Proposed energy sector reforms likely to increase electricity prices

This blog post previously contained the Powershop Media Release (that has already been widely reported) outlining some of our views on the proposed electricity industry reforms. Meridian Energy, the sole owner of Powershop, has requested that we remove this statement because, despite Powershop’s operational independence from Merdian, some media and commentators reported or interpreted our position as being Meridian’s position on these reforms – this is not the case, our stated position is solely our own.

28 thoughts on “Proposed energy sector reforms likely to increase electricity prices

  1. Felix

    Do you think it is a good idea to just re-nationalize the whole thing?

    Another topic: there was a gold banner on the top right corner of the homepage showing the 92% Consumer rating. I think you should put it back. It’s more eye-catching there.

    Reply
  2. Ari Sargent Post author

    @Felix:

    No, nationalisation has its own issues. The energy industry is complex, and there really is no easy answers or perfect solutions, particularly in a small market like NZ.

    I am not averse to major reform per se, but given the complexity of the industry I would advocate for more incremental reforms unless there is an overwhelmingly strong reason to drive major changes.

    What gives me real concern about the current proposals is that the consequences have not been fully worked through, and like I said in the media release, the Government’s own Cabinet papers identified the lack of a comprehensive risk review.

    I think if these reforms go ahead as planned there will be significant negative unintended consequences for prices, security of supply and competition – the very things they are the reforms are trying to address.

    Reply
  3. Ari Sargent Post author

    @Felix:

    … and about the Consumer rating banner – I agree that the gold was more eye catching, however, Consumer asked us to remove this, and any reference to the survey results as they don’t want to appear to be endorsing any particular organisation as this compromises their independence.

    Reply
  4. Jared

    I feared this would be the case – it’s a ministers job to ‘just pretend’ to fix things… :) Especially in a profitable sector like this.
    It’s a shame as this could really be Brownlee’s chance to shine!

    Reply
  5. Jared

    Hopefully, when the price hikes continue, they can make changes again…
    When are the reforms expected to come into effect? Will they be reviewing further? It’s absurd that retailers will be expected to fork out for dry times… and they call him the ‘Energy Minister’…
    It’s good that they took your recomendation regarding swtiching speeds :)

    Reply
  6. Jared

    Ahh… I just noticed this was all in Powershop’s submission a couple of months ago! It is sad that they have ignored the concerns of retail-only companies… I hope further discussions will take place, all the best!

    Reply
  7. Peter

    “Put a floor on spot prices during a conservation campaign or dry year power cuts.”

    When they say “floor” do they mean “ceiling” ?

    It seems to me that conservation campaigns or power cuts imply times when demand exceeds supply and thus when the spot price will (in a free market ) go up. The purpose of then setting a floor price ( ie a lower limit on the spot price) escapes me.

    Reply
  8. Felix

    Genesis welcomes the report. Meridian grudgingly accepts it.
    No comment from Mercury, Tiny Mighty or Energy Online.
    Interesting how Powershop is the only state-owned retailer to come out all guns blazing. What do you recommend we do?

    Reply
  9. Ari Sargent Post author

    @Peter:

    No, they do mean a ‘floor’. During a period of forced conservation they want prices to be really high to encourage retailers and consumers to reduce consumption, and also to ensure that retailers are adequately hedged. I don’t have an issue with the intent, but it will put prices up. This risk will be factored into all wholesale contacts and retail tariffs. It also provides another risk to ‘hide behind’ when justifying price increases because it will be hard to place a value on. There is also some risk that the generator-retailers internalise this risk at a different value to wholesale contracts they sell, thereby disadvantaging standalone retailers and retail competition.

    Reply
  10. Geoff Pritchard

    I still can’t believe they are giving control of the southern lakes to a company that makes most of its revenues by generating coal-fired power, and would like nothing better than to have a hydro shortage every winter. What are they thinking?

    Ari: Powershop’s submission suggests you are pretty relaxed about retailing by lines companies, given a suitable regulatory regime. How much chance do you think there is of that happening?

