• Wolak disbelieved but politically potent.
• “Half-measures” deemed insufficient.
• Asset reallocation looking attractive.

Work is proceeding apace on the report for Cabinet from the Ministerial Review of the electricity sector, with a first draft from MED officials circulating for comment among the panel of experts appointed by Energy Minister Gerry Brownlee. The paper is due to pass through the Cabinet for release and public discussion by early July. Soundings by NZ Energy & Environment Business Week suggest that the biggest challenge is to match political expectations created by the Minister’s handling of the controversial Wolak Report, while encouraging investment in electricity production. Wolak’s report has been used to accuse the big four power companies - Genesis, Contact, Meridian and MightyRiverPower - of “gouging” power users of $4.3bn between 2001 and 2007.

In official circles, among Ministerial working party advisors and senior politicians including the PM, there is little faith in Wolak’s findings. As previously reported, Wolak’s Californian model is widely slated for failing to understand the value of stored water, in particular, in the NZ context. As a result, most of the focus of the current review is drawing on the 2008 Winter Review, undertaken by consultants John Isles and David Hunt, of Concept Consulting, and the Market Design Review work undertaken over the last couple of years by the Electricity Commission. This stacks irony upon irony, in that the EC is officially in the dog-box with Brownlee, but its work is being taken seriously, while the Wolak findings are political flavour of the month but are being largely discounted in the detail of the review.

There is, however, one set of suggestions from Wolak which may yet find favour: the potential benefit to wholesale market dynamics if the ownership of the power stations belonging to the SOE’s were shuffled around. Wolak says “structural remedies include considering the balance of each generator’s fossil and hydro generation assets, and the geographic spread of generation units.” In particular, as first reported here in March, there may be powerful arguments for stripping Meridian Energy of some of its South Island hydro assets and replacing them with some thermal generation.

Other options include a compulsory insurance scheme, a central purchaser for wholesale electricity, and the long-discussed potential either to re-merge the three electricity SOE’s into one company or to force a split between the generation and retail electricity businesses. The latter two options have failed to find favour in previous periods of political stress over electricity market arrangements, while the insurance option risks shifting the burden of responsibility for security of supply to consumers rather than generators. Technical or incremental change would be too little to offer now the $4.3bn “rip-off” is embedded in the public mind.

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