Labour-Greens power policy could work, says Vector CEO Mackenzie

Vector boss Simon Mackenzie
Labour MP Shane Jones

The electricity policy announced by the Labour and Green parties could be made to work and the current debate is overly emotive, says the chief executive of the regulated monopoly electricity and gas network owner, Vector [NZX:VCT].

Simon Mackenzie told BusinessDesk he was encouraged by the fact the proposed central purchaser system would incentivise commercially rational investment in energy efficiency, and that the opposition parties were not pursuing direct subsidies.

He also welcomed the fact Labour was proposing to simplify regulation of lines companies, which has become enmeshed in the courts after policies Labour implemented was "not tracking as was intended", Mr Mackenzie says.

There was "no perfect model" for electricity systems, and other countries used similar methods to set prices and to procure investment in new power plants as demand rises.

At present, new generation is procured by competing generators identifying the "next least-cost" of new generation and deciding to build it.

Under the Labour-Greens model, a central buying agency and market regulator, NZ Power, would tender for new generation capacity.

"There's competition for providing that next plant," said Mr Mackenzie, who stressed he was "not taking political sides".

"The model is used in other jurisdictions. It has its pros and cons. It's made to work."

Took some convincing
Labour's regional development spokesman Shane Jones told BusinessDesk he had taken some convincing to abandon the market model which Labour presided over during its nine years in power from 1999.

But he was convinced lower-priced electricity would create jobs in energy-intensive regional activities such as the timber industry.

The Labour-Green policy would deliver an "equity dividend" for New Zealand households and businesses by removing some of the profits made by power companies.

"Not only asset owners need dividends," he says. "Politicians need dividends as well."

To win the 2014 election, Labour needed to move about 5 to 7 percent of the voting public to favour it.

He suggested energy analysts' capacity to "make 5 to 7 percent of the public hate us [because of this policy] is zero. Our capacity to impress that percentage [with this policy] is infinite."

Mr Mackenzie says the policy is "focusing on small-scale generation, energy efficiency and how that works in the market not through subsidies".

He was defensive about generator-retailers trying to "pass the parcel" on rising power prices to lines companies.

Increased national grid transmission charges, reflecting a multi-billion upgrade by state-owned monopoly grid owner Transpower, are one reason electricity prices are forecast to keep rising in coming years.

Local network charges have also been rising, although the Commerce Commission has ordered deep cuts in charges on some networks, including Vector's.

Contact Energy CEO Dennis Barnes has questioned whether the company would have invested $2.5 billion on new geothermal and gas-fired generation plant in the last five years if the Labour-Green policy had been in place.

Shares of Contact Energy have fallen about 10 percent in the day since the policy was announced, leading to expectations the policy announcement has effectively cut the issue price for shares of state-owned generator-retailer Mighty River Power shares, 49 percent of which are being offered to the public ahead of a sharemarket listing scheduled for May 10.

The other NZX-listed generator-retailer, TrustPower, has fallen 6.8 percent today to break through its previous 52-week low of $7.20 to trade just after noon at $7.05. TrustPower's 50.5 percent owner, Infratil, has fallen 2.6 percent to $2.27.

Contact, Infratil and TrustPower are leading falling stocks in trading today.

(BusinessDesk)

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17 Comments & Questions

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A "once over lightly" policy, given a "once over lightly" viewing....The contact CEO however does raise what is the real issue for this policy - investment in new capacity. As long as NZ doesnt need any new capacity ever, or need significant maintaince, then this policy would work. For those of use who use electricity via KCE, know that electricty compnaies can always come up with new ways to make money. Price of electricity is such a samll part of the equation - shame the watermelons cant see that, or choose not too !

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It is interesting reading how the govt is looking into how we are charged.
Why do they not spend a little time and money search for something that will benefit the population rather than corporations.
One man comes to mind. A man very few have heard of, and a man whose work the energy corporations definitely do not want heard of.
Why, you ask? Because his research if released to the general public would change our lives dramatically and take away the profits from the corporations and power away from the govt.

This is not some conspiracy, It is fact, and the question that should be ask to our politicians is, why does this technology remain hidden?

The man's name is Nikola Tesla.

Tesla is finally beginning to attract real attention and encourage serious debate nearly 70 years after his death. Was he for real? A crackpot? Part of an early experiment in corporate-government control?

We know that he was undoubtedly persecuted by the energy power brokers of his day -- namely Thomas Edison, whom we are taught in school to revere as a genius. He was also attacked by J.P. Morgan and other "captains of industry". On Tesla's death on January 7, 1943, the US government moved into his lab and apartment confiscating all of his scientific research, some of which has been released by the FBI through the Freedom of Information Act. (I've embedded the first 250 pages below and have added a link to the pdf of the final pages, 290 in total).

activistpost.com/2012/01/10-inventions-of-nikola-tesla-that.html

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A self-serving "I am OK, so why should I care?" comment if ever I have seen one.

