The cost and functionality of electricity in New Zealand has been under close scrutiny. Ben Fahy asked the experts about what’s happening with the energy system.
This content was created in paid partnership with Flick Electric.
A good, modern electricity system is a bit like a three-legged stool: we need it to be reliable, even when demand is at its highest; we need it to be affordable, whether for our homes or for our businesses; and, the most recent addition to that stool, we need it to be sustainably produced.
When you put your toast down or plug in your phone, you’re part of a beautiful dance between physics and capitalism. The electrons required to run our lives and businesses are generated by power companies (about 95% is generated by five major companies), transported to where they are most needed by distribution companies and then paid for at a rate that is meant to reflect the laws of supply and demand.
In New Zealand, the vast majority of our electricity is created by water that is stored behind big dams, with other generation sources like fossil fuels, wind, geothermal and solar making up the rest. When there is plenty of water behind those dams, the supply of cheaper energy is high and there’s less need for more expensive gas or coal-fired electricity to be created, so the price should go down. When the demand for electricity is high, as it is in winter, and we need more generation to match that demand, the price should go up.
So, does it work?
According to the Electricity Price Review from 2018, residential power prices in New Zealand have gone up by 48% since 2000 after adjusting for inflation. Prices for industrial and commercial clients were largely flat during that time but, as Bernard Hickey recently pointed out, “right now, wholesale electricity costs have tripled in 12 months and New Zealand burned through one million tonnes of coal last year” to keep up with demand.
An unexpected reduction in our gas supply, increased carbon prices, and weather patterns that mean our lake and wind levels have been lower than normal have affected the wholesale price. But even in dry winters we need our three-legged stool to stand up.
Auckland University energy economist Stephen Poletti has estimated the generation companies made $5.4 billion in “excess profits” between 2010 and 2016 because the wholesale market wasn’t truly competitive. John Harbord, the chair of the Major Electricity Users Group (MEUG), says the fundamental issue is that the cost of generating the electricity – and, increasingly, the amount of water stored in the hydrolakes – doesn’t appear to be reflected in the wholesale price. He says the cost to generate a megawatt hour from hydro is around $9-12 but the wholesale price has been as high as $500 this year.
Harbord says electricity is one of the top three costs businesses face and most of the smart ones have already taken major steps in terms of energy efficiency. But big businesses that use a lot of electricity have reasonably inelastic demand. This means the high wholesale price is affecting New Zealand’s ability to maintain competitiveness in export markets and threatens the viability of some of its members that have had to limit production.
New Zealand has generally sat in the middle of the OECD pack when it comes to industrial electricity prices, but it’s moved up the ranks in recent years. While Harbord says it’s not an apples with apples comparison (due to various subsidies for renewable energy and the fact that thermal generators don’t pay for their emissions), Australia’s wholesale price in July was much less than half that of New Zealand’s.
“The gap shouldn’t be that big,” he says. And the average wholesale price in July was more than double what the Interim Climate Change Committee said was “unaffordable for the economy”.
How do we bring the price down?
In most markets, competition does that. But Harbord argues there isn’t enough competition when it comes to generation.
The five big generators (or gentailers) are basically electron farmers that sell their product to their own retail arms, and then sell what’s leftover to the wholesale market. Competitors have accused some of them of setting higher prices for third parties, than what they sell to themselves. The Electricity Authority has investigated the claims and has ruled there needs to be greater transparency from gentailers around pricing to inform public understanding.
Around 357,000 New Zealanders now get their electricity from retailers outside the big five, which is a major structural shift in the industry and has created a vocal group of smaller challenger brands like Flick Electric and Electric Kiwi. The generators are now selling electricity to their competitors via the wholesale market. But despite these recent changes to the retail market, the big companies still hold around 84% of the market share.
The small retailers have criticised the set up for the way the generators can also compete in the same retail market and sell electricity to themselves at what is called an internal transfer price. There is little transparency on that price but it is thought to be lower than the wholesale price.
Poletti said bluntly in his report that “we should redesign the electricity market so that the profits are less and people pay less for electricity”.
What about the third leg of the stool?
