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It’s the market, stupid: that’s how power works

HIDE SIGHT A government can regulate prices downward. But that doesn't change the cost of suppling electricity.

Rodney Hide
Wed, 24 Apr 2013


I keep being told that the market for electricity has failed us. It could be that I am stupid. Or ideologically blinkered. Uneducated. In the pocket of Big Business. Lack empathy for the poor. Or all of the above.  

But I seriously don’t know what it means that the market for electricity has failed. I turn the switch on at home and I have electricity. All that I want. Two weeks ago a young man knocked on my door with a better deal from a rival retailer.  

He walked me through the numbers and signed me up. I switched retailers and I am now saving significant money. How cool is that?

Labour has fired a blunderbuss of reasons why the market is not working. The first is that electricity prices have risen faster than inflation! I feel embarrassed even typing that.

Individual prices aren’t supposed to align with inflation. They are supposed to match quantity demanded with quantity supplied. That’s how a market works.

It’s absurd to be bashing the market for doing its job of matching supply and demand, and of providing the incentive both to conserve power and invest in generating capacity.

Labour complains that electricity prices aren’t “fair”. But a fair price in a market is one on which willing buyers and willing sellers agree. And that’s precisely what happens.

The third failure is that generators are making “super profits”. That’s because some generators are cheaper to run than others and it’s the more expensive generators that set the price. Once again, that’s exactly how a market works. That’s if the supply curve slopes up – which at any moment in time it certainly does for electricity.

We have land that is more productive and fertile than other land. That land is worth more. Once again, that’s the way a market works. Hydro is more “productive and fertile” than thermal generators and the dams are worth more, just as better land is worth more.

One of the easiest
Besides, the electricity market is one of the easiest markets to enter. The system operators are eager to hook up new generating capacity. All you need is a generator and a connection.

The big hurdle is the Resource Management Act, which makes developments tough. But that’s not a failure of the market. That’s a failure of successive governments.

There’s nothing stopping Russel Norman, David Shearer and David Parker building their own generator, proving there are super profits to be made, driving down prices and funding their own election campaign in the process.

Of course, they won’t because they can’t. Their rhetoric is not the reality.

Labour’s analysis makes a further serious mistake. It confuses price and cost. The government can regulate power prices downward. But that doesn’t change the cost of suppling electricity.

Indeed, the increased risk that government is putting on the generators will increase the cost of electricity.

The nannas at BERL run their computer model to conclude that Labour’s policy will generate jobs and wealth. It won’t. BERL confuses cost and price.

Of course, getting the cost of power down would boost jobs and incomes. But regulating the price down won’t. All that will achieve is rolling blackouts, business collapse and serious under-investment in generating capacity.

I am long used to politicians and BERL failing school-level economics. But it’s the endless repetition of the nonsense by journalists and commentators that’s embarrassing. They are paid to know better.

Rodney Hide
Wed, 24 Apr 2013
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It’s the market, stupid: that’s how power works