Sapere on Labour/Greens power policy

February 11th, 2014 at 11:00 am by David Farrar

Business NZ has published a report by Sapere on the Labour/Greens power policy, which is effectively to destroy competition among generators and have the Government set wholesale prices.

Sapere find:

The primary driver for lower wholesale electricity prices under the alternative proposals is that a single buyer would compensate generators for fixed costs at a fair return on historic costs, and pay for the operating costs of the generation plant. These purchasing arrangements are unlikely to lead to lower wholesale electricity costs in the short-term and would lead to higher costs over time.

Of course costs would rise once the Government is setting the price. The Government will be a monopoly buyer and seller and will treat as a way to effectively increase tax revenue for spending promises. Plus add on their proposed ETS changes and will be rising faster than ever.

It is not clear how the proposals would result in more retail competition. If all retailers are able to access a comparable homogeneous product from NZ Power, then the emphasis for retailing would shift from service innovation and differentiation in managing price and volume risk, to achieving economics of scale. Price and volume risk would sit with NZ Power. Smaller new entrant retailers, and retailers wishing to provide niche services to customers, would suffer from having to spread fixed costs over a small customer base. The result would be consolidation to fewer, larger, retailers and less innovation. This is perhaps why no country has managed to implement retail competition under a single-buyer wholesale model.

This is key. The Labour and Greens policy would not just destroy competition with generators, but also reduce competition with retailers. We have a hugely competitive retail market with hundreds of thousands of households swapping companies to get better deals.

My body corporate has just signed up to do an all of premises deal with a small nice power retailer. That retailer would probably be out of business if Labour and Greens get in – and the significant savings we are looking to make will be gone.

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28 Responses to “Sapere on Labour/Greens power policy”

  1. Harriet (4,534 comments) says:

    And the very same people want a market based carbon tax – but without the market!

    Fuck Cunliffe is an idiot. :cool:

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  2. stigie (916 comments) says:

    Key, English and Joyce need to hammer home to the NZ public about the stupidity of the Lab/Green power policy this year
    and the rising costs to every household. Fucking nuts !!

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  3. Ed Snack (1,740 comments) says:

    Interesting though that the prices would be set on historical cost plus an operating margin. Right now we are probably paying 10,000% over historical cost on most of our power. Lesson on how to profit (simplified to make the point). Buy assets at 10 x historical cost; cost $10 Million, buy at $100 Million; wait a couple of years; revalue to $1000 Million on a “replacement cost basis”, charge a reasonable return on assets of (say) 10% of $100 million per year, and that’s the purchase paid off tout suite. And who is paying, why, the same as usual, you, the consumer; and yet the return on the “asset cost” is not all that high is it….

    And before complaints, tell me, what’s the historical cost of our power assets, and why are we paying every year a return on the inflated “cost” of these assets if it is to fund investments in new generation ? Wouldn’t a specific “fund” be the way to accumulate the funds ?

    It’s always easier to make money by financial and accounting manipulations than by actually making and selling stuff.

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  4. s.russell (1,565 comments) says:

    It really saddens me that more and more Labour/Greens are making policy simply based on what sounds good. Not based on what is good for the country. Not even based on what is good for the sectional interests they represent. Idiotic policies that will hurt everyone (except a few bureaucrats) designed for no other purpose than to win power for Labour/Greens.

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  5. burt (7,842 comments) says:

    The Labour and Greens policy would not just destroy competition with generators, but also reduce competition with retailers.

    And everyone who becomes unemployed as retailers go to the wall will be encouraged to go on a benefit and vote for increased state assistance which will be funded by increased power prices ! The great socialist dream of taking from Peter to pay Peter while re-educating Paul !

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  6. burt (7,842 comments) says:

    s.russell

    Increasing power prices don’t really hurt rich pricks. Increasing power prices for state revenue are a very regressive tax but for some reason Labour voters think it’s right to punish low earners to support low earners.

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  7. wreck1080 (3,735 comments) says:

    but why has demand fallen last year but power prices increased at twice the inflation rate?

    While the greens/labour ideas are loopy, the power market has not performed as I would have expected.

