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Business energy
6 Dec 2024


NZ'S ELECTRICITY MARKET A PROBLEM FOR PRODUCTIVITY - OECD

12:29 pm on 6 December 2024
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Susan Edmunds, Money Correspondent
susan.edmunds@rnz.co.nz

There have been renewed questions about the structure of the country's
electricity market. (File image) Photo: RNZ / Russell Palmer

The OECD has highlighted New Zealand's electricity market as a problem for
productivity - and says the country should consider whether the generation and
retail operations of the gentailers should be split.

Spot power prices soared in the middle of this year, and some businesses shut
their doors, prompting renewed questions about the structure of New Zealand's
electricity market.

Critics say the current scenario, where gentailers generate and retail
electricity, creates an uneven playing field for independent retailers, and
discourages investment in generation.

The OECD's latest economic outlook noted New Zealand's economic momentum was
weak, but said lower interest rates should help it turn around and growth should
increase to 1.4 percent in 2025 and 2.1 percent the year after.

However, the report noted that labour productivity growth had fallen a lot since
2021.

Growth in gross domestic product had been driven by an expansion of labour
supply via migration, of which 80 percent was low- and medium-skilled.

It also said high future electricity prices were a problem for productivity
because they could weaken business investment, especially in "green and digital
transitions" because electricity was a core input for both.

"The electricity regulators and the government have launched reviews of the
electricity market. Despite previous reforms to improve competition, electricity
futures prices are high and above the threshold considered sustainable for the
economy in the long run.

"These reviews should re-examine separating the generation and retail operations
of large electricity companies to boost competition in the futures market and
provide industry with more hedging options."

The recommendation was not a surprise and followed comments from the Reserve
Bank and other economists emphasising the need for competition reform, Octopus
Energy chief operating officer Margaret Cooney said.

Margaret Cooney from Octopus Energy. Photo: Supplied / Steve Montgomery

"It also follows six years of elevated electricity prices for businesses and a
winter where supply shortages shut down some of our largest exporting
businesses. Unfortunately this self-made energy crisis is not over, New Zealand
families and businesses will continue to see prices rise until action is taken.

"There is broad consensus now across international experts, business, and
consumer advocates that something needs to be done about the state of our energy
sector. Until the rules are changed, we will continue to see issues with supply,
business shuttering due to high power prices, and Kiwis struggling to pay their
bills when we should have much cheaper electricity.

"The key to lower power bills, and a secure energy supply is ensuring that
competition spurs more investment in generation and smart retailing. New
entrants need to be able to enter the market and invest in growing it if we want
to decarbonise and grow our economy affordably.

"The current settings mean gentailers are able to manage their pricing between
their generation and retail arms, often selling energy to themselves for less
than they sell to independent retailers. "

In August, the Electricity Authority Te Mana Hiko and the Commerce Commission Te
Komihana Tauhokohoko set up an energy competition task force to improve the
performance of electricity markets.

But that had limited scope and had relegated substantive reform to a backstop
measure, Cooney said.

"However, [Energy Minister] Simeon Brown has initiated a sector review and has
the ability to undertake substantive reform. It's critical that Brown's review
translates into action to reform the electricity market.

"The OECD highlights that previous iterative and limited actions have been
ineffective. As the costs of a poorly performing market add to the bills of
struggling households and businesses the can can't be kicked down the road
again. Brown will be well aware that bill payers and voters patience and wallets
are worn thin."

Meridian chief executive Neal Barclay said people could expect to see more
innovative products that would reduce power bills.

He said removing coal and gas from the electricity system would bring prices
down.

"I think we all want customers to have the best deals possible, especially in
what continue to be times of cost pressures for many homes and businesses.

"The latest International Energy Agency report ranks New Zealand seventh for
residential prices and fifth for industrial prices, and we have an extremely
reliable and sustainable electricity system."


ASSOCIATION STANDS FIRM ON CURRENT MODEL

The Electricity Retailers Association said the vertical integration model
benefited households and consumers.

"In fact vertical integration helps with managing wholesale price risks,
supports investment, and provides better outcomes for consumers, including lower
retail prices, than under mandated separation.

The Electricity Authority has recently reviewed the wholesale market and
concluded "the electricity market has served consumers well, and competition is
most likely to deliver the best outcomes for consumers".

"There has also been significant entry into the retail and generation markets
since the wholesale market was established.

"There have been numerous reviews into the competitiveness of these markets over
the years which have not identified any evidence that there is a problem with
competition."

It said the gentailers were investing heavily in building new power plants to
meet increasing demand.

The OECD also said school education reforms should continue and tax credits for
research and development should be complemented by increasingly targeted and
evaluated grants to industry-research collaborations.

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