Former Tiwai smelter boss says electricity market government mandated extortion

The former head of New Zealand’s largest power user has thrown his support behind a petition calling for a shake up of the power industry, describing the current system as “Government mandated extortion”.

Kerry McDonald a former managing director of Comalco, the business which owned the Tiwai Point aluminium smelter, was deputy chairman of the establishment board of national grid operator Transpower when the then National Government was planning major reforms of the electricity sector in the 1990s.

The establishment board was meant to help the government design the electricity system which would later see the generators split up and, eventually, sold off.

But McDonald said many of the key recommendations, that the system be oriented to a reliable low cost system to provide for the best interests of consumers went “completely out the door”.

Instead the system allowed companies which generated electricity to also operate as retailers, while providing no obligation for the electricity companies to collaborate even when it was in the national interest.

“The restructure was a complete disaster in almost every respect,” McDonald said. “The fact that we haven’t built a new hydro station for 40 years is criminal.”

Electricity prices have been a hot topic for much of this year, while wholesale prices typically more than double the long term average. For much of March prices spiked even higher to levels which had major users warning they could be put out of business.

But McDonald said the problems of this year had happened before and were predictable at the time of the reforms.

“There’s nothing special about where we are now. It happens all the time. It’s just a little bit worse.”

McDonald emailed several contacts imploring them to support a petition by Flick Electric, an independent electricity retailer, which is calling for a break up of the “gentailers”, companies which both generate electricity and sell it to retail customers.

Alternatively, the petition calls for a marketplace where all retailers are required to buy from the same market.

McDonald said he was pleased to support the move, saying while other reforms were needed, structural separation was likely to lead to immediate improvements in the functioning of the electricity system.

“It would be a very important first step. It would really start to level the playing field, quite dramatically. On its own, it would probably level the playing field quite dramatically.”

Electric Kiwi made a similar suggestion when it wrote to Energy Minister Megan Woods complaining that the company had lost confidence in the wholesale electricity market.

Luke Blincoe, Electric Kiwi’s chief executive told Woods that the only reason Powershop – a subsidiary of Meridian – was able to beat his company to 100,000 customers was because it had access to “internal transfer payment arrangements which are not at levels remotely achievable by efficient independent retailer”.

'An attempt to discredit'

New Zealand’s largest electricity generator pushed back on Tuesday.

Meridian, which generates more than a third of New Zealand’s electricity, mainly from large hydro stations in the lower South Island, said the calls for a break-up of the vertically integrated companies by independent retailers was “not supported by the evidence”.

“Multiple studies and reviews have indicated that the vertically integrated business model, delivers efficient outcomes for consumers in that it enables better management of risk, lowers the cost of doing business, and makes it easier to invest in generation,” a spokeswoman for Meridian said in a statement.

“The two most vocal Independent retailers Flick and Electric Kiwi are both backed by substantial businesses that have the capacity to support new renewable builds that would enable them to more effectively manage their risk.

“But building new renewable generation assets is an expensive and risky undertaking and so they choose not to invest and instead they choose to attempt to discredit those businesses (like Meridian) committed to NZ who are investing heavily in Aotearoa’s future.”

The Electricity Authority (EA) is conducting a “robust examination” of the wholesale electricity market, looking both at the function of the spot market and the market for electricity futures contracts. The results are expected to be provided to the EA’s board in September and released soon afterwards.

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