No guarantee of lower prices from Labour, Greens power policy

Monday 10th February 2014

Power prices could be expected to rise if the Labour and Green parties' electricity policy is adopted using the high historic cost of building some of the country's largest hydro dams, a research paper prepared for Business New Zealand claims.

Produced by the Wellington consultancy Sapere, which advised on the government's 2010 electricity reforms, the paper also doubts the Labour-Greens NZ Power policy would have the desired effect on energy poverty.

Instead of moving to a centrally planned model for electricity and abandoning the wholesale electricity market developed over the last 18 years, Sapere says electricity companies should be required to do a better job of explaining their price increases and government policies should be developed to address energy poverty.

It says the NZ Power policy would place risks currently borne by the power companies on the taxpayer - one of the problems the current electricity market arrangements had fixed.

The NZ Power proposals seek to use the historic cost of electricity assets to bring power prices down by up to $300 a year.

But Sapere says "the historic cost in today's dollars of the major hydro electricity generation schemes is higher than their current value, so that regulating wholesale prices to reflect historic cost would not lead to lower prices."

Yet the policy implied a 40 percent drop in the price of wholesale electricity, since two-thirds of the cost of electricity didn't come from power stations' costs but from national grid, local transmission line and other costs.

"Over the life of these assets, valuations have been made at various dates which may be lower than historic cost or current values (such as when assets were transferred from a government department to a state-owned enterprise)," the report says. "Selecting and imposing one of these valuations on the current owners of the assets is not supported by economic arguments and would likely be viewed as capricious by investors in long-life assets."

Central planning would also return electricity pricing to political rather than commercial decision-making.

The analysis questions the accuracy of both the Labour and Green parties claims about other countries using central buyer systems, while the policy's aim of creating a more competitive retail market had never been achieved in countries that have centrally planned electricity systems.

The case for the single buyer policy was also based on analysis claiming "super-profits" by power companies that had been "rejected as inaccurate by the independent market regulator, the Electricity Authority, Castalia Strategic Advisors, Frontier Economics, Professor Frank Wolak and others," the report says.

The NZ Power proposals would not make new plant less expensive to construct, but could reduce the incentives to build the next cheapest unit of generation, which current market arrangements had achieved.

However, the report does not give the electricity sector a completely clean bill of health. It notes that while there has been a big increase in retail competition since reforms in 2010, residential electricity tariffs had risen disproportionately fast, compared to industrial and commercial tariffs.

While householders were paying tariffs "in the middle of the pack" for OECD countries, Sapere questions "whether middle of the pack is a satisfactory outcome after decades of reform."

On energy poverty, the report recommends doing away with the Low User Tariff, a policy intended to help low income households meet their energy bills, but which did nothing for large households and was often used by high income households that had the funds to invest in energy efficient appliances.

BusinessDesk.co.nz

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