Labour drop their worst policy

November 7th, 2015 at 10:00 am by David Farrar

Stuff reports:

Labour leader Andrew Little has all but dumped the party’s controversial NZ Power policy.

In his opening address to the party’s annual conference in Palmerston North Little said the policy, which aimed to set up a single buyer for the country’s power generation, was too complex to explain simply to voters.

When it was announced it was widely criticised by business and the sector as too interventionist.

Little said the policy, which was unveiled before the last election in concert with a similar policy from the Greens, was important.  

There was something wrong with the power system, given rising prices and the high salaries paid to top executives in the sector.

“But our answer to that has to be something we can explain simply to New Zealanders. … So we will have to revisit the NZ Power policy.”

It is understood the Greens will also drop the policy before the next election.

Good. It was the worst of their policies. It was a de facto nationalisation of the power generators, which would have seen the state determine all prices, who can build new supply, and would have destroyed any competition between generators. It was an appalling policy.

But not all good news:

He said if Labour won the election in 2017 it would pass legislation to implement the foreign sales ban policy.

It would also try to renegotiate the deal on the foreign buyers issue, something Trade Negotiations Minister Tim Groser had indicated was possible over dairy exports.

“We will not support anything that takes away the right of New Zealand politicians in our democratic elected Parliament to make laws in the best interests of New Zealand … it simply isn’t acceptable,” he said.

He said other countries had deals that allowed such a restriction on land sales, but the current Government had not even tried to secure an exemption for that.

Little said Labour was a free trade party, but standing up for the right of Parliament to legislate in the interests of its citizens was not anti-free trade.

Asked if it would be acceptable for other countries to make unilateral changes – for example if Japan legislated against dairy imports – Little said “other countries can do what they like”.

So Little is saying he is fine with other countries breaking agreements they make with New Zealand, because he intends to do the same. Credibility zero.

Inflation remains low

October 16th, 2015 at 12:00 pm by David Farrar

Stats NZ reports:

From the September 2014 quarter to the September 2015 quarter:

  • The CPI increased 0.4 percent (0.4 percent in the year to the June 2015 quarter).
  • Cigarettes and tobacco (up 13 percent), newly-built houses excluding land (up 5.5 percent), rentals for housing (up 2.3 percent), and local authority rates (up 5.9 percent) all increased.  
  • Lower petrol prices (down 6.8 percent) were the main downward contributor.
  • Prices for non-tradable goods and services increased 1.5 percent, which was the smallest annual increase since the December 2001 quarter. 
  • Prices of tradable goods and services decreased 1.2 percent.

This is good as it means families get to keep more of their income, rather than have it soaked up in higher costs.

In the last three years overall prices have gone up only 2.8%.

The tradable sector has actually had prices dropped 2.6% over the last three years while non-tradable has gone up 7.0%.

Labour often go on about power prices. Guess how much electricity has gone up in the last year? 0.07%. Another crisis solved!

Herald on power prices

July 29th, 2015 at 1:00 pm by David Farrar

The Herald reports:

One in five Auckland households switched power companies last year, helping them save an average of $136 in the process.

The Electricity Authority’s annual review of the industry’s performance showed that 385,000 households changed their electricity provider in 2014 using Government-sponsored tools. That was fewer than the previous year, when 396,000 consumers changed companies.

The review by Government’s electricity regulator said the biggest savings were made in Bay of Plenty, where people changing providers saved an average of $318.

Households on the East Coast were most likely to switch companies – nearly a third moved to another retailer in 2014.

The review said growth of electricity brands – including a record-high 27 retailers – had fostered the high rates of company-switching. Aucklanders had the most choice with 21 companies, four of which had joined the market in the past year.

Great to see competition working.

The authority said prices had risen more slowly than retailers’ costs, which suggested that competitive pressure was limiting price rises.

However, prices still increased last year despite the more competitive market. Statistics New Zealand figures showed power prices rose 3.6 per cent – more than three times the rate of inflation.

This is the increase in the 2014 calendar year, but …

In the last quarter, Statistics New Zealand said there was zero change – the lowest annual change since 2001.

Yep a nil annual increase. Here’s the increases for June years for the last few years:

  • 06/07 6.0%
  • 07/08 6.7%
  • 08/09 5.3%
  • 09/10 1.0%
  • 10/11 7.6% (GST increase)
  • 11/12 3.7%
  • 12/13 3.3%
  • 13/14 4.5%
  • 14/15 0.0%


Electricity Prices

June 24th, 2015 at 3:11 pm by David Farrar

Backbenches have said a topic for Wednesday is electricity prices:

POWER PRICES-A SHOCKER?:  Nearly 80% of our electricity comes from renewable energy sources, primarily hydropower. Power prices have more than doubled since 2002. So, why are our monthly power bills so dear? And why can your power costs vary so greatly from power company to power company. Labour says we are paying far too much. But what is the solution to lower prices? Do we need to nationalise the power companies? Do we need to change how much lines companies charge? Their tarrifs can make up to 40% of a monthly powerbill? Or is this just the price of doing business?

Yes they have doubled since 2002, but the increase has not been consistent. To help, here is a graph of annual electricity inflation.


Quite a difference, although price increase of over 3% are still too high.

