Small retailers argue we’re paying way too much for power. Big ones say the system is working just fine. Who are we to believe?

It’s been a strange few weeks for our electricity market. First came news that retailer Electric Kiwi would be refusing to take on new customers, citing ballooning wholesale costs that meant they would be running at a loss with every new account opened. 

Last week, an even bigger bombshell – electricity prices also mean Winstone’s huge central North island pulp and timber mills are temporarily shutting, risking hundreds of jobs. This was followed days later by news a paper recycling plant in Penrose was also considering a temporary closure.

Finally, the chair of New Zealand’s second-largest dairy collective talked about New Zealand as “sleepwalking into an energy crisis”. Open Country Dairy is in many ways a poster child for lower emissions agriculture, having converted its boilers to run on waste or wool pellets and set a target of 2025 to move on from coal – yet supply risks it described as essentially a certainty mean it will keep coal-fired boilers on stand-by well into the future.

A business refusing new customers. Another pausing production, risking vital regional jobs. A third having to maintain costly and high emissions equipment. For a country in the economic doldrums, nearly 5% down on a per capita GDP basis, it shows that the cost and reliability of electricity is becoming a major issue. 

The developments prompted an extraordinary interview with Shane Jones, regional development and associate energy minister, on RNZ last Thursday. In it he called the regulator, the Electricity Authority, a “chocolate teapot”, and said the major power companies, known as the “gentailers” are “probably the most powerful economic institutions in New Zealand, beyond the supermarkets and the Aussie banks”. He explicitly called out “profiteering”, a serious and potentially legally consequential accusation.

Winstone cited wholesale prices as high as $700 per megawatt hour (mwh) as driving its closure – up from around $100mwh a couple of years ago. Australia experienced its own sharp price increases this winter yet still kept prices mostly well below that level. Winstone says it has seen energy as a percentage of its costs rise from 10% to 40%, making it unsustainable to operate, and impossible to compete with manufacturers in other countries with cheaper electricity.

How could this happen? Part of our national myth is that New Zealand generates the vast majority of its electricity from cheap, renewable resources – largely hydroelectric projects built in the 70s. Yet a relatively dry winter means hydro lakes are below 60% capacity, hence the high prices – with flow-on devastating outcomes for business.

It’s not an issue for everyone, though. As Jones said, some in the electricity market are making more money than ever. Those involved in electricity generation and retail (the “gentailers”) are dominated by four large companies – Meridian, Contact, Genesis and Mercury – three of which are majority owned by the government. Far from suffering, high wholesale prices will lead to huge profits for the gentailers.

‘The market just blows up’

Perhaps this explains why we agonise over the profits of banks or prices at supermarkets, but electricity prices don’t seem to generate the same political fury. Electric Kiwi’s Luke Blincoe is extremely outspoken on the issue. He keeps a stable price for his customers through the use of hedge contracts, essentially rights to buy energy at a specific price. These have become so expensive he can’t buy them and still make a profit margin on any new customers. He draws a direct line between political inaction and the government as being the “single biggest beneficiary [of the situation], by way of dividends”. 

To Blincoe, “the lack of supply is a fundamental driver. New Zealand relies on a market to deliver efficient outcomes for an essential service. So if you’re going to place your bets on that, you better have a functioning market that delivers efficient outcomes. And we don’t have that, because we’ve got market power that allows the generators to really keep the supply balance tight, which keeps the market firm.” 

Blincoe says that by keeping the margin between supply and demand close, it almost guarantees huge price jumps. “When anything unexpected or abnormal happens in our hydrology or gas outlook, the market just blows up.”

According to Blincoe, the fundamental issue is that our biggest generators of electricity are also our biggest retailers of electricity. Even at very high prices, he says, “generation businesses are extracting monopoly profits out of the generation market, while cross subsidising hopelessly inefficient retail businesses.” He says the gentailers win even if their retail arms lose.

Electric Kiwi is not the only electricity retailer to have to take extreme action due to surging prices in recent years. Nau Mai Rā, which aims to help people other retailers won’t service, had to offload 500 customers in 2021. Flick spent five months refusing new connections in the second half of 2021 too. Three companies acclaimed for their innovation or customer-centric approach, all refusing new customers – surely an indication of a non-functioning market?

