Having recently switched from investment banking on Wall Street in New York to leading a corporate team on Willis Street in Wellington, I am often asked to compare the quality of life and business climate between the two, and I always answer with a question – why did we not make the move years ago? Therefore, as a new and somewhat objective observer, I offer my first impressions of the utility industry in my adopted land down under.
This wonderful country has a population of only 4 million, and true competition in such a small market is rare. The utility industry is no exception. This tendency towards oligopoly manifests itself in the electron chain at the generation end. The traditional vertically-integrated utility model of generation, transmission and distribution has been disaggregated in New Zealand, so step 1 of utility deregulation is done.
However, while there are a number of generating companies who ‘compete’ against each other, all but two are wholly-owned by the government, and they are subject to regulatory oversight by, you guessed it, the government, plus they pay healthy dividends to, right again, the government. Moreover, the generators operate as essential monopolies within their respective geographic regions of the country, not unlike the hub-based airline industry in the US. So you tell me how much competition we should expect from such a cosy regulatory and shareholder structure.
Transmission constraints plague New Zealand too. Ironically, there is ample hydro generating capacity at the south end of the country on the sparsely-populated South Island, but the major load is on the North Island in Auckland and Wellington. NIMBY (Not in My Back Yard), the infrastructure investor’s lament, is alive and well in this environmentally-friendly nation, and legislation permits anyone to successfully oppose the construction of new interconnections between the supply and demand centres. Ergo, no new transmission capacity is in the offing.
The government appears singleminded in its fixation to address the growing energy crisis by deploying supply side solutions (building more generating capacity) rather than by creating the financial incentives for customers to reduce their consumption (energy conservation).
Apparently such a technically-savvy population as we have here that understands reduced telecom calling rates at night and weekends, and knows enough to book ahead to get the best air fares, cannot be expected to understand that there is a cost difference between peak and off-peak electricity.
Anyone who survived the power crisis in California will appreciate the inherent systemic risk of shielding the customer from natural supply and demand price signals. We at Energy Intellect develop advanced interval meters, cellular modems and meter data management (MDM) platforms that serve to reduce electricity demand by empowering the customer with near-real-time consumption information and enabling time-of-use price transparency. However, energy customers here have no financial incentive to alter their consumption behaviour, yet their electricity bills continue to increase faster than the rate of inflation.
Does New Zealand’s energy market stimulate innovation? Sadly, no. The market’s inherent inefficiency and the government’s flagging political courage thwart the entry of new service and technology providers. Complacency is a dangerous thing, and the lack of economic stimulus in this market is already hitting the consumer (and voter) in the wallet through high energy prices.
New Zealand should take advantage of lessons learned by others. A decade ago, New Zealand was in the vanguard of utility deregulation, keeping apace of other competition-minded markets like Australia, Scandinavia, the UK and many states in the US. But since then the political will has waned, stranding potential investors mid-stream between the fully-regulated rate of return model and the fully-competitive low-cost model. Just ask California how a semi-deregulated market performs during a period of stress.
The New Zealand legislature must finish deregulating the utility sector, introduce interval meters, and encourage tariffs to all energy consumers to create the incentive to manage electricity demand in a price driven, rational way. Come on, New Zealand, you’re more than half-way there – finish the job you set out to do, and please avoid the inevitable economic crisis of an energy sector melt-down.