In the seven years from 2001 to 2008 inclusive electricity prices increased 63.5%. Since 2008 they have increased 24%.

Issues that matter – the Economy

September 9th, 2014 at 4:00 pm by David Farrar

I think the economy matters and should be a much bigger issue in this election so I’ve put together almost a dozen graphs showing the difference between National and Labour’s record on 11 important economic indicators. These are issues that matter to families and businesses.



Food prices increased 18.6% in Labour’s last term. Food prices have increased only 1.3% in National’s last three years.



Labour left office with the current account deficit at 7.9% of GDP. It is now at 2.8%.



Power prices went up 22.9% in Labour’s last three years. The rate has halved to 12.1% in National’s last three years.



There was a net loss of 35,830 people to Australia in Labour’s last year of office. In the last 12 months only 7,150 net departures – and in recent months under 100 a month.



The overall cost of living increases or inflation totalled 9.5% in Labour’s last three years. A third of that now at 3.3% over the last three years of National.



Labour left office with an annual balance of trade deficit of $5.3 billion. In the last 12 months it has been a surplus of $1.3 billion



Remember Labour wanting to remove GST off fruit and vegetables. Under the last three years of Labour their prices went up 33.2%! Total increase in the last three years is a mere 1.4%.



The deficit in 2008/09 (on the fiscal settings left by Labour, and the impact of the GFC) was a massive $10.5 billion. Labour have opposed every piece of spending restraint since, but despite their opposition we are on track to a small $300 million surplus this year.



In June 2008 the median after tax income for a full time worker was $38,600 (in 2013 dollars). That has increased to $42,100 by June 2013, meaning the median FT worker has an extra $3,500 income to spend – and this during the worst recession the world has seen since the Great Depression.



Unemployment went up by 27,000 in Labour’s last year in office. It has declined by 17.000 in the last 12 months, and is projected to keep declining.

You are welcome to share any or all of these graphs. All data is directly from Stats NZ Infoshare except the income data where I have used the IRD website to calculate the tax impact and the Reserve Bank website to adjust them for inflation.

New Zealanders have a clear choice. Remaining on our present course which is surplus, falling unemployment, low prices, fewer Kiwis leaving, growing after tax incomes and affordable food – or a radical change of policy which would see many more taxes, less competition, a massively expanded state and an unstable alternate Government.

It is only through a healthy economy do we get to have the money to fund our health and education systems. And that brings me to my final graph.


That is economic growth for Labour’s last year in office, and National’s last 12 months.

Government do not directly control many of these economic measures. But they can and do impact them with their economic policies. The difference between where we are today and where we were in the mid to late 2000s is stark.

Heffernan says Labour’s power policy is nationalisation

September 2nd, 2014 at 11:00 am by David Farrar

The Herald reports:

Doug Heffernan is not a fan of what Labour and the Greens plan to do to the electricity sector.

Dr Heffernan retired last Friday as chief executive of Mighty River Power after nearly 40 years in the industry, during which he witnessed radical structural changes.

He worked for the New Zealand Electricity Department and its corporatised successor, ECNZ. He was chief executive of Power New Zealand, before the local power companies were split into lines and retail energy businesses.

And he had been chief executive of Mighty River Power since it was carved out of ECNZ as a state-owned enterprise and latterly as a listed company under the mixed-ownership model. …

Under the NZED central planning model, nearly every generation investment decision was a bad one, he said, citing Marsden B (built to run on oil but which never generated a single kilowatt hour), the Clyde Dam with its massive over-runs and Huntly, designed to run on coal but which spent most of its life gas-fired.

“I’m old enough to remember the shortages in the 1970s because someone made the wrong decision about what plant to run. Same thing happened in 1992. We actually ran out of electricity,” he said.

California also has a single buyer model and they are warning they may need blackouts.

“That is what has surprised me over my career. To go from a position where you think the smartest brains would work out the best thing to do, to a system where a diversity of thinking has created far better outcomes.”

Dr Heffernan sees the single-buyer model as a form of nationalisation. “They say, yes, it is someone else’s capital but we will control the outcomes. That’s equivalent of having nationalised the industry.”

Of their many bad policies, this is arguably the worst. Even the man they cite as the inspiration for the policy, Frank Wolak, has lashed it as being a very bad move.

Lowest power price increase since 2001

July 16th, 2014 at 9:00 am by David Farrar

Simon Bridges announced:

New power price data released today shows the Government’s 2010 electricity reforms are making a real difference for consumers, says Energy and Resources Minister Simon Bridges.

“The sales data released by the Ministry of Business, Innovation and Employment for the year ending March 2014, shows the lowest annual price increase since 2001 at 2.3 per cent,” Mr Bridges says.

“Discounts and other benefits from retailers are becoming the new norm in an increasingly competitive electricity market and the new data captures what consumers have actually paid for their power, rather than the advertised price.”

In other words, competition helps keep prices from increasing greatly.

For the June quarter, there has been an increase of 2.3 per cent.  This was driven by a 6.7 per cent increase in lines charges — the component regulated by the Commerce Commission — as retailers passed on the significant investment costs associated with upgrading local networks. 

The energy component — the part subject to competition — decreased by 0.7 per cent. 

