Don’t blame the market for hikes
Electricity price rises are coming from the regulated parts of the industry, writes Chris Hargreaves.
ROD ORAM’S recent comments in the Sunday Star Times and on National Radio were critical of the current market prices for retail energy and the way increased profits were distributed to shareholders by generators and retailers rather than being used to bring retail pricing down.
Oram’s analysis failed to take into account market changes over the past few years – and the considerable impact of key pricing factors such as transmission and distribution charges (both of which are regulated and out of the control of retail providers).
Oram also appears unaware of the significant reductions in energy prices that have benefitted commercial users. Total Utilities Management has seen reductions averaging 20 per cent on recent contracts since the last quarter of 2012 as both generators and retailers have rebalanced their portfolios in response to changes in generation capacity, lower demand and increased regional competition.
Electricity pricing in New Zealand is far from transparent. This leads to uncertainty around how invoiced prices are derived and means changes to the various cost elements can be difficult to police.
However, the Electricity Authority recently released a Statistics New Zealand survey covering historical retail residential pricing. The graph clearly shows where the underlying drivers for cost increases are coming from. Only the blue areas are contestable – where the competitive market operates. The contestable portion of a typical monthly invoice accounts for around 65 per cent of the total cost.
Around 90 per cent of all cost increases seen over the last three years are due to changes in noncontestable transmission and distribution costs.
According to the study, over the last 12 months the cost of the energy, or competitive, portion of electricity increased by an average of 0.3 per cent nationally.
Over the last three years energy increased by an average of 0.5 per cent. The previous seven years prior to 2011 saw increases of 7.1 per cent – much of this was due to regulated competitive constraints in the market and capital infrastructure projects.
During Oram’s interview on Radio New Zealand after the Contact Energy and Meridian Energy profit announcements, the line between contestable charges and regulated ‘‘pass-through’’ charges was blurred.
However, some facts do remain:
1. Demand is flat but starting to increase
2. Low demand means there is little incentive for building new generation assets
Oram asked, ‘‘If the above is all true, why are generator/retailers not reducing prices when underlying wholesale costs are low.’’ To turn this logic around, would residential customers accept much higher prices when the wholesale market spiked?
Generator/retailers are now indexing their retail pricing to the ASX futures market – which combines a number of longerterm factors to smooth out short term fluctuations. This system has had a powerful stabilising influence on market pricing.
There are plenty of reasons for the cost increases postderegulation, however what we see now is a huge increase in market participants giving customers a huge number of retailer options and choices. In the commercial energy space we continue to see large reductions in fixed energy prices, better contract terms and conditions and more creative products for customers.
Fundamentally, all of the arguments currently in the media are driven by residential prices. They forget or fail to understand that residential rates under ECNZ were subsidised by industrial customers. Deregulation has changed this somewhat. It is much more expensive to service residential customers compared with larger commercial customers and some of the cost increases seen since 2000 have resulted from the removal of artificial subsidies. Residential consumers are still not covering their cost to serve at current pricing levels.
Oram also appears to be a fan of the Labour/Green power policy which has been condemned by nearly everyone in the business community.