The first blush of the NZ Power policy is another variation of models that have been tried, tested and failed for well over a century. That is, the state looks askance at the messy process of market-discovered price and production and figures it can do a better job.What Labour really means is that the government doesn't plan the energy sector. But that is the entire point of a free market, the government doesn't plan industries. Firms and consumers do the planning. As Hayek put it in his essay, The Use of Knowledge in Society,
Labour says as much in its policy document stating; “No one plans the New Zealand energy sector and ensures it operates for the benefit of all New Zealanders”.
The answer to this question is closely connected with that other question which arises here, that of who is to do the planning. It is about this question that all the dispute about "economic planning" centers. This is not a dispute about whether planning is to be done or not. It is a dispute as to whether planning is to be done centrally, by one authority for the whole economic system, or is to be divided among many individuals.So the energy sector is planned but within a market system it is planned by individual firms and households. For Labour, there is one authority, them, who will do the planning.
The idea of a central planner co-ordinating supply and prices is superficially alluring. But almost invariably it ends in either taxpayer funded over-supply or rationing.Another part of the current debate revolves around the so-called "super-profits" that the power companies are said to be making. But are these profits "super"? This report from Stuff.co.nz calls the superness of power companies profits into question.
A brief look at New Zealand’s own history in the energy sector provides ample evidence, with the Think Big projects of the 1970’s an example of well-meaning but ultimately financially crippling supply-side state intervention.
The Clyde Dam was built on price assumptions that are still distant 30 years later.
It is illuminating that Labour cites California, Virginia, South Africa and Brazil as poster children for the centrally planned electricity model.
A quick scan of media headlines in three out of the four markets from the last quarter alone shows significant supply problems:
“California Girds for Electricity Woes”, Wall St Journal February 2013
“Biggest Crisis Since 2008 Looms for South African Mines: Energy”, Bloomberg March 2013
“Fears grow of Brazil power shortages”, Financial Times January 2013
The Californian example highlights just one of the many ways a central planner can come unstuck:
Changes in California's market have attracted lots of new generation; the state expects to have 44% more generating capacity than it needs next year. Grid officials say they expect the surplus to fall to 20% by 2022, though it will remain high for about a decade. However, the surplus generating capacity doesn't guarantee steady power flow.The electricity market is extraordinarily complex – the notion that a central planner can sit, Wizard of Oz-like, making long term planning, production and price decisions more efficiently than thousands of minds working in a market process is hopeful.
Even though California has a lot of plants, it doesn't have the right mix:. Many of the solar and wind sources added in recent years have actually made the system more fragile, because they provide power intermittently.”
Of course there is a role for the Government in the economy, including the electricity sector. It is as a regulator, not a player.
None of this is to say that the current system, which sets prices at the marginal cost of the most expensive generation, is perfect.
Whilst likely more efficient, there is a trade-off that electricity consumers bear versus an average price model. So a discussion on New Zealand’s electricity market is a worthwhile exercise.
However, 1. New Zealand has had this debate before and found strongly in favour of the market model, and 2. We believe there should always be a strong bias toward the status quo given the increased risk and detrimental impact on investor sentiment that constantly changing regulatory regimes engender and for which NZ already has a poor reputation.
The country's biggest electricity firms generated enough profits over the past five years to buy every man, woman and child in New Zealand a new 40-inch Sony flat screen television.Labour has been quoting the Wolak report's figure of $4.3b as the size of these "super-profits". But as Seamus Hogan has noted before that report has come in for some "trenchant criticisms".
That's according to an analysis of power sector earnings since the global financial crisis, which showed Contact Energy, Genesis Energy, Meridian Energy, Mighty River Power and TrustPower collectively earned net profits of $3.2 billion.
But while the figures are eye- catching, and appear to add weight to a Labour-Greens bid to reorganise the sector under a cheaper single buyer model, the investment community notes profits have been slipping for years.
Operating earnings before interest, tax, depreciation, amortisation and other fair value movements have risen 5.6 per cent across the sector on a compound annual growth basis since 2008.
But over the same period, average profitability across the sector has fallen 3.6 per cent - a level analysts say shows these businesses are not extracting unreasonable amounts of profit from customers.
William Curtayne, a senior investment analyst at Milford Asset Management, said that while New Zealand had one of the highest rates of electricity inflation among developed countries, much of that had been to redress a past imbalance.
Businesses subsidised household electricity through higher rates in the 1970s and 1980s.
That's now unwinding, which is why retail power prices have been on the rise, but he said correcting for that showed New Zealand real power inflation was in the middle of the OECD average.
"In my view companies are not making super profits, earnings are flat, and there's been a pullback in demand."
There is also the problem of what effect yet another rapid regulatory shift will have on the wider economy. Investors more likely to demand a higher risk premium before they invest in the country. Regime uncertainty is never good for an economy.