This is what makes Labour’s policy so bizarre. Rather than focus on better regulating the parts of the electricity sector which are monopolies, their policy seeks to destroy competition and the market among generators.

Latest figures released by the Electricity Authority show that consumers can save, on average, $155 per year by switching power retailers.

Yep. I’ve saved heaps by swapping.

Former Labour energy minister slams Labour/Green power policy

March 6th, 2014 at 11:00 am by David Farrar

Stuff reports:

A former Labour energy minister has slammed the party’s proposed power policy, saying it would mostly benefit the rich while damaging the renewable energy sector.

David Butcher, who now runs a consulting firm, was one of four speakers debating the merits of NZ Power at the Downstream energy forum in Auckland. …

Butcher said the proposal would overturn 25 years of collaborative market development for an “untested and very flawed model”.

“I think it would largely destroy the renewables industry, or at least set it back five or six years,” he said.

Butcher said that before deregulation in 1990, power prices were rising by about 20 per cent a year.

Today, 72 per cent of new generation was renewable, there was private investment in renewables and there were no blackouts, he said.

Butcher said the benefits of the policy would largely go to rich people with high power usage and companies like Rio Tinto, which runs the Tiwai Point aluminium smelter.

Of their many bad policies, I rate this one the worse.

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 power prices as a way to effectively increase tax revenue for spending promises. Plus add on their proposed ETS changes and power prices 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.

Another made up figure

January 29th, 2014 at 2:00 pm by David Farrar

Stuff reports:

And Labour Energy spokesman David Shearer said consumers would disagree with the authority’s claim that power prices were fair, after bills had risen 30 per cent in the past five years.

But they have not. The CPI shows the cost of electricity is 19.7% higher than five years ago, not 30%.

In the previous five years under Labour it increased 39.2%

Wholesale electricity prices at a three year low

January 7th, 2014 at 11:00 am by David Farrar

The Dom Post reports:

Electricity prices are at a three-year low, at the very time people are using less power.

But, despite the low prices – which have reached 48 times lower than the peak last year – residential customers will notice little change as contracts buffer them from the highs and lows of the volatile wholesale market.

NZX Energy figures show wholesale electricity prices on Boxing Day dropped to $7.70 per megawatt-hour – one million watts of energy used continuously in a single hour.

The last time it was that low was on January 30, 2011.

This is of course conclusive proof that we need to destroy the wholesale market in electricity and have the Government become the sole monopoly purchaser and wholesaler seller of electricity.

Competition and choice is great

December 20th, 2013 at 11:00 am by David Farrar

Stuff reports:

Power customers are switching companies at the highest rate for more than two years.

Across all retailers in November, some 37,000 customers changed electricity company, according to a monthly report from Meridian Energy.

The 12-month average switching rate was 19.6 per cent at the end of November, the highest since the middle of last year.

A recent global report on household electricity prices showed New Zealand had the highest level of retail “churn” in the world, ahead of Belgium and Australia which are just under 18 per cent a year.

The VaasaETT report said New Zealand had some of the most efficient switching procedures anywhere, with “a good supply of competitors”.

The latest government survey of household prices estimates the average tariff as 28.5 cents a kilowatt hour, which would make prices about the fourth cheapest compared with European countries.

37,000 customers in one month swapped providers to get a better deal. That’s excellent.

Of course that will end with the Labour/Green nationalisation policy. All generators will be forced to sell at the one price to a state monopoly, which will then sell at the one price to retailers. This will mean no effective competition and effectively no choice. Everyone will be ultimately buying their power from a Government monopoly, and that’s batshit crazy.

Mighty River to hold prices for 15 months

December 11th, 2013 at 11:00 am by David Farrar

Some have scaremongered that moving from an SOE to a mixed ownership model will increase power prices. Well the Herald reports:

MightyRiverPower, the first state-owned power company to be partially privatised by the government this year, plans to keep the price it charges for electricity on hold until at least April 2015, but can’t guarantee transmission and distribution prices won’t rise. …

“However, there will likely be changes in customer pricing from April 1 due to variables over which we have no control that we pass through on our bills – such as transmission and distribution charges and any increases in metering costs due to regulatory requirements.”

So there will be no increase in the price for the actual power.

The way to keep power prices down is to increase competition, not destroy it as Labour/Greens propose. If you look at the Powerswitch website run by Consumer, there is a big difference between what companies charge.

  • In Auckland the most expensive average price is Mercury at $2,251. Mercury is owned by MRP and its prices are the same as when MRP was an SOE. The cheapest is Contact at $2,018. Contact is 1005 privately owned.
  • In Wellington the cheapest is Budgie at $2,012 (also owned by MRP) and most expensive is Energy Online at $2,269. Energy Online is owned by Genesis, which is an SOE.
  • In Canterbury Trustpower is $2,653 and Nova $2,044. Nova is owned by the 100% private Todd Corp. Trustpower is owned by Infratil and Tauranga Energy Consumer Trust.


Will Lianne allow Orion to price gouge?

August 20th, 2013 at 9:00 am by David Farrar

Mike Yardley at The Press writes:

Orion’s odious proposed price hike, which would gouge an extra $1000 off every Christchurch customer, over and above its existing 25 per cent share of power bills, has run into a brick wall.