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  8. Nookin (3,042 comments) says:

    The Greens do not want the prices to go down across the board. They want to control the prices as a form of revenue collection. Herne Bay residents will pay twice as much as South Auckland residents. They talk about progressive pricing. Bullshit. They want control and wealth distribution

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  9. Spam (593 comments) says:

    There is a power company that has been regulated by the Commerce Commission in such a way that the commerce commission has specified what net return on asset value is allowed. What this actually means is:
    1.) The Company spends a fair chunk of its time “re-valuing” its asset – the higher the asset value, the higher the profits they are allowed to make.
    2.) The company has zero incentive to reduce costs – because the allowable return on investment is based on net profit, then costs are irrelevant to profit. This means that the corporate culture is such that if you are heading to another city, and not sure what time your meeting will finish, you simply book yourself on three flights at varying times, and take the one that is most suitable. Who cares what it costs?

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  10. tas (596 comments) says:

    I think it would play out as follows:

    Labour and the Greens would initially artificially decrease the price of power by using monopsony power. Thus they can claim that their policy is `working’. That would kill the profitability of our power companies — Labour and the Greens would be gleeful to see the shares National sold becoming nearly worthless.

    Of course, the problem is it would immediately kill private investment in power in NZ. So supply would not keep up with demand. The solution is of course government investment and measures to curb demand: A new 100% govt-owned generator with billions of taxpayer dollars sunk into it along with making power more expensive for businesses.

    End result: SNAFU resulting in taxpayers subsidising power and business burdened with high power costs.

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  11. Tom Jackson (2,458 comments) says:

    Competition hasn’t worked. I, for one, have had enough of subsidising some idiot classical liberal’s philosophical experiment through my power bill.

    Of course, the problem is it would immediately kill private investment in power in NZ. So supply would not keep up with demand.

    As it miraculously failed to do throughout the decades under the NZED…

    This is too easy.

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  12. Than (425 comments) says:

    Competition does work. I, for one, don’t want to deal with power restrictions because of some idiot socialist experiment with the electricity market.

    You’re right Tom. Making declarative statements without any fact or evidence to back them up is too easy.

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  13. Albert_Ross (252 comments) says:

    Glad to see you are with a nice power retailer Mr F, I would hate to see you taking up with a horrid one

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  14. NoCash (255 comments) says:

    As many have said already, there’s no need and it’s even daft to create a single buyer. The easiest way to improve competition in the electricity market is to break up the retail business from the generators (aka gentailers). Once the vertically integrated business model is gone, the big four (Contact, Genesis, MRP, Meridian) won’t be able to game/manipulate the wholesale market.

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  15. ross69 (3,652 comments) says:

    One of NZ’s most respected economists, Dr Geoff Bertram, has been unequivocal in stating that the power companies have been rorting taxpayers for many years. I wonder how many on the Right support this rorting.

    http://www.stuff.co.nz/business/industries/9661789/Academic-attacks-electricity-report

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  16. ross69 (3,652 comments) says:

    Moreover, John Key and many others are right behind the Pharmac model of one buyer and various suppliers. I suspect their dislike of Labour’s policy is about ideology and nothing else.

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  17. ross69 (3,652 comments) says:

    “Residential consumers have been progressively more seriously rorted since the industry was restructured – I certainly don’t think they were overcharged 30 years ago,” Dr Bertram said.

    Funny how mad Max Bradford said the reforms would be good for consumers. Another economic theory destroyed by an inconvenient fact.

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  18. Tom Jackson (2,458 comments) says:

    Competition does work. I, for one, don’t want to deal with power restrictions because of some idiot socialist experiment with the electricity market.

    You’re right Tom. Making declarative statements without any fact or evidence to back them up is too easy.

    OK. It’s a fact that during the years of New Zealand having a fully state owned electricity system that there were not widespread power shortages, and that power was affordable. So the previous “idiot socialist experiment” worked quite well as in it actually met demand at a price people thought was reasonable.

    Since the reforms, all that’s happened is a massive increase in prices and no real choice. There’s no real choice when all the options suck.

    As a matter of practical reality, the reforms have failed.

    I mean: Max Bradford, for all intents and purposes, turns out to have been a wanker.

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  19. burt (7,842 comments) says:

    ross69

    One of NZ’s most respected economists, Dr Geoff Bertram, has been unequivocal in stating that the power companies have been rorting taxpayers for many years. I wonder how many on the Right support this rorting.

