Electricity Review Makes Generators More Responsible?
August 12th, 2009
All eyes in the electricity industry are on this week’s release of the results of the Ministerial Review of electricity market arrangements. While there are likely to be parts of the review not yet finished, and it will give scenarios rather than concrete recommendations, there is already evidence emerging of careful thought given to ways of creating both political and market wins for the vexed issue of electricity supply. Energy Minister Gerry Brownlee’s suggestion in a weekend TV interview the Govt could institute a rebate scheme for power company customers forced to save electricity has a lot going for it, as long as it doesn’t incentivise power companies to claim everything’s fine until too late in the piece.
Such a rebate would play directly to one of the most widely supported recommendations of the Hunt/Isles report produced after the 2008 dry winter, which recommended generators rather than power consumers bear the costs of failing to hedge appropriately against the risk of a dry year. Thinking in the industry to date has centred on two possibilities: 1) generators should face greater pressure than they have so far to enter into hedge contracts against winter shortages – a criticism levelled particularly at Meridian and Genesis, whom many in the industry say could have written better insurance contracts in the past to avert the habitual dash to the Beehive for another power savings campaign; and 2) shuffling thermal and renewable power stations between SOEs to give Meridian part of the Huntly gas and coal-fired power station.
Brownlee is endorsing a system which makes generators pay for their mistakes, and the idea of a customer rebate to reinforce this is clever because it gives customers a sense not only that they will be actively rewarded for making savings, but power companies will be actively punished if they get it wrong. This is perfect politics for the retributive political atmosphere which surrounds the electricity industry, which struggles apparently endlessly to engender public trust.
A combination of stronger wholesale market rules to require better hedge contracting, along with the threat of a further cost to compensate consumers in power savings campaigns, means there would be a heavy incentive on generators to “get it right” and not turn to the public for help so often. Add in the prospect of a new, higher prices than the current $200 per Megawatt hour at which the reserve plant at Whirinaki kicks into action, and the stage is set for a much more careful electricity industry.
Whether this political gesture will be enough to head off the asset reshuffle idea remains to be seen. To the extent that this suggestion is really no more than shuffling deck-chairs, it is likely to have struck resistance at Cabinet, especially if stronger incentives to obtain dry winter hedge cover are successful. Just one problem – appropriate hedge cover comes at a price – which should eventually be reflected in retail power prices.
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