The Commerce Commission’s draft report has virtually halved the scope of Orion’s planned cash-grab, while also noting that the community-owned lines company does not have to proceed with this increase.

No-one disputes the critical infrastructure repair and enhancement programme Orion has embarked upon.

But there are alternative ways to pay the $150 million bill for this 10-year project.

As the Earthquake Recovery Minister, Gerry Brownlee, has pointed out, the company’s balance sheet is very strong, its cash reserves are healthy – and Orion has generated $220m in profit in the past five years alone.

Brownlee has described Orion’s proposed price hike as “an appalling slap in the face to the community, by a council-owned company that is behaving like a rapacious capitalist”.

Well that is a clear stance by Gerry. But what about Lianne Dalziel? Are Labour not against price gouging by electricity companies?

So what is the position of our mayoral aspirants?

And should they be successful on October 12, what pressure will they apply on Orion to abandon this lazy financial assault on a captive market?

Paul Lonsdale swiftly responded to me, pledging to negotiate with Orion’s board to abandon the proposed increase.

But Lianne Dalziel took umbrage at my inquiry as to whether she would lean on Orion to jettison the increase.

Instead, I was emailed a diversionary missive from the red-hot mayoral favourite as to why Orion was an “over my dead body” strategic asset which must be protected.

So is Lianne saying that she supports Christchurch people paying an extra $1,000 a year for power, so long as she owns the company and can get to spend the dividends?

Dalziel also fired off a chapter and verse broadside about why the power retailers are the real “villains”. (Although, unlike the retailers, the customer can’t shop around for a lines company. And, unlike the lines company, the council has no control over power retailers.)

Retailers have competition, and effective competition also. Hundreds of thousands of people swap retailers when they can get better offer. Why would Lianne ignore the monopolist lines company? Oh, maybe because is she becomes Mayor their profits can fund her spending plans?

Of course, all of this is a big fat red herring by the mayoral contender and, surprisingly, Dalziel declined to give me a straight answer on whether she specifically supports Orion’s desire to fleece an extra $1000 out of your backpocket.

It seems like a very reasonable question.

Fallow on power

August 9th, 2013 at 4:00 pm by David Farrar

Brian Fallow writes at NZ Herald:

The Labour Party probably regrets invoking the work of Professor Frank Wolak when making the case that New Zealand’s electricity system is broken and in need of a radical overhaul.

Announcing its policy alongside the Greens in April it cited as evidence that the electricity market is not competitive “a 2009 report by international expert Frank Wolak which concluded that between 2001 and 2007 the four big generators extracted super profits of 18 per cent ($4.3 billion) which came at the expense of higher prices for consumers”.

Having put those words in the Stanford economist’s mouth, Labour’s finance spokesman David Parker got to hear him spit them out, when he gave a lecture to the Victoria University’s Institute for the Study of Competition and Regulation in Wellington last week.

Wolak also made it clear he is no fan of cost-based systems such as Labour is peddling, where – instead of a market where generators offer power at whatever prices they see fit – the system operator, armed with a mathematical model and the technical specifications of the various generating units, decides which will run at any given time.

In fact he called their policy a sham. Now many people have called it a sham – but when the person calling it a sham is the man whose work is quoted as the rationale for the policy – well that is devastating.

So what about an alternative cost-based system, adopted in several Latin American countries, where instead of generators competing to be dispatched on the basis of the prices they offer, the system operator decides which will run and what the spot price will be, based on its information about various units’ variable operating costs?

The difficulty with this in a predominantly hydro system is deciding what the opportunity cost of water is in any given dam at any given time, that is, what future value is forgone by sending it through the turbines, and doing that involves trusting the mathematical innards of some black-box model.

One problem is that a key input for such a model is setting a cost of shortage. If it is set too low – and the political pressure is to do that – wholesale prices will be low in normal years but the risk of power shortages in dry years is high.

And many of the countries or states that have such a model are indeed facing blackouts.

Wolak counsels against going that route. It’s far better, he suggests, to make the wholesale market more competitive by making the demand side more responsive to price signals.

“If you are this close to the finish line with the actual market and this far away in the cost-based market, why do it?”

Because you are desperate to win power, and hope it sounds good to the public.

When asked about a single-buyer market, another feature of the Labour/Greens policy, Wolak was dismissive.

If the single buyer simply aggregated the demand that was there anyway, and did not reduce demand in response to higher prices, there would be no competitive benefit, just extra overheads.

So Wolak says Labour’s policy will reduce competition, increase costs and increase teh risk of power shortages. And this from the man they cite as the rationale for their policy. How humiliating.

More on Transpower

July 12th, 2013 at 9:00 am by David Farrar

I blogged yesterday on Labour’s silly claims about how the recent payment of a dividend from Transpower to the Government means that Kiwi households are paying hundreds of dollars too much in power bills.

A reader has e-mailed in with some facts that show how Labour’s claims are detached entirely from reality. The scary thing is that Parker must know what Labour is saying s not true, but they hope people will fall for it.