    Tell us how when state owned generators make massive profit it’s not ripping the consumers off ….

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  20. Tom Jackson (2,458 comments) says:

    Back up until the mid 90s, I was paying about the same for power and phone.

    Now I pay about 50% more for power than I do for my phone bill (same size house, more efficient heating, etc.).

    Except my phone bill now includes broadband internet, vastly cheaper calls, etc. My phone company even calls me periodically to offer to reduce my bill and increase the value of the service.

    My power bill goes up and up, no matter who I am with, and attempting to deal with the power company is a Kafkaesque farce.

    The telecom privatisation seems to have worked reasonably well; the power thing sucks.

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  21. Ed Snack (1,740 comments) says:

    Tom, yes, but who really pushed the power prices up ? I myself would guess that the owners did so, and until very recently, who owned the majority of the generation assets ? Bradford’s reforms may have changed the structure but largely not the ownership. Perhaps the criticism is that the new structures made it easier for the government to rip us off, because that’s who has been creaming off the extra money.

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  22. Harriet (4,534 comments) says:

    “…..power was affordable…”

    Fuck me Tom……..that’s as arbitary as it gets………the country was also stone fucken broke in ’84.

    You fucken idiots had a railways, post office, Airline, Shipping Company, and a fucken TAB with no casinos, pokies, lotto or a even chook raffle over $60 to compete against – and huge alcohol, petrol and cigerette commissions and you still couldn’t turn a profit Tom…..you fucken failed!

    And you had 50% personal tax rates to help support your utopian aspirations.

    fucken dreamer. :cool:

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  23. Harriet (4,534 comments) says:

    “……My power bill goes up and up, no matter who I am with, and attempting to deal with the power company is a Kafkaesque farce……..The telecom privatisation seems to have worked reasonably well; the power thing sucks….”

    FFS Tom………..you nutters have stopped further power from being generated since the ’70′s……..Hulun even had to suggest that we should have shorter showers!

    you’re so unrealistic Tom. :cool

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  24. Tom Jackson (2,458 comments) says:

    Tom, yes, but who really pushed the power prices up ? I myself would guess that the owners did so, and until very recently, who owned the majority of the generation assets ? Bradford’s reforms may have changed the structure but largely not the ownership.

    The corporate model is my guess.

    My father used to work for Electricorp. The very first thing they did when it was corporatised was to build a massive suite of offices next to the power station he worked at to house all the highly paid bureaucrats (it was on the site of the old pay office, which had employed two middle-aged ladies). Then they spent a fortune on corporate logos, etc. I wonder how much of my power bill goes to fund advertising.

    Before corporatisation, the NZED was focused on generating power for NZ as efficiently as possible. That’s all it did. About the only PR it did is that you could get a free tour of any facility because it was public property.

    I’m willing to take a bet on labour’s policy even if it only has a 30% chance of stopping the rot.

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  25. Tom Jackson (2,458 comments) says:

    FFS Tom………..you nutters have stopped further power from being generated since the ’70′s……..Hulun even had to suggest that we should have shorter showers!

    You are one of the sad results of MKULTRA and I hereby claim my prize.

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  26. adze (1,873 comments) says:

    Funnily enough Tom, I also worked for Electricorp in the early days… and I remember when I first started working at a power station in the late 80s, the plant employed more than 400 staff; including tea ladies, carpenters and a whole training school. There were several stop work meetings every year and around the PSA negotiating round there was always the threat of strikes.
    Fast forward to the early 21st century, post privatisation, it was still producing the same amount of power, but with about 15% of the staff.

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  27. OneTrack (2,624 comments) says:

    “but why has demand fallen last year but power prices increased at twice the inflation rate?”

    Wind turbines? ETS?

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  28. PaulL (5,875 comments) says:

    Perhaps power prices have risen because successive governments have had a deliberate policy of increasing them in the name of “reducing carbon emissions.” I can understand their viewpoint – if I believed it necessary to reduce carbon emissions and reduce energy usage, then I’d absolutely do it through increasing power prices. But I find it incredibly bizarre that the Labour party would be giving options to reduce power prices when the last Labour govt (and presumably the next one) had a deliberate policy of increasing power prices through a carbon tax and mandating of renewables.

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