Power price policy: A matter of religious belief

Your policy stance on power prices may depend on how much Kool-Aid you've imbibed, writes Pattrick Smellie.

Don’t get me wrong. I drank the Kool-Aid during the seven years I spent in corporate public relations for a power company.

I think Labour and the Greens’ central buyer policy for electricity, NZ Power, will be much less effective in practice than its politics.
But I would think that, wouldn’t I?

Back on the righteous side of the line last year, reporting for BusinessDesk, I met a US electricity market development from a leading Harvard academic, who was breezing through. He described the tortuous development of an arcane range of financial instruments and tradeable products required to deal with the deeply finicky nature of electricity. Not only is it a product that can’t be stored, it must also be constantly available, and only in the quantities required to meet demand at that moment. Get that wrong, and the whole thing blows up like a physics experiment gone wrong. 

There are two basic alternatives for achieving this balance. The first is to have public service boffins at a central government agency calling the shots, or have trading rooms all around the country making calls seeking the best answer, based on their own needs. A market, in other words.

If you believe in the power of government, have never believed in the electricity market, and have ever read anything about Enron, you’re going to like option 1. Roughly speaking, it’s the Labour-Greens option.

But if you believe in industries involving hugely expensive capital assets with very long commercial lives, whose primary purpose is to provide security of electricity supply at the lowest possible cost, you may prefer option 2. That’s the one where a prolonged process of trial and error leads to a market where prices encourage deep-pocketed (preferably private) investors to build new power stations in time to deal with demand growth because they think they can make a buck at it. New Zealand has that arrangement now.

But the professor got me thinking it all sounded like Enron and that perhaps option 1 might be better after all. Which, I asked, did he think was better: central government control or markets?

“Well,” he mused for a moment. “That’s really a question of religious belief.”

For readers of this magazine, with its focus on businesses that grow from creative cleverness and innovation, the preferred answer would presumably be Option 2.

The collective wisdom of those who make half-hourly the decisions that shape the New Zealand electricity market are always more likely to provide better answers than a monolithic central decision-maker.

Not only has dry-year hydro management improved under market arrangements, but the rise in the price of electricity has underpinned a massive shift to renewable geothermal and wind energy.

The NZ Power policy, with its primary focus on the energy price to consumers rather than security of supply – a big call since electricity consumers are angriest when it’s not available rather than when it’s price goes up – would almost certainly see heavier use for longer of coal and gas-fired power generation facilities already operating in New Zealand. And that’s a perverse outcome for political parties that say they’re more committed to dealing with climate change than the current government.