  1. Transpower’s “Maximum Allowable Revenue” (MAR) for its monopoly line services (ie almost all its activities) is regulated under Part 4 of the Commerce Act 1986 by the Commerce Commission.
  2. When the Commerce Commission sets Transpower’s MAR it does not take into consideration Transpower’s dividends or any interest it pays on debt. This is in line with standard regulatory practice as the dividends and interest payments are distributions and do not reflect the economic costs of production. Charges are related to efficient costs, including costs of capital (whether funded by debt or provided as equity).
  3. This means that Transpower’s dividends have no bearing whatsoever on its charges for its monopoly line services; ie they have no impact at all on the parts of the price of power relating to transmission lines.
  4. It is also the case that, given how the Commission sets Transpower’s MAR, Transpower’s charges do not depend materially on whether or not it finances its investments from retained earnings (ie foregone dividends) or by raising debt. 

It’s great to get feedback from people who know what they are talking about.

Labour lies on power prices

July 7th, 2013 at 12:00 pm by David Farrar

Radio NZ reports:

Infrastructure investor Infratil says the Labour Party’s portrayal of how much New Zealand electricity prices have gone up in the past three years is misleading.

A graph on Labour leader David Shearer’s Facebook page – using Government data for 14 countries – shows New Zealand was one of only two where electricity prices rose between 2009 – 2012.

Bruce Harker, the head of Infratil’s manager’s energy team and TrustPower chairman, said the list of countries put forward by Labour omits Australia, where electricity prices have risen much more than in New Zealand.

Dr Harker said the comparisons being made are misleading and although if it’s converted to New Zealand dollars it appears the electricity price has fallen in other countries, the reason for that is that the New Zealand dollar has appreciated so much over that period of time.

He said consumers in Britain, Denmark or Norway would say their prices have gone up 15% – 20% in that period.

That’s outraegous – to use exchange rate changes to make it appear power prices have not shifted in other countries. Intellectually absolutely dishonest. Unless consumers in Denmark and Norway pay their power bills in NZ dollars, it is meaningless. The graph should show the actual increases in each country.

Labour finance spokesperson David Parker, a former minister of energy, concedes power prices have gone up more in other countries than in New Zealand.

So Parker admits Labour lied.

The Layton paper

June 6th, 2013 at 4:00 pm by David Farrar

If you are actually interested in policy and analysis, rather than slogans, I recommend you spend an hour or so reading the 28 page paper from Electricity Authority Chair Brent Layton. It is a mine of valuable information and analysis. I’ll do a few extracts, but it is worth reading it for yourself.

In the wholesale electricity market, prices are determined by competition between generators offering to supply and these offers being matched to demand. The values of the different generation assets are driven by market prices and not vice versa. The wholesale market is not one in which a regulator exercises price control because it is a workably competitive market with over a dozen grid-connected players on the supply-side and five reasonably large players. There are more major generators in New Zealand than there are major banks, petrol companies or telephone providers. There are, in addition, another 70 generating entities in New Zealand.

With 13 grid connected generators, the challenge is how best to foster competition between them – not haw to remove it.

Regulators are always able to transfer wealth, but if they do so it has to recognise there will be a cost. The cost will be in the willingness and terms on which parties will invest in generation capacity in the future and in other sectors of the economy. Given the size of the expropriation required to raise, say, $500 million a year would be about $7 billion, the chilling effect on investment in New Zealand is likely to be large, widespread and long lived. Either the government will be forced to build future plants (and many other assets) or shortages of electricity (and other services) will be likely.

Labour and Greens seem convinced that generators will invest in new capacity, despite their Government unilaterally setting the price they will be able to sell at. So I have a solution. Why don’t they set up a generating company, go to a bank and borrow the capital needed, and set up their one generator.  With a guaranteed rate of return, how can they lose out?

Firstly, it would require a large bureaucracy and an army of generator staff supported by consultants to determine the appropriate amounts to pay existing generators to cover their operating and capital costs. I estimate that for the approximately 110 generator-class market participants and their 300 plus plants it would take at least 300 analysts and lawyers five years to set up the system ($180 million) and after that 150 people to run it ($18 million a year). A major cost would be working out the opportunity cost value of water in each storage dam.

Maybe this is what they meant with 5,000 extra jobs! Can’t see it leading to cheaper power though!

In addition, the new arrangement would require the central contract buyer and potential investors in generation to have significant expertise and resources to conduct tenders for future capacity. I estimate 50 analysts and lawyers would be required for this at an annual cost of $6 million.

Moreover, there will be a need for extensive negotiations with retailers over their contracts with the single contract buyer and there may also be the need for monitoring of the split between retail and generation activities within the one company. I estimate a further 50 analysts and lawyers would be required for this at an annual cost of $6 million.

Time to become a lawyer!

In South Korea, the central decision maker has struggled to break even and satisfy demand. Industrial consumers were recently requested to alter their  working hours to reduce pressure on electricity capacity. In August 2012 prices for consumers were increased by 4.9% in an attempt to reduce demand and return the sole buyer to profit. In January 2013 prices were increased on average by a further 4%

But they are one of the model countries!

Secondly, in 2004 the government introduced a requirement that retailers provide a low fixed charge option to customers, such that residential consumers using less than 8,000 kWh a year pay less on this option than they would on any other corresponding option. This regulation effectively requires a cross-subsidy from all high use consumers to low use consumers receiving the low fixed charge. The data upon which the residential price trends are based relates to the cost of electricity to residential customers using 8,000 kWh a year.

