Good start but work needed to deliver electricity market outcomes

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Good start but work needed to deliver electricity market outcomes

24 Oct 2019 | BusinessNZ

New Zealand’s government has reviewed the electricity sector frequently since the 1970s and significant changes have been made to develop the sector’s performance.

In the 1980s, the sector was partially privatised to improve competition, and a light-handed regulatory regime was developed. These changes were desperately needed in a moribund sector.

By the 2000s, concerns about industry performance and self-governance arrangements meant further improvements were made, like developing new regulations and improving market competition to limit retail prices. A more formal regulatory regime was put in place.

The latest 13-month review investigated concerns about how prices are set within the electricity sector and whether its structure is contributing to the problem of energy affordability.

The review is unique as it tackles the need for electricity prices to be fair and affordable, not just efficient or competitive.

In particular, the review investigated whether the current electricity market delivered a fair and equitable price to residential consumers and considered what enhancements could be made to future-proof the sector and its governance structures.

The focus on the consumer is something the BusinessNZ Energy Council (BEC) supports. BEC favors a more competitive electricity market that delivers improved outcomes for all Kiwis.

But understanding the conceptual gap between what the market can reasonably be expected to deliver, and the outcomes the Panel wishes to achieve speaks to the identification of problems and the allocation of appropriate, matching solutions.

Even with cost-reflective, efficient prices, outcomes can emerge that are undesirable for some consumer groups.

Many of the Electricity Price Review’s (EPR) recommendations released this month are relatively straight-forward fixes, like phasing out low fixed charge tariff regulations. Things like establishing a consumer advocacy council, setting up a fund to help households in energy hardship become more energy-efficient and offering extra financial support for households in energy hardship are all no-brainers.

The decision to establish a consumer advisory council, and to direct the Electricity Authority and Commerce Commission to listen more to customers’ views will ensure the consumer’s voice is heard.

However, some recommendations, many related to the wholesale market, are not easy fixes and must be carefully considered.

If there were easy solutions, they would have already been implemented. Without care, some of the fixes could have outcomes that run counter to the Government’s desire to hold electricity prices down and reduce energy hardship.

The EPR concluded that there are no obvious signs of excessive profits being taken by companies operating in the electricity sector, and that the sector’s structure is not a significant contributor to the issue of energy hardship, which remains a serious issue. We agree.

But markets can always be more competitive.  A competitive electricity market is a desirable objective and a strategy of mostly using competitive tools to deliver on it an appropriate one.

It is also appropriate that the Electricity Authority be tasked with the delivery of many of the recommendations.

The Authority already has several initiatives underway to address many of the EPR recommendations like improving access to information and data, enabling new technologies and business models across the electricity sector and enhancing competition.

Any changes should improve New Zealand’s Energy Trilemma performance of balancing energy security, affordability and environmental sustainability.

Incentives to invest and to create an affordable, secure electricity system do not come from the passing of laws or regulations, or from Government Policy Statements but from clear, predictable and stable regulatory and investment environments. The price all consumers pay for their electricity is primarily determined by the wholesale market.

Without clear policy, the Government’s desire to transition smoothly to a low carbon future, supported by a growing role for renewable electricity might be more difficult. Increased transparency will help restore confidence that consumers are not paying more for their electricity than they need to.

In addition, steps taken need to be mindful of wider factors outside of the electricity market, like implications of a tight gas market, the likely increase in carbon prices, uncertainty around the consenting of renewable electricity generation projects and water reforms.

Overburdening the Electricity Commission with multiple and conflicting objectives led to the establishment of the Electricity Authority.

Caution is required - any work on the sector’s governance and purpose must identify clear problems. Any outcome must be an institution independent of government if it is to retain the confidence of market participants.

We look forward to working with the Government and the Electricity Authority as its recommendations are developed and implemented.