Getting your head around the electricity takes about two years. That’s what I found anyway.
In some ways, the power companies are very simple businesses that send an invisible, inevitably commoditised stream of electrons down wires and collect the money that pays to keep people lit, warm, and in work.
Not so fast.
All that free wind and water is handy – but it’s only free fuel. Not much use if you haven’t got an engine to run it in. Power stations cost a poultice to build, and they can last between 30 and 150 years. You don’t build them lightly and you’re stuck with the consequences if you don’t get it right.
If we paid the true cost for electricity from the Clyde Dam – the subject of billion dollar-plus cost over-runs to fix unforeseen geological instability – electricity would cost a lot more than it does today.
Likewise, pioneering renewables giant Meridian Energy is finding that its newest windfarm, behind Wellington, struggles to produce electricity at less than $100 per Megawatt hour, in a market where the hourly wholesale price in recent months has often been lower than $60.
Meanwhile, with great scads of hydro-electric water trapped in the South Island because the Cook Strait cable isn’t working properly and a third of the energy-hungry Rio Tinto aluminium smelter at Bluff has been out of commission, wholesale prices have been as low as 2 per cents per MWh in Meridian’s stronghold, the South Island.
Meridian is also in the gun with its shareholder Minister, Simon Power, who has identified it as the worst-performing of the electricity SOE’s, and is putting the screws on for something better than last year’s 3% return on capital.
Meridian and other SOE’s will have to show how they will up their performance in their Statements of Corporate Intent, due with Ministers in less than a fortnight on June 30.
At the same time as being told to make more money, the electricity SOE’s are also being told not to raise their electricity tariffs, at least until the results of a Ministerial review of the electricity sector is known.
That’s not likely before October this year, if not longer, and electricity retailers’ pricing and marketing is much more competitive than it used to be.
For example, the biggest private player, Contact Energy, is eating profit margins by freezing its prices till the end of next winter in key markets. This is to achieve two things: to stem recent customer losses and to act humble following the flawed but politically potent Wolak report on the use of market power in the wholesale electricity market.
Commerce Commission officials totted up the numbers in Wolak and came up with the highly dubious but unforgettable claim that power companies had “over-charged” by $4.3 billion during the three dry winters between 2001 and 2007.
While no one close to the ministerial review process sees that as a credible number, it was the kind of shiny button of a number that was just the thing for the populist and energetic Energy Minister, Gerry Brownlee.
So great are the expectations that Brownlee has created of a “big fix” for the power system that he is now obliged to come up with something that the average person will acknowledge as being “big”. I’m only guessing, but I suspect it won’t be enough to announce, for example, further development of tradeable financial transmission rights – one thing that everyone in the industry thinks would be a good idea, but which nobody up at the shops has heard of.
As a consequence, there has been on the breeze some excited chatter lately regarding a section of the Wolak report that advocates reallocating power stations amongst the SOE’s, to give a North Island generator some South Island hydro, and a South Island generator some North Island thermal – i.e., gas or coal-fired – plant.
The fact that parties in the market today could achieve effectively the same outcome by writing hedge contracts for one another’s output is irrelevant. Such an exercise in deck-chair shuffling could be politically powerful.
It could also be just what the doctor ordered for Genesis Energy, which owns and would love to be shot of the ageing gas and coal-fired 1000 Megawatt plant at Huntly. Might it nudge enthusiastically a review process looking for theatre as well as policy improvement to the view that Meridian might pick up Huntly? Probably too Machiavellian, but the electricity issue is so politicised at present that stranger things could happen.
Naturally, this combination of forces is all a bit of a worry if you’re Meridian.
With a relatively small 183,000 or so customers – Genesis and Contact both have around half a million each – Meridian struggles with economies of scale and, say industry observers, high inherited cost structures.
The annual cost to serve a customer – around $150 at Contact or TrustPower – is reportedly over $300 per customer at Meridian -an unsustainable position that must almost certainly mean that Meridian will face job cuts to meet its Minister’s wishes.
And if it’s handed Huntly, which still does sometimes run on coal, that would make quite a dent in Meridian’s all renewables story.
Throw in the uncertainty that is, if anything, growing around climate change policy and the introduction of an amended Emissions Trading Scheme, and it’s as confusing a time as it’s ever been to be in the power game.
I know a fair bit about the industry and agree with many of your comments,BUT: The Meridian cost structure was made by them, in 1996 – 1998 when the industry was split Meridian elected not to buy retail customers of the Supply Cos and so decided to acquire the customers on market and it hasn’t worked. Meridian have revalued there assets by two high an amount and too much of there output goes to Comalco at very low prices. It used to be 2.5c for firm energy,furthermore wind energy is not economic especially at the bottom of the SI when the market is in the north of the north island.
The Generator retailers have made the mistake of charging domestic customers too much to keep down industrial tariffs. The only way to get more competition is to let line cos into retailing and generation with accounting separation of functions BUT the Govt won’t do that as they will lose major revenue streams and furthermore they want to keep them up so if they privatise after the next election they want good prices.
So the the Govt will huff and puff and Not Do Much.
If you want to talk to me my phone no is xxxxxx. I am very synical about all politicians of all parties.