As more and more low use consumers took up the low fixed charge tariff option as time went by it was almost inevitable that the reported price of electricity to residential customers consuming 8,000 kWh a year would rise as retailers set standard charges to offset the increasing level of subsidies required under the regulations.

This is a key point. Part of the reason why most people have had power prices go up, is because of the Govt mandated subsidies for some users. And Greens are proposing many more subsidies – ones that will ultimately be funded by those who are not eligible for them.

A tale of two responses

June 6th, 2013 at 7:00 am by David Farrar

The Herald reported:

In a 28 page paper delivered to an industry audience in Auckland, Dr Brent Layton argues current arrangements are working well but can be better, and that returning to a central planning approach will lead to higher prices and more likelihood of power shortages.

“Conclusions based on inadequate research are not a basis for sound economic policy,” said Layton, in a direct attack on Victoria University Institute of Policy Studies economist Dr Geoff Bertram, whom he accuses of producing graphs that overstate the extent of household power price increases relative to other countries.

Dr Layton is the Chairman of the Electricity Authority, which is the sector equivalent of the Commerce Commission. It is the body that helps regulate the market to try and maximise competition to benefit consumers.

Dr Layton is not a politician or lobbyist. He is not campaigning for votes. His job is to identify what sort of regulatory regime will best deliver for consumers.

Layton also says he would not implement the Labour-Greens’ NZ Power proposal because it would contravene the requirements of the regulator’s legislation “to promote competition in, reliable supply by, and the efficient operation of the electricity industry for the long term benefit of consumers.”

Asked whether he would be able to serve on the Electricity Authority if a Labour-Green government were elected, Layton said: “I personally wouldn’t.”

What he is effectively saying is that their proposal threatens reliable supply. Not surprisingly, he doesn’t want to be the fall guy, should that come to pass.

On central buyer proposals, he said similar policies had been examined four times in the last 25 years and “found wanting in terms of what would be of long term benefit to consumers.

That is not just his view. That was also the view of David Parker when he was Minister of Energy.

What is fascinating is the responses from David Parker and Russel Norman to his paper.

David Parker has done a critique of his analysis. I don’t agree with Parker’s critique, but it is policy based and respectful.

Contrast that to Russel Norman’s response:

“Dr Layton’s extraordinary foray into political debate is nothing more than a National Party-appointed civil servant who has failed to do his job and is now trying to protect his patch,” said Dr Norman.

So once again Dr Norman attacks the man, instead of the issue. Rather Muldoonist, dare I say.

It is worth recalling what the annual increase in electricity CPI have been. For the last ten years they have been:

  • 2003 9.3%
  • 2004 8.8%
  • 2005 4.1%
  • 2006 7.1%
  • 2007 6.5%
  • 2008 7.7%

Then since the election

  • 2009 2.1%
  • 2010 5.8% (of which 2.2% was GST increase, so underlying figure was 3.6%)
  • 2011 2.4%
  • 2012 5.2%

The increases in the last four years have been fairly modest. Excluding the GST change, it has been around 3.3% a year which is higher than desirable but much less than the previous Government.

Thanks Clint

April 23rd, 2013 at 1:56 pm by David Farrar

Clint (of Hey Clint fame) tweeted a link to a spreadsheet of power prices since 1979 adjusted for inflation, per kWh.

So this data is from the Green Party itself. So let’s have a look at in graphical form.

power prices 1979 to 2009


So what does it show. The average cost of power was less in 1999 than it was in 1990.

Also that after the 1998 Bradford reforms, the price dropped.

And then under Labour the price skyrocketed.

Since Labour left office, power prices have increased only 2% a year when you exclude the one off GST and ETS decisions which have nothing to do with what generating companies charge.

Labour created the problem, and despite the fact of far lower increases under National, they are using their legacy as a pretext to nationalise the industry.

JB Were on how single buyers works overseas

April 23rd, 2013 at 12:00 pm by David Farrar

Bernard Doyle from JB Were writes:

The first blush of the NZ Power policy is another variation of models that have been tried, tested and failed for well over a century. That is, the state looks askance at the messy process of market-discovered price and production and figures it can do a better job.

Labour says as much in its policy document stating; “No one plans the New Zealand energy sector and ensures it operates for the benefit of all New Zealanders”.

The idea of a central planner co-ordinating supply and prices is superficially alluring. But almost invariably it ends in either taxpayer funded over-supply or rationing.

 A brief look at New Zealand’s own history in the energy sector provides ample evidence, with the Think Big projects of the 1970’s an example of well-meaning but ultimately financially crippling supply-side state intervention.
It is literally a return to the policies of the 1970s.

It is illuminating that Labour cites California, Virginia, South Africa and Brazil as poster children for the centrally planned electricity model.

A quick scan of media headlines in three out of the four markets from the last quarter alone shows significant supply problems:

California Girds for Electricity Woes”, Wall St Journal February 2013
Biggest Crisis Since 2008 Looms for South African Mines: Energy”, Bloomberg March 2013
Fears grow of Brazil power shortages”, Financial Times January 2013

It is not surprising when you have a government department in charge of deciding how much power New Zealand needs, and how much it should cost.