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Was it not Labour who first started to deregulate the electricity sector to save us all money years ago? Didn't work then; why will it work now?

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I dont get it, last month Vector was spewing vitrol about regulation being terrible, because it was happening to them and now he is trying to support the whole sector being managed through a central agency. zero credibility!! He must be eying up the NZpower job!

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Greens don't seem to have noticed that single buyer markets have the effect of reducing the incentive to build renewal generation. If you are going to provide a 10% return to two different plants and one has no certainty of revenue (eg, wind) and one has certainty (thermal) which one would be chosen? Where is supply risk in this model?

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Over half my power bill is daily fixed charges, capacity charge, congestion charges and these have seen the biggest increases in the last 5 years. The power price is still12.78 cents per unit.

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I don't get how Labour were crying about loss of income from partial float of power companies. Now they've decided to forego the income, divvies and taxes, with nothing in return. At least National will build new assets/infrastructure.

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They won't build infrastructure. What they will do is engae in PPPs that cost the taxpayer 3x the amount it should... Boys club.

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I can say one thing for sure, having authored a couple of the better "stags" of the '80s.There is no stag here any more.

They are running from their lattes and wrung out flat whites on Ponsonby and Jervois roads.

The smart money will now sit this out, watch Key bulldog his way through to allotment and the thing will become exactly that - a dog, for a long time.

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The Labour Greens announcement may knock about 20-30 cents off the value of MRP. Mercury Energy (retailer) would likely be split from MRP and it could even end up reunited with Vector (if that is allowed).

With NZ Power responsible for ensuring new generation is bid for, it does mean central planning. However, we are likely, if the smelter closes within 5 years, not to need any new generatyion for quite some time.

But when we do, a prefered market risk/solutions to central planning that in the past either invested too little too late, or at other times too much too early. Both mistakes are very costly to the economy.
Genesis, with its USP in March 2011, did not help the trust in the market, but that was one hickup which the EA sorted out.
Ther market system can always be improved. Dismantling it means we settle for what we once had; it wasn't too good. But yes, it can work.

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I am interested in the reduction of profits for these companies - do not these companies pay tax on profits? So if you reduce the company revenue and maintain the company costs then profits and tax on profits will be reduced. Further, do not these companies pay dividends to the government? These 5000 people, I assume, are working for the Government?,
Ok, I am not a finance expert but get the feeling that, yes, this option will deliver some savings to the individuals who buy power, but it does seem that the government will get reduced tax, reduced revenue via dividends and will incur more costs with these 5000 workers.

If I am right (and I might not be, I do admit) did I miss the bit where the Labour and Greens explained where they would make up the government losses in this.

Further and I am willing to see more in depth research into the viability of this, but if a government was to set the precedent of taking steps to limit profits of business - what are the additional impacts that might come from this?

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Yeah, price controls ... that'll work.

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This move is a breath of fresh air. It now needs careful work to refine it - but keep the existing industry players away from it. They hijacked the last reform process, in their self interest, made it too complex and costly, aided by naive politicians who didnt understand what they were doing. Nor did most officials, especially Treasury. It's not about dogma, it's about simplicity, transparency and effectiveness.
Get it right and a lot of cost can be taken out of the industry and its regulation.
The last reforms not only screwed households with excessive costs but damaged competitiveness, fatally. So we export logs, not added value! Who would invest significantly now where there is an electricity dependence over the life of the plant.
Who will invest in new generation - easy! Competitive process, clear and simple rules. Been there already!

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This is not fair. What happens to our super bonuses and other perks. This will affect our lifestyle. Our investors expect us to give super profits and if that stops we will have the ones that will have to tighten our belts.
The gain to the housolds will be just $300 but the loss to us (corporate executive ) will be huge.

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A single buyer market is a genuinely competitive market in an international market for building and operating power stations against a long-term contract. It will allow us to coordinate the electricity system for lowest cost operation while retaining the benefits of private ownership and operation. if shareholders will have a steady return and the risk will be low. As it should be for a market delivering something that we cannot survive without.

It was suggested to the Wholesale Electricity Market Development Group in the mid-1990s as the least risky option. Sadly, they opted for the option that guaranteed ever increasing prices and traded in a commodity that does not have price elasticity or an alternative good. The generators maximise their profits by keeping us on the edge of the shortage. And this is what the market rules tell them to do. They regularly rort the market and it is entirely within the rules.

The electricity market has also devalued our once world leading demand side management system – ripple control. It cost consumers millions of dollars.

It is a pity that Labour and the Greens made such a mess of their proposal. They could have done a lot better.

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