    Reply
  11. Lucas

    Good on you Ari and powershop for speaking out about the reforms – I believe it to be a completely misguided and under-researched mistake to swap these assets.
    I see it as a bold move to make National look like the good guy in the middle of a very public and topical issue.

    As I am moving on from within the industry to the outside, I am just happy to see Powershop continue on its innovative customer-focused path, but i will watch with some interest the results.

    Reply
  12. Ari Sargent Post author

    @Felix:

    We are making a stand because we genuinely believe these reforms are likely to harm consumers – there is too much change too quickly with no ability to manage unintended risks. We would advocate for more measured changes – these seem like major reforms for major reform’s sake with an unclear analysis of the benefits versus the very real risks. I am not sure there is a lot we can do, but we do want our voice heard in the hope that some of the proposals might be revisted or at least deferred to see if some of the less risky components of the package deliver enough benefits to avoid needing a big bang.

    Reply
  13. Ari Sargent Post author

    @Geoff:

    We are pretty relaxed about lines companies re-entering retail, in fact we see it as a good opportunity for Powershop. These companies have not run retail operations for over 10 years and we offer them an easy way back in.

    However, I don’t anticipate any flood gates to open. The larger lines companies have already publicly stated that the risks are too high, and they will not enter until there is level playing field access to wholesale contracts. The imposition of customer rebates on retails and the introduction of a floor price during shortages add further cost and risk. So overall I think you might see 1 or 2 lines companies, perhaps those with some generation re-entering the retail market.

    Reply
  14. Molly Melhuish

    I agree with Ari’s concerns about hydro management, nobody knows that subject better than him!

    Roy Hemmingway is concerned about how well Commerce Commission manages the grid investment test – they have a lot to learn. And with MED writing the “power plan” (SOO) this politicises the crucial planning function.

    I suppose Ari, you will totally disagree with making electricity an “essential service”. (DEUN’s opinion but I think I agree).

    I will not be calling for a price cap or direct price regulation, only threshold regulation like for networks – the gentailer oligopoly will remain for many a long year.

    The vicious thing about the Commerce Act is the pricing methodology which promotes price discrimination in the extreme form called Ramsey pricing. In effect the most competitive consumers are paying little more than incremental costs of power from existing stations, and captives paying stand-alone cost of new generation plus major retail padding.

    The Electricity Commission supported Ramsey Pricing. Following
    submissions it deleted the term “Ramsey” but kept the principle!

    Until the industry is forced to disclose actual costs, for consumer representatives to scrutinise, we will continue to see residential prices rise much faster than prices to the competitive sector.

    Reply
  15. Peter

    Gerry Brownlee responds here, tinyurl.com/y997use
    Addressing the issues Ari raised might have been more credible than questioning Powershop’s parentage and size.

    Reply
  16. Mark

    I sent of an email.

    Mr Brownlee

    I am disappointed if the following attribution is correct because it is belittling and fails to address my real concerns:
    Mr Brownlee said Powershop should “come out from behind Meridian’s skirts”.
    “When Powershop manage to achieve a significant presence in the retail domain, they’ll be able to speak with a great deal more credibility and authority,” he said.

    If I apply that line of reasoning, then “when Gerry Brownlee manages to achieve a significant improvement in retail electricity prices, he’ll be able to speak with a great deal more credibility and authority.”

    Powershop customers may be only ~1% of retail accounts but they tend to be tech-savvy, motivated, and engaged in the electricity debate.

    I’ve have been tracking my electricity usage since 1993 and have ample evidence that government plans to improve electricity supply have failed to deliver better prices. During that time Powershop is the first company that has my support because they have actually given me something that I want:
    - One all up price per unit – it makes it easy to compare prices (try comparing broadband packages too!).
    - Online database and tools for tracking power usage – I can quickly see what the impact of changes in our activities has upon electricity consumption.
    - Responsive management – fast responses on the messageboards; non-patronising responses; and I can request improvements knowing there is a good chance they will be adopted.

