Saturday, July 31, 2010

Further power privatisation in NZ

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Power privatisation has been a huge failure in NZ. The reason is that it was performed by self-serving politicians. So we are asked whether Trustpower should be sold? The answer is that it may as well be, since the market does not function efficiently anyway. Why is that? Well, not all markets are competitive. In fact if you structure markets the 'right way', they can be utterly 'cozy', real 'sleepers'. So that is the nature of the NZ power market. Expect power prices to rise by about 2-3% more than the rate of inflation until there is some political opposition, and market reform is adopted, or perhaps when coal seam gas is readily available.
There are two huge problems for competition in NZ:
1. The lack of competition in gas supply - its another oligopoly
2. The huge disparity in the competitiveness of the partially state-owned players
3. Most importantly, the disparity in operating costs between these players

This last issue is critical. Some 70% of NZ's hydro stations produce power at almost zero cost. There is 20% of capacity which carries a fuel (coal, gas) cost, so they are high cost base load producers, which always operate because they cannot afford (technically or financially) to stop. So this places a minimum price under power supplies. More importantly, at peak times the hydro producers can charge what they want. Why? Because how can new generators compete with old, fully-depreciated plants. For this reason, any new plants added merely fill 'gaps' in the market demand, they never result in competition or lower prices for the consumer. It does however result in efficient resource allocation, so that is a good thing. I guess you could argue its good if you want the country to develop more renewable (wind, solar) because it funds that. But now that its private, expect that those surpluses will go to government and shareholders. Utility users might be better off buying shares rather than complaining. I guess that is the appealing side of it. You can always profit from the utilities advantage. Mind you, the investment bankers and government got the best of you on privatisation in several respects:
1. The market structure robbed you with hidden 'taxes'. Kind of like the vested contracts used by the Victorian utilities during their privatisation. By structuring a 'consumer-unfriendly' market, the government was able to get a higher price for these assets, but that was with the prospect that consumers would be paying higher electricity charges, despite all the savings that would result.
2. The investment bankers were paid huge fees to rip you off. You may also have paid a huge premium for the shares too if you bought them in the you were a 'jipped' shareholder as well? Too bad.
A lesson in not to trust governments....with anything.
Andrew Sheldon

ConvinceMe.Net - Anyone up for a debate?