Energy Minister Gerry Brownlee is briefly off the leash with a writ to lash the major electricity companies for the $4.3bn of “over-charging” found in the research by American electricity market regulator and academic Frank Wolak of Stanford University. The reality however is the Commerce Commission proposes to take no legal action against any of the generator retailers, which it says were legitimately using market power to maximise profits. The reality also remains all new generation options are more expensive than those of the past, especially with thermal options yet to face the cost of carbon.

Brownlee is not impressed by this as a major factor in future power prices. He says “the new Boeing jet engine is the most expensive ever, but the seats on the plane don’t cost more. I wouldn’t get too hooked up on one little aspect of a business plan.”

Such cavalier rhetoric about a fundamental input may suggest a very wide range of options are available to fix the Commerce Commissions finding of “serious systemic issues arising out of the current market structure, market design and market rules that provide the generators the ability and incentive to exercise market power under certain periodic and recurring conditions.”

Certainly Brownlee is saying everything is on the table and this is stoking nervousness in the industry about what kinds of outcomes a John Key Govt might countenance. When Brownlee gets more specific, however, the language becomes less scary. He expects energy prices to be set by market mechanisms. He is indicating “re-design and augmentation” of the market rules that operate when hydro lakes are low. He also acknowledges Wolak’s methods are open to contest.

At the heart of the Wolak analysis are assumptions about the value of stored hydro water. By concentrating on the short-run marginal cost of water, critics say Wolak has trivialised the importance of the long-run marginal cost of new generation options as the primary guide to what power station gets built next. Outcomes in NZ to date under current market arrangements have succeeded in prioritising new projects roughly in order of their cost of production, as desired.

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