    Powershop is out to make a good profit and the staff bigger bonuses but their customer-focused model could be a good example for politicians to adopt. I can envisage a PolicyShop where voters engage with Policy Packages presented by the different electoral parties and voters “buy” into their preferred options with responsive message boards providing input to refine the packages.

    Sincerely

    Reply
  17. Ari Sargent Post author

    @Peter @Mark:

    I agree that sticking to the issues is more helpful.

    At the end of the day the Government has been given the mandate by voters to implement their policy – I have no issue with that, and I am comfortable that Governments implementing the will of the majority may implement policy I neither like nor agree with. That is not my concern. In fact I agree with the objectives of containing prices, increasing competition and improving security of supply.

    My concern is that any Government needs to take all reasonable steps to ensure that the implementation of policy is likely to deliver on the objectives with minimal risk of unintended consequences. Particularly in a long-term and complex industry like energy. I have genuine concerns that there has been inadequate scenario analysis, given the scale of this reform. No-one has a crystal ball and can predict the future, but analysing a range of possible outcomes, with an assessment of consequence, likelihood and possible mitigations can only lead to better informed decisions in my view.

    Reply
  18. Pingback: Bully Brownlee forces SOE CEO to withdraw critical blog « The Standard

  19. Ari Sargent Post author

    @Felix:

    I am happy to comment and give my views on the energy reforms, however The Standard’s article is not actually about the reforms, it is merely using Brownlee’s energy reforms as an example of concerns they have about the tactics of Ministers. It is not appropriate for me to comment on this.

    Further, The Standard have made some claims that I have no way of substantiating. I can say though that the request (not direction) to remove the post came from Meridian management and not Wayne Boyd because (as this post now states) they had concerns that my view on the reforms was being represented as Meridian’s official view, which it wasn’t. Given that my views had already been widely reported I was happy to oblige.

    Reply
  20. Warwick

    Hi Ari

    I thought your blog post was well thought out and explained and raised serious concerns that needed to be raised. I am disappointed that it has been removed, but pleased to see it was widely republished before it was.
    I hope this incident wont put you off from making similar blog posts in-future(although I suspect it will)
    The irony of this whole situation is now that the blog has been removed it will be read, quoted and discussed by far more people then it ever would have been if it was left alone….. and that’s got to be a good thing.

    Keep up the good work Ari and please continue to post and publish your uncensored thoughts and concerns

    Reply
  21. Warwick

    What Meridian Energy needs to bare in mind is there are reasons why Powershop scored first place in the customer satisfaction ratings while Meridian scored below average. One of Powershops best assets from a PR and customer satisfaction point of view is Ari. Customers admire him for speaking his mind and saying what needs to be said. He is online all hours of the day and night diligently answering questions and concerns and posting insightful blogs that I and many others enjoy reading. What other power company in NZ or the world for that matter could I post a public message of my thoughts and feedback and have a reply from the CEO the same day? Meridian needs to look and learn from powershop how it can improve itself, not try to user what ever power it does or does not have to mold powershop and powershops staff into its ways of thinking and working

    Reply
  22. Ari Sargent Post author

    @Warwick:

    Thanks for that. To be fair, Meridian is aware of and do understand the issues you raise. Let’s not forget they had the foresight to establish and fund Powershop in the first place. The fact that we have challenged the status quo for power companies in a whole number of different ways (in particular our transparency) was actually part of the thinking behind this.

    In this instance Meridian have not said to me that I should or shouldn’t have said what I did. They were merely concerned that our views were being interpreted as theirs and compromising their own response to the energy reforms. Given that they are Powershop’s sole funder it is appropriate that I responded to their request – this would be the case whether or not Meridian was an SOE. If your major shareholder(s) has concerns you naturally need to accomodate those concerns.

    I will continue to make comment on these reforms and issues like it, but will need to be vigilant in distancing my own views from those of Meridian.

    Reply

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