Article for The Independent on Electricity
Max Bradford MP, Former Minister of Energy

This year has been a watershed for the electricity industry. Not since 1992 has the vulnerability of the system to dry years been brought home close to industry and, to a lesser extent, household consumers.

In 1991/92, a similar dry year exposed consumers to the risk of blackouts. At the time the industry was much more vertically integrated than it is now, where ECNZ and local monopoly supply authorities controlled the market. Few knew of the emerging crisis until too late.

The proposal by the 1992 Electricity Shortage Review Committee to provide much more information to the marketplace was acted on. Unfortunately, that information seems to have been ignored by the marketplace in the early stages of this year when another 1992s dry year loomed large.

With the benefit of hindsight, it is clear that the price signals of a significant rise in wholesale electricity prices through May to July caught many electricity companies and their consumers by surprise. Some companies had no contracts of supply at agreed prices to hedge their risks, or had not been advised by their power supplier of the risks they faced.

As the hydro system was well supplied with water in the 7 years after 1992, the electricity industry in general and business enjoyed low prices in the wholesale market. Indeed, with the final stage of implementing a fully competitive wholesale market in 1999, prices fell significantly to the benefit of commercial consumers and electricity retailers purchasing power through the wholesale (or spot) market.

Had there been a normal hydro year, those low prices would probably have continued. Even now, prices in the wholesale market have dropped back almost to pre-crisis levels, so the question is what should happen in future.

Peter Kammler (Independent, 7 November) has usefully suggested that the electricity market needs to develop demand side pricing where the risk of shortage can be paid for, a little like an insurance policy or a foreign exchange hedge. Alternatively, in return for a low price consumers contract to reduce their consumption in the event of a shortage of hydro capacity.

Mr Kammler was utterly wrong, however, in saying the reforms of the 1990s "actually designed power crises into the system". If that was so, there would have been little new generating capacity built over the period. In fact, over ??MW was built, much of it efficient thermal plant that has lessened the hydro risk.

The essential problem remains though. New Zealand's hydro capacity has little long run storage, and unless consumers are prepared to either pay for (sometimes) idle non-hydro generation to cover the occasional year when it doesn't rain, then the electricity market will have to begin offering interruptible electricity supply properly priced to give consumers plenty of notice to enable the demand for electricity to be managed when it is needed.

On Energy learned the lesson the painful way. It had contracted to supply at fixed prices, and when wholesale prices rose to reflect the hydro shortages, it lost the proverbial shirt.

Unlike previous years when such a commercial mistake would have been borne by household consumers, the market put the cost - properly in my view - on the electricity supplier and its shareholders. The events of 2001 were predictable, as more hydrological and pricing information was in the marketplace then ever before, as well as the searing experiences of 1992 and 1987.

In most respects the electricity reforms of the late 1980s and 1990s have succeeded. There are residual problems in the pricing methodology of the wholesale market, constraints in the Transpower network that need resolution by Transpower meeting what its consumers want at a reasonable cost, and the development of more relevant pricing for retail consumers as Peter Kammler has pointed out.

There is still a problem with some sections of the monopoly lines companies. Some estimates put the cost to consumers as high as $200 million a year. Why the government is dragging the chain with the regulatory framework is mystifying, when the problem was clear in 1999 and Labour and the Alliance, amongst others, blocked the legislation to deal with it.

On the whole, retail consumers have done well since 1999. The implementation process of the last big stage of the reforms was rough on some participants, and with 20:20 hindsight another six months for implementation could have smoothed the problems.

Over 500 million consumers in virtually all OECD countries will benefit from competitive markets in the next few years. The reforms introduced in New Zealand are now mainstream policies in the OECD, and have brought significant consumer gains in terms of choice of supplier, and lower electricity prices.

In New Zealand, for the first time household prices have flattened off in nominal terms, and fallen in real terms, according to official CPI data. This only occurred after the retail reforms were announced in September 1998.

Commercial electricity prices fell 20 percent in real terms in the same period, although some of this huge gain will be offset by the events of mid 2001. The same occurred for consumers in the agriculture sector.

Another test of the health of the reforms is the willingness of consumers to change their electricity supplier, something they could not do before the reforms.

Since April 1999, over 450,000 New Zealanders have changed their power company, one of the highest switching rates in the world. Although we hear of horror stories, they have to be the exception rather than the rule. Over 90 percent of consumers have a choice of supplier now, and the industry needs to strive to make that 100 percent.

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