The electricity market is extraordinarily complex – the notion that a central planner can sit, Wizard of Oz-like, making long term planning, production and price decisions more efficiently than thousands of minds working in a market process is hopeful.

Of course there is a role for the Government in the economy, including the electricity sector. It is as a regulator, not a player.

Exactly. This not a choice between an unregulated market and a regulated market. It is a choice between the Government being a regulator or a player.

Transpower and lines companies are already heavily regulated, and supply and retail companies have industry specific regulation also.

KiwiSaver is an example of a virtuous circle, with fund inflows encouraging new floats such as Trade  Me, and encouraging broader investor interest in the local equity market. This will in turn help future promising businesses raise capital via local investors rather than selling directly to offshore trade buyers.

We believe the latest policy, as announced, will be an example of a vicious circle. Share prices in the electricity companies are already falling – which directly impacts New Zealanders savings via KiwiSaver.

And will dry up future investment

Four reasons why nationalisation won’t reduce the cost of electricity

April 23rd, 2013 at 10:00 am by David Farrar

Labour and The Greens say their policy will reduce the cost of electricity to households by around $300 a year, or $6 a week. But there are some very good reasons to doubt that power charges would be even one cent cheaper under Labour. Here’s four reasons why.

1. David Parker said so

As Minister of Energy he said that “a single buyer would likely result in higher capital and operating costs”. He went on to say that: “The risks involved in changing arrangements could be significant. The resulting uncertainty could lead to investment proposals being put on hold. Direct implementation costs could be large.” And, he admitted that “The single buyer would be relatively poor at sustaining pressure on operational costs.

So who do you believe? The David Parker of 2006 when he was a Minister or the David Parker of 2013 desperate to regain power?

2. Their plans for the Emissions Trading Scheme

Steven Joyce pointed out:

“When National was elected to Government in November 2008, Labour’s Emissions Trading Scheme was estimated to cost an average family of four around $330 a year based on a carbon price of $25/tonne,” Mr Joyce says. 
“The National Government amended the ETS and more than halved the cost to families and businesses. However the Greens-Labour coalition have stated publicly as recently as the beginning of this year that if they were the Government they would increase the price of carbon to $50/tonne.

“This would see a family of four paying $495 extra a year on electricity and fuel; which would more than wipe out any of their claimed savings from their plan to nationalise the power supply.

3. Their policy ignores costs

Economist Matt Nolan commented at Dim Post:

walking out and saying “I’m gonna get people to give you guys $230-$330 a year at no cost if you vote for me” is a incredible load of crap – it isn’t even a bribe because they can’t deliver, it is a lie.

3. The Government will be both the monopoly buyer and seller

This is an aspect overlooked by many people. Not only will the Government be the sole monopoly buyer of electricity from generators, it will be the sole monopoly seller of electricity to retailers. And it will clip the ticket with a margin between buying and selling.

Now sure at first that margin may be modest – just to cover claimed costs. But think about what is likely to happen in the medium to long term. What will happen when inevitably a Government wants more money to fund its spending? They’ll be able to do it by just increasing their margin on electricity sales. A 10% margin would bring in $600 million a year. A 20% margin $1.2 billion. This will be like a special slush fund for politicians who like to spend.

At the moment if the Government wants to significantly increase its revenue, it has to go to Parliament and ask for a change in tax rates. A special law change has to be enacted. It is a public accountable transparent act.

But why go through that process, when you an bring in hundreds of millions of dollars by just picking up the phone to the appointed chairman of NZ Power, and telling him you need some more money. And NZ Power will be the sole buyer and seller of electricity in NZ. No one at all can avoid paying.

Now some may say no Government would do this, as it would be unpopular. And sure in the first couple of years they may not. but if we now have Winston Peters talking about raiding our private KiwiSaver accounts to fund his promises, why on earth would they not use NZ Power as a revenue source in future?

You might even trust the next Government not to use a monopoly buyer and seller to generate revenue for the Crown. You might think the fact Labour took in $3 billion of dividends from energy SOEs was an aberration. But what about the Government after them? And the one after that? Do you really think no future Government will ever try and use a monopoly to generate revenue when it is needed to fund promises?

So I’d be very very wary of the claims that power prices will come down. Sure maybe for a year or two. But I think the more likely outcome is this becomes a cash cow for future Governments.

Current Power Price Increases

Labour have gone on a lot about the increases in power prices in the last 15 years, neglecting to mention most of the increases occurred on their watch. I thought it would be useful to calculate how much power prices have increased since 2008, when you exclude two external policy changes.

The electricity CPI in December 2008 was 1175 and in March 2013 was 1368. That is an increase of 16.4% over 17 quarters.

But GST went from 12.5% to 15% in that time. So to calculate the underlying increase, we should exclude that. That means 2.2% of the increase was due to GST.

Also the Emissions Trading Scheme was implemented. Officials estimate that the impact of this on electricity prices would have been 5%.

So take 7.2% off 16.4%, and this means that underlying power prices have increased 9.2% over 17 quarters.

A 9.2% increase over 17 quarters is equal to a 0.52% compounding increase per quarter, which is very close to 2% a year – which is the midpoint of the target inflation range.

All about power

April 22nd, 2013 at 11:00 am by David Farrar

Stuff reports:

Labour is defending the release of its plan to regulate power prices on the eve of the Government’s sell-off of power company assets.