Recently, the Climate Change Commission released advice aimed at guiding the government towards policies that will help the country reach its climate change goals. A big part of that is reducing the use of fossil fuels for transport, electricity generation and industrial processes.
That transition means the demand for electricity is expected to grow two-thirds by 2050 and the commission says we’ll need 47% more renewable generation in the next 15 years. The challenge is that the transition also needs to be affordable.
MEUG’s Harbord says the current volatility in the wholesale price is not a good investment signal and he believes it is stopping businesses from investing in electrification. One of the MEUG’s members recently had a business case for electrification rejected by its international board because New Zealand’s energy system was considered to be “a basketcase”.
The recently announced incentives for EVs and low-emission vehicles and additional fees for high-emitting vehicles are a good example of a carrot and stick approach to decarbonisation. But unless we have renewable and affordable ways to generate electricity, the irony is that EVs could be making the problem worse if we have to burn more expensive coal to charge them all.
What is energy hardship?
A lot of New Zealanders won’t be worried about whether they can afford to charge their EV. But they will be worried about whether they can afford to meet all of their home energy needs for heating/cooling, cooking, washing, showering, lighting, education and entertainment. That’s the accepted definition of energy hardship and research suggests that between one in four and one in five New Zealand households might be experiencing it, depending on how it is measured and where the people live.
The University of Otago’s Dr Kimberley O’Sullivan has been studying the link between energy hardship, housing and public health since 2008 and says households that are energy poor often restrict their use of energy as a form of budgeting.
“It often comes down to choices like to heat or eat, to heat or go to the doctor,” O’Sullivan says.
Electricity prices are consistently part of the problem, she says, although certainly not the only cause, and those who can only access electricity through more expensive prepay schemes are typically at higher risk of energy poverty.
One of the things O’Sullivan has found from her research is that those who are struggling to pay for their energy are often very aware of what it costs to, for example, “put a roast in the oven or put a load of washing in the dryer”.
Can’t we just, as mum used to say, put a jersey on? New Zealanders need to move past this stoic attitude to living in cold, damp houses, she says. There’s plenty of evidence that homes below the World Health Organization’s recommended indoor temperature of 18C (or 21C for homes with babies or the elderly) are detrimental to the occupants’ health. A study carried out by Statistics NZ in 2018 showed that the winter temperature was under 18C in a third of New Zealand homes and was also too hot in a third of homes during summer.
“We need to stop charging the highest prices to those that can least afford it,” says O’Sullivan. “The technologies and the options we have to address these thorny problems are growing. It’s really about the political and societal will to do something about it.”
Surely this issue has already been looked at?
Reviews into the sector have taken place every decade or so since the 1970s; the most recent was in 2018. This one was mostly focused on retail prices because they had increased so much faster than inflation and many of the recommendations are in progress now – although they have been, like most things in life, delayed by Covid.
The Electricity Authority is currently reviewing spot prices and the wholesale market due to recent volatility, stubbornly high prices and growing discontent from politicians, the business sector and independent retailers and it expects to announce the results later this year.
But independent electricity retailer Flick Electric and others believe incrementalism won’t get us where we need to go. In Flick’s view, the review is just tinkering around the edges within the existing regulations, when there needs to be a fundamental change to what chief marketing officer Sunil Unka calls a “system that is creaking”.
“The system is failing on sustainability, affordability and, as we’ve seen with recent blackouts, reliability. We can’t afford to wait any longer for change. With demand for electricity set to rise we can’t keep burying our heads in the sand, or our climate goals won’t be met and we’ll leave more New Zealanders in the cold,” says Unka.
Flick has launched a petition demanding reform of what it calls a “broken market”. The company is urging the government to separate the gentailers so that these companies can only generate electricity or retail electricity, but not both. At a minimum, Flick is asking for the government to bring equality to the marketplace by making all retailers buy power off the same market.
Says Unka: “We’re hoping that if enough New Zealanders back our petition, the government will have to listen and finally get into real, substantive action, at a time we need it more than ever for the well being of our people and the planet.”
Subscribe to Rec Room a weekly newsletter delivering The Spinoff’s latest videos, podcasts and other recommendations straight to your inbox.