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

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.

Comments (41)

Login to comment or vote

Add a Comment