
Categories: energy, privatisation - Tags:

Analysts are apparently ‘not worried’ about the impact of the increasingly likely-looking closure of Tiwai Point on the price of electricity and, hence, on the value of the assets National is trying to hock. A 12% reduction is all one analyst sees in Mighty River’s price is Meridian floods the market with some of the cheapest power going. The analysts have missed the politics.

That’s the problem with economists, they tend to think of our socio-economic system as an economic system with social and political factors tacked on insignificantly around the edge. That’s not true. Especially in the case of the electricity system. Our electricity system has been in a state of near constant reform for the past 25 years. The oldest institution in the system that hasn’t been radically transformed is Transpower – and that’s a state-owned monopoly. Everything else has been cut up, sold off, renamed, retasked, constrained, unrestrained, taken apart, and put back together differently just in the past 15 years.

If you think that 15% of the country’s electricity suddenly becoming freed up is merely an economic issue that will see some expensive plant mothballed but do little else (not that a 12% reduction in the value of these companies is little, really), then you’re ignorant of history and political reality.

Such a situation will present a golden chance for a government to break the oligarchy of the big 5 generator/retailers. In a surplus situation of that magnitude, the power goes from the people with the plant to the people buying the electricity, especially if the government chooses to intervene on their side (and who doesn’t want to be the politician who brings down power prices?). It will be all the more fiscally easy to do so if those companies are less on the government books and more in private and foreign hands – ie after the asset sales.

All buying into those asset does is make it easier for a future government to slash their value.

15 comments on “Caveat emptor ”

  1. Why would the NACTs want to break an oligopoly?
    Capitalism is on its death bed needing blood transfusions from monopolising scarce resources such as water.
    The problem for the NACTs is when the monopoly is public allowing non-NACT governments to use the public dividends in social investment/spending. What an abuse of the market!
    Part privatising is their tailored solution to allow some public dividend (monopoly rent) to flow into corporate welfare schemes such as irrigation.
    The 49% monopoly rent that goes into private hands is for their mates, their relatives, their blind trusts and US and Chinese masters balance sheets.
    Why would the NACTs be concerned about cutting power prices except for corporates?
    The political economy of the NACTs is to make workers pay at both ends, cutting wages and raising prices to maximise profits.
    Especially when they have no competition from a pathetic opposition.

  2. tc 2

    ‘and who doesn’t want to be the politician who brings down power prices? ‘

    Nobody it seems as renationalising the system and stripping out the profit takers would do that on a long term basis, you could freeze the price on day 1 and then bring it down over time in real terms.

    The NZED has been made to look an effective and efficient supplier of energy services compared to the BS that goes on between generators/transpower/lines/retailers……look at how long it’s taken to get true redundancy of supply into the akl CBD after the 97 blackout.

  3. aerobubble 3

    Problem with modern economics is economists.

    When a new mall goes up they need a linchpin retailer to draw people in.

    In a fascinating show on Coastlines, in the early industrial period Britain would
    source its bricks from Belgium!

    why? Well currency flows go up with trade.

    What is the effect of Tiwai?

    We already know our currency is overly traded, could it be because there is a
    consistent flow of currency in and out due to Tiwai?

    Our currency is already very volatile, loosing Tawai will only make this worse.

    Now imagine, a drought knocking diary out, and no constant trade from Tiwai.

    Loosing Tiwai may make it inevitable that a single OZ-NZ currency becomes reality,
    that’s at best. At worst it may have devastating effects on our economy when the
    post-Tiwai drought hits and our currency descends into peas. Since we have no
    depth to our economy, thanks to a CGT.

    So just like the Nats to remove yet another brick in the economy and social life
    of our economy, for cost savings (i.e. to pay for tax relief to the richest – temporary
    relief for their prolific borrowing habits) in a black and white type reasoning, that
    there is no collateral effects.

    National suck at government.

  4. geoff 4

    Get Molly Melhuish to write a post for The Standard. That lady knows her shit.

    • Wisdumb 4.1

      I’ll second that in spades.

      Looking at some other numbers, Meridian sold 5,073 Gigawatt hours to the smelter in FY 2012. http://www.nzherald.co.nz/news/print.cfm?objectid=108266619 on 13 August 2012.

      Jeanette Fitzsimmons, another extremely reliable source, says that the power price was around 6 cents per Kwh. (Sorry I don’t have the link but see “Jeanette Fitzimmons: NZ could cash in on Rio Tinto move”, NZ Herald online, 6 September 2013.)

      This means that on a per Kwh basis electricity cost the smelter around $304 MILLION in 2011/12.

      There is a three year take or pay period if Rio shuts down tomorrow. That means they would have to pay for around $900 million of electricity whether they take it or not. Even Key can be believed when he says that this is a huge penalty. On top of that there is a 2 ½ year compulsory wind down period.

      Anyone who thinks that Rio is going to switch off tomorrow and waltz away laughing is not thinking straight. And big ups to the Kiwis who negotiated this contract – it would have been government and NZED back in the 1960s, I can’t remember whether Labour or National.

      On the other hand Rio was presumably hoping for a fat reduction in power price to dress up their sale of the smelter so that they could then walk away leaving the incoming owner with all the commitments.

      Key said, though he has probably already forgotten, that last week he offered Rio a short term subsidy to tide them over, which they turned down. I would say the amount would have to be around $20-$50 million per year to be meaningful, and he said that it was for a number of years. Say three years, maybe $75 – $150 million.

      Why can’t that sum of money be used to buffer a transition for the present smelter workforce and contractors who depend on the smelter and kiss Rio goodbye? Over to you Labour, National won’t do it.

      • Lanthanide 4.1.1

        On Campbell live Key said they were offering to meet the gap between Meridian and Rio Tinto out to 5 years, in 2018, but after that period the gap became too big.

        My guess is $300m over 5 years.

        • Wisdumb 4.1.1.1

          Thanks Lanthanide. I hadn’t caught that it was for five years. I think $60 million per year is high because a subsidy of 20% is a heck of a lot but, whatever, there would be a pile of money for retraining, support, industrial development, etc. I think poor old Clayton Cosgrove is barking up the wrong tree trying to trip up Mighty River, it’s a done deed now unfortunately.

      • geoff 4.1.2

        Why can’t that sum of money be used to buffer a transition for the present smelter workforce and contractors who depend on the smelter and kiss Rio goodbye? Over to you Labour, National won’t do it.

        Precisely.

      • karol 4.1.3

        6 September 2013? Fitzimmons can predict future prices?

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