JB Were on how single buyers works overseas

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

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