Yesterday, Federated Farmers accused Labour and the Greens of trying to sabotage the sharefloat.

“There is suspicion this policy may be a tactical response to the Government’s asset sales programme,” Federated Farmers spokesman Anders Crofoot said.

However, Labour finance spokesman David Parker said if Labour had waited till after the shares in Mighty River Power and the other state-owned power companies had been sold it would have been criticised.

Of course it is sabotage. If it was not sabotage, they would have announced the policy months ago before the float document was released. To wait until the offer document is out in the marketplace is a calculated act of economic sabotage.

If their policy was to buy back MRP, then there might be a case for saying they had to wait to see the float details before announcing their policy. But there is nothing in the details of the MRP float that necessitated them waiting until after the float document was out, to announce their policy.

Here’s the good thing for investors. Their policy will probably see the share price set at the lower end of the range, however I don’t think it will ever be implemented which means that actually investors will get shares at a discount. Note this is not financial advice. So the real victim of the policy announcement will be taxpayers.

On the topic of the electricity policy, some must reads:

  • An open letter from Seamus Hogan to David Shearer and Parker. He has 10 questions for them, including if they have even read the Wolak report they cite.
  • A lengthy article by Lance Wiggs at NBR on the electricity industry and some more sensible alternatives to the Labour/Greens proposal.
  • A column by Brian Gaynor on how the Labour/Greens policy would be a “major backward step for the economy” and saying “The best way to keep prices down is to ensure there is a competitive market rather than heavy-handed price regulation that is more reminiscent of the Muldoon era
  • A column by Liam Dann. Some extracts:

We’d all like lower power prices. It’s a clever election bribe. But if a government bludgeons down the returns available to international investors they simply won’t invest, they’ll go elsewhere.

New Zealand taxpayers in the future – my kids – will have to earn or borrow the money to pay for new power generation as the population grows.

 Capital is mobile.

If Labour wants to gain votes from swinging voters who still trust capitalism – rather than just appeasing those on the left that joined the Russel Norman party – then Shearer is going to have to do a very good job of convincing them that Labour is not a destroyer of wealth.

Shearer needs to distance himself from the gleeful schadenfreude of those who celebrated the $600 million value destruction suffered by Contact, Infratil and Trustpower in the day and a half after the new policy was announced.

As the policy was designed to sabotage the float of MRP, and destroy wealth, I can’t see any distancing.

He will need to communicate clearly how this policy ensures we have enough foreign capital investment to grow power supply as GDP grows. Presumably Labour still hopes it will grow. The Greens, remember, aren’t so wedded to GDP growth as a concept.

Despite Norman’s efforts to normalise the Greens by talking more about economics than core policy, this is still a party living in a hippie fantasy world. It is a party that “envisions an organic nation” in its policy on food production. Good luck with that. New Zealand owes its first-world status to a world-class, technologically-driven machine of a farming economy. We don’t put that on the tourist posters but let’s be realistic.

People don’t realise how extreme the Green policies are. Now Labour is buying into them, their joint policies are looking to be the an extremely radical policy change – at a time of huge global uncertainty.

It won’t stop at power companies

April 21st, 2013 at 7:00 am by David Farrar

I don’t think people realise the precedent that will be created if you allow a Government to nationalise the entire power generating industry, on the grounds that they are not competitive enough and charge too much.

I said that using the same logic, you could nationalise supermarkets on the grounds we do not have enough competition there. Any politicians from the left have been going on about the lack of competition there for some time.

Now Fran O’Sullivan says the energy policy is a Chavez style nationalisation. Well read this story to understand where things may end up:

Citing price-gouging and “multiple violations of Venezuelan laws”, Venezuela’s President Hugo Chavez has nationalised Exito, a chain of supermarkets under French and Colombian ownership.

Chavez accused the chain of raising food prices without just cause, after Venezuela devalued its currency earlier this month.

Now both Labour and Greens want to devalue the NZ currency. The inevitable impact from doing so, is price increases. So if supermarkets increased their food prices, it would be the perfect excuse to introduce a single buyer for food also, effectively nationalising supermarkets also.

Some people may say Labour’s policy is not nationalisation, but it substantially is. In theory the power companies remain privately owned, but they will be forbidden by law to sell to anyone but the Government at whatever price the Government demands. That is effective control.

Ignoring the cost of capital

April 20th, 2013 at 2:15 pm by David Farrar

I blogged on Wednesday the following graph:



I was pointing out the Greens are against nuclear, coal and large hydro which doesn’t bode well for the future cost of power.

Now Gareth Hughes has responded with this graph:



But do you see what is missing? The cost of capital or construction. These costs are often the largest part of total costs.

Of course once you have a dam in place, or a wind turbine in place, the operating costs are less than having to keep digging up coal from the ground. But capital is not free (unless you print money!) and there is an ongoing cost to capital – either interest or opportunity cost.

So if you look at the graph I provided, it shows that solar has no operating costs (of course) but huge construction costs.

Now don’t get me wrong. I think renewables are the future. I think wind, hydro, solar and even tidal are part of our future energy supply. But they need to be cost effective. Blanket bans on coal and large hydro are not the way to go.