Brian Easton at Pundit provides a clear overview on what is happening in our large generator / retailer market at present and the way that their implicit collusion on excessive pricing looked at in economics. They’re profiteering and even using future capital to pay off investors rather than improve the cost of and efficiency usage of power.
Brian Easton’s question “Should We Nationalise The Electricity Industry?” is extremely relevant based on the decades of rapidly escalating power prices since the failure of our electricity de-nationalisation in the 1990s.
In particular I liked these paragraphs explaining strange expectations about the benefits of competition.
We are trapped into the thinking we were taught in Econ101 about pure competition. Sometimes we need to think more radically. Here I focus on the number of significant firms in the market. The trick about pure competition is that the individual firms do not have to think a lot about other individual firms; rather they focus on the market generally and their customers particularly.
As the number of market players reduces, businesses start looking at one another and responding according to how they think their competitors will behave. You might think that this will be beneficial to their customers, but what this sort of behaviour can lead to is that the incumbents connive to raise prices. No, not meeting in smoke-filled rooms, but by working out how their competitors behave the market can, in effect, behave almost monopolistically. There are number of experimental studies involving players separated in different rooms who nevertheless work out how to attain cooperative outcomes without direct communication.
I was once taught that where there were more than five significant firms in an industry that the gaming became too complicated and the industry began to behave like the competitive businesses that workable competition was based upon. However, the ‘five’ was a rule of thumb; in particular circumstances it might be six; it might be four.
As it happens, New Zealand is riddled with markets where there are only a few significant players: one (domestic) airline, one port per region, two supermarket chains, three petrol chains, four banks, four electricity gentailers (generator-retailers). There are, of course, smaller firms in each market but each is dominated by a handful of players.Brian Easton: “Should We Nationalise The Electricity Industry?“
The comment about Econ101 just about exemplifies the purported naive economic viewpoint of Act supporters and some of the National support I run across. They clearly haven’t ever bothered to look at how companies and even individuals operate in reality. I once spent a decade working on code and economic algorithms for commercial management simulation software for teaching business students (I referred to it as my ‘MBA torment revenge’ ).
That was designed to elicit a realistic economic behaviour of students working in teams running one of a number of companies in a market place. There were many markets (worlds) covering some very large classes. More often than not there was a lot of implied price making between teams – most often after a few companies had driven out their weaker competitors. It was certainly more frequent than the worlds where effort was made on R&D or production process savings or even expensive marketing. It was easier and less expensive to implicitly collude between near-equals than to actually drive price efficiencies.
This is also what is evident in just about every economic study that has ever been done.
In NZ, this is very evident amongst our gentailers.
There is a recent report by the NZCTU which draws attention to the fact that from 2014 to 2021, the four big gentailers distributed $8.7b in dividends but earned only $5.4b in profits. Firms that do this usually go bankrupt, but not in this case. It is a bit complicated to explain but, briefly, a monopoly is able to borrow secured against its future profits and pay the borrowings as dividends. That is what the gentailers have been doing.Brian Easton: “Should We Nationalise The Electricity Industry?“
In effect, this is a bribe specifically aimed at securing their political base against regulation or the opening up of their market. The recipients of such borrowed largess are the relatively affluent who hold shares. In other words mostly Act and National supporters who have capital, often explicitly or implicitly inherited.
Rather than using their ability to raise capital to improve the delivery and production of power, they are using it to pay off the affluent so that they can continue to bilk those consumers who don’t receive benefits from dividends.
This is most clearly seen when you look at the commissioning dates of power plants in NZ over the last decades. Wikipedia has a comprehensive list complete with an ability to order on commissioning dates. In the last decade there have been 4 geothermal, 1 hydro, 2 fossil, 4 wind, and 2 solar plants built. The capacity of these additions to our societies power generation is dwarfed by the decommissioning of fossil plants Otahuhu B, Southdown, and the slow drop in power from Huntly in the same decade.
During that same decade our population grew from 4.4 million to 5.1 million. Something doesn’t add up. Rather than spending capital to ensure the capacity to handle a growing population and industry, the gentailers have been using it to bribe investors.
Now there have been major improvements in the efficiency of use of power. But this doesn’t come from gentailers or retailers of power.
For instance in our two near identical apartments in the last decade we have changed all of our power hungry appliances for much more efficient ones. The only things that we haven’t replaced have been the oven (which we don’t use) and the stove top. As you can imagine in the days of increasingly working from home, the number of screen and computing devices has been proliferated. We have 3 workstation level desktops, more and bigger screens for them.
Our actual use in kwH in our apartment has been dropping for the last two decades as our power bills rise. The improvements in overall power usage in the last decade have been in the order to 10-15% despite far more productive work coming from our home/office. The price rises in the total bill have been been close to 10-15% in real terms. In effect, our apartment has seen a 20-30% increase in power prices over the last decade despite our apartment having considerable capital expenditure and process changes for a more efficient usage of power.
This is common everywhere in the country. Figure NZ has a great set of domestic power price graphs (unfortunately not Auckland) that exhibit this. Like this chart for Whangārei which has been experiencing similar but higher power increases (“Northlanders struggle to pay power bills that are 40pc higher than Auckland“). It demonstrates the same slight rise in line charges and a massive increase in energy and retail components – most of which come from the dominant gentailers.
The efficiency increases hasn’t coming from the gentailers. It is impossible to see anything more than lip-service to power efficiency from them at the consumer level. No real assistance towards energy efficiency – just a whole lot of marketing trying to poach customers from other power retailers. The domestic and business efficiency levels are driven almost entirely by overseas technology and by the consumers of electricity.
About the only efficiency improvements that are perceivable in the electricity generation and transmission sectors appear to come our monopoly transmission supplier Transpower. Their pricing effect in mostly in the line costs, the part of the bill that hasn’t been increasing at breakneck speed. Transpower have a active set of capacity, refurbishment, and update projects underway or being planned.
When I look at the electricity sectors, the only things that I can see from gentailers that indicates that our ‘competitive’ gentailer market is that it is efficient in bribing investors with dividends in a large part paid for by borrowed capital. It certainly hasn’t been efficient at keeping power prices down or providing sufficient capacity and efficiency gains to allow those prices to come down.
That is unacceptable.