POWER COMPANIES THREATEN SECURITY OF NATIONAL SUPPLY
12 February 2009
NICK SMITH
Electricity generator-retailers are threatening security of the national supply by making self-interested decisions to boost commercial returns, according to an independent report into the 2008 energy crisis.
Companies such as Meridian and Contact should have to pay much more for their power if caught short, as they were last year, it said.
Authors David Hunt and John Isles recommend rules be changed so the full cost of generator choices - such as whether to hedge should electricity capacity fall due to low lake levels - be fully borne by the "decision- makers".
Both companies benefited from the use of the government-owned Whirinaki thermal station, which supplied electricity at a capped price to the market during a winter when inflows to the hydro lakes were at their lowest since 1931.
This allowed the generator- retailers to pay less to supply customers, to the detriment of competitors and lessening security of supply, said Hunt, former Contact chief executive, and Isles, an economist.
The two companies caught short by the crisis are not named in the Hunt-Isles report but Electricity Commission chairman David Caygill confirmed it was Meridian and Contact.
Caygill would not be drawn on whether the commission endorsed Hunt and Isles' recommendations, but are seeking industry submissions by February 20 before issuing a draft proposal in response to the report.
While spot-market prices soared in response to the critically low lake levels "some thermal generation was available but was not used".
"Some South Island storage could have been conserved," the report said, and the decision to not use additional thermal generation "was contrary to the expectation of supplier behaviour set out in the Electricity Commission's security policies."
Most concerning was the "cost- shifting" distortion of Whirinaki, operated by the commission as "the supplier of last resort".
"Market participants know that if the system becomes sufficiently stressed they can look to the Electricity Commission for help and much of the cost will be met by others [from a general levy]," the report said.
"This ability to shift costs is undesirable."
This may have led electricity companies to make choices that led to greater risk if dry periods eventuated, they said.
The pair's concern, explained Caygill, while emphasising this is not necessarily the commission's view, is that Genesis lost potential earnings selling its energy to Contact and Meridian, who could not meet consumer demand because of low lake levels.
"Is that a problem? The review says, yes, potentially," Caygill said.
Are electricity companies threatening national security in pursuit of bottom-line interests? "They were well aware of their own commercial interests. The question is, if individual generators are left to pursue their best commercial interests, does that necessarily leave us in the best overall place as a country.
"Theory would say yes, if you've got the right incentives."
Hunt and Isles said the incentives, particularly with the market-moving entry of Whirinaki, are wrong.
Caygill agreed with the pair's emphasis on correct market price signals: "Price signals matter because of the cost consumers pay, but also because they are the basis upon which companies invest. If we discourage investment, we'll be insecure in future."
As for the use of Whirinaki during the crisis, Caygill said: "It's no mystery why. What we're trying to do here is maximise security [of supply] at the minimum cost."
The Independent Financial Review
(c) 2009 The Independent Business Weekly
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