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Did Wolak say our power should be cheaper?

  • May 26th, 2009

 I’ve been puzzled by the lack of informed commentary on the Wolak report. A couple of days initial vituperation was to be expected. The DomPost for example is still grumping about the reforms that brought NZ energy out of lala land, to pay prices that acknowledge scarcities in things like gas,  and the costs of capital that we have to borrow, because we  do not save enough of our own. They can’t write about electricity without the canard that Max Bradford’s EIRA was weird.

In fact separating generation and retailing from distribution was and is internationally mainstream. The European Union is still trying to get to where Max took NZ in one go. 

Now more balance is emerging. Two commentaries across my desk today claim there are errors in the Wolak report. One is from Energylink of Dunedin, and the other from Auckland University.
But even if Wolak is read uncritically his report does not justify fears of “gouging” or "robbing us blind". It warns against pressure on the Minister for political redress:
 A1.12. Remedies that ask suppliers not to exercise unilateral market power when they have the ability and incentive to do so, or subject them to political pressure or popular scorn for exercising market power under these circumstances, are likely to be ineffective and may even degrade system reliability and market efficiency. …. Managers will instead be asked to balance the risk of political pressure or popular scorn against the wrath of their shareholders for not maximizing the return on their investment. Therefore, remedies that tell suppliers not to exercise unilateral market power can create instances where the firm might not take actions that benefit shareholders and consumers for fear that these actions are deemed politically unacceptable and will subject the firm’s management to public scorn.
Wolak must have expected sensationalisation, but not for the coverage to be quite as incomplete as it has been.
For example, Wolak does not say there can or should be refunds for us electricity consumers. Wolak says that the generators derived $4.3 bn from use of their market power to price high during low rainfall years. They were able to charge more than their short run marginal cost. But he does not say that they should not have got the full $4.3 bn.
Indeed Wolak suggests that they should get new source income, the premiums from what he calls ‘reliability insurance’.
Under his scheme generators to get the premiums for compulsory reliability insurance. I’m not numerate enough to work out from his price formula what that premium income might be.  Perhaps it could get near the $4bn level. How could it be much less if current prices are somewhere near the middle of the range needed to justify new generation? If we New Zealanders are not willing to pay what it costs to get new plant, then we will not have it, and in dry years the lights will go out.
I’ve not seen much Green  comment on Wolak. In the past they’ve understood that energy will not be saved, nor will there be much wind or other green generation if the price is too low.  Sadly, after geothermal, gas and coal are still the cheapest forms of generation.
But Wolak is pretty clear about what he thinks we need most to reduce the market power on which he has reported – a new fossil fuelled power station in the South Island, and more fossil fuel generation in the North Island, not under the control of existing major owners.

So there’s plenty in the Wolak report to keep the pot boiling. And I’m still waiting for the interpreters who read the algebra to tell us all whether he thinks we should be getting cheaper power overall, or just a similar total cost spread different ways.

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