Is it really so simple?

Bridget Abernathy is CEO of the Electricity Retailers Association of New Zealand, which represents the major gentailers. She says the critiques, while understandable, are overblown. She characterises recent studies by the Electricity Authority, which regulates the sector, as saying that “overall, the market delivers well for consumers, that structural reforms were not justified, and any major changes to the market would increase uncertainty at a time of major transition for the energy sector, and would chill much needed investment.”

According to her, the current market design has spared households the volatility of wholesale markets. “The average household electricity bill rose about 6.5% over the last five years, and that’s in the context of a 20% increase in inflation, with cost of food up 26%, transport up 22%, and housing up 36% over the same period.”

To her, that shows that households are largely shielded from spot market volatility. Abernathy says Blincoe’s Electric Kiwi is part-owned by a British hedge fund, and could easily enter the generation market itself if it felt like the high prices warranted it. She also believes that the prices are in part a reflection of a reality that the country is in a period of enormous energy transition. 

“We’ve got a massive amount of investment required in this country between now and 2050. New Zealand’s energy sourced from electricity has got to grow from around 40% today to 60% by 2050. It’s got to be 95% renewable and available 100% of the time. These are massive investments required. And you know, it’s the gentailers which are doing the heavy lifting.”

Power users of electrical power

Given that surging prices have caused multiple major energy users to have to turn off their factories, you’d expect the Major Electricity Users Group (MEUG) to back Blincoe’s theory of our market problems. It’s true to an extent – its chair John Harbord agrees with the idea that our market design has an impact, and that hugely profitable generation businesses can end up suppressing innovation by masking losses on the retail side.

However, when asked to nominate the most important reason for staggering increases in wholesale prices, Harbord says it’s “the nature of our energy mix”. What this means is that while we’re rightly pleased with the total volume of renewable energy in our system, renewables are always supplemented by what are known as “firming” electricity sources. Currently this often means coal and gas – with gas preferred both due to its lower emissions profile and the fact we have domestic sources. 

Harbord says that the three core elements of electricity are reliability, affordability and sustainability, and that the previous five years saw an overemphasis on sustainability at the expense of the other legs of the stool. As the above chart shows, the quantity of gas in our energy mix has been falling for some years – something Harbord puts down to the previous government’s decision to ban exploration for new wells. As a result, the current government is considering importing liquified natural gas (LNG) to cope with the crunch. 

He believes the lack of domestic gas is the driver of a steady rise in the cost of wholesale electricity, from $65-80 per megawatt hour (mw/h) six years ago, to more than $300 per mw/h for months at a time this year. And because large energy users use hedging contracts which lock prices in for years into the future, elements of the current crisis will linger long after wholesale prices come down. While there is a major push to increase renewables, sometimes it’s dry, cloudy and the wind doesn’t blow, which means that you need a backup plan.

Who should we believe?

The truth is that the electricity market is phenomenally complex. As Harbord says, moving electrons around a long, thin, hilly, sparsely populated pair of islands is inherently complex. It’s deeply seductive to think this could be solved with one major regulatory move. Most tantalisingly, the prospect of a breakup, like that which the Helen Clark Labour government forced on Telecom, to become Chorus and Spark. 

For his part, Blincoe believes it’s time. “Telecommunications reforms in New Zealand already provide a clear blueprint for efficient, well-targeted regulation that benefits consumers,” he says. But it carries risks too. It’s a huge measure, and both Abernathy and Harbord believe it’s a bridge too far. 

Mike Casey from Rewiring Aotearoa , who I recently saw talk about his all-electric South Island cherry farm, is beloved by everyone from Groundswell to the Greens. He believes that there is a financial case for a huge increase in roof-mounted solar connected to EV batteries, which will help meet the need for more and more electricity in future, from transport to data centres to generative AI. 

That’s a consumer revolution – and really could happen, over time. But for now, all eyes are on the government, the biggest winner out of high wholesale prices, but furious about them too. The next few weeks will reveal how serious it is about finally doing something about this issue – one crucial to the solve for climate change, but maddeningly complex too.