Meridian Energy, having doubled its net profit to $184 million, says power prices are still too low. (Dominion Post 25 August, page C1). They say prices will have to rise to meet long-run energy costs.
Long-run costs are the costs of electricity from new power stations, including capital charges. These are much higher than the cost of running existing power stations. Pricing at long-run costs lead to very high profits, which increase every time fuel prices increase.
Only some of the profit is being re-invested in new power stations. In the case of Meridian, some of those new power stations are being built overseas, to capture subsidies available in Australia and the U.S. This does nothing to meet New Zealand’s growing electricity demand. Nor does it create a surplus of generation that would make supply more reliable – but could also drive wholesale prices down.
This long-run pricing principle was promoted by the Electricity Corporation (ECNZ) in its Annual Report of 1992. It raised a storm of controversy that led to a Parliamentary Report on Wholesale and Retail Electricity pricing. The Committee found no justification of long-run pricing, and instead advocated increased efficiency in retail pricing instead, especially the “Hydro New Zealand” proposal for progressive pricing, now advocated by the Greens.
The two private generator retailers, Trustpower and Contact Energy promoted long-run pricing from their beginnings Meridian is probably the first State Owned generator to support it publicly. It is also embodied in the electricity price forecast of the Ministry of Economic Development.
Long-run pricing assures the commercial viability of new power stations. It means that rising power prices will give a guaranteed return on investment in new power stations and lines.
This guaranteed return is not consistent with a competitive electricity market. It denies choice to many consumers - the choice to spend their money on their own equipment to reduce power bills - for example by insulating their houses, installing solar heating or wood burners, or even generating their own electricity from the sun.
People who can afford such investments are increasingly making that choice. Their investments mean that electricity demand will grow more slowly, and fewer new power stations will be needed.
Low-income householders are denied that choice. They cannot afford the $1500-$$2000 typically required as a contribution towards a Warm Homes/ Clean Heat retrofit. Instead they simply pay the rising power bills that enable new expensive power stations to be built.
If Government insists on the long-run pricing principle, then Government’s share of the windfall profits must be prioritized towards greatly increasing the number of household retrofits for the lowest-income people, including people in rental housing.
This would not only cut our power bills, but reduce the need to build new power stations and save carbon emissions. Most important, it will create warm dry houses, improving the health of many of New Zealand’s most vulnerable citizens.