Labour's Parker recommended against power reforms in 2006

Friday 19th April 2013

The single buyer model for electricity pricing would be more costly and less efficient than market arrangements, and would stifle innovation in energy efficiency and generation development, Labour's Energy Minister in 2006, David Parker, says in Cabinet papers from the time.

The current Minister of Energy and Resources, Simon Bridges, drew attention to the documents on the website of the Ministry of Business, Innovation and Employment, which show Parker recommending against adopting policies the Labour and Green parties are now endorsing for the electricity market.

It would also be "almost impossible to detect" if the central buyer was incurring unnecessary costs, and would be "relatively poor at sustaining pressure on operational costs."

"While generation owners in the regulated market have strong market incentives to minimise costs, the single buyer would be cost-plus (as single buyer it can pass on the cost of poor investments)."

"The single buyer would also face information constraints and it is unlikely that its long term contracts with generators could cover all possible future issues," Parker's 2006 Cabinet paper says.

However, Parker told BusinessDesk much had changed in seven years, and that the only reason for continuing with the market arrangements at the time was because there was a shortage of new generation, and the changes could discourage such investment from occurring.

The paper says: "implementation of a single buyer would be complex and challenging."

"Transition would require the coordination of extensive change across a large number of parties, many of whom would have significant value at stake creating a high potential for contractual disputes."

It would also take at least two years to implement and would "create uncertainty and require a high level of engagement from key decision-makers and may lead to a reduced focus on current investment initiatives."

On the upside, the 2006 paper said the single buyer would likely "increase the availability of contracts for buyers on reasonable prices and terms", which "could facilitate retail entry by new players and allow existing companies to expand coverage."

In a statement, Bridges said the Labour-Greens policies would produce "higher prices over time because we've seen before that politicians and central bureaucracies do a bad job of setting prices and ensuring supply. Anyone who remembers the power blackouts of the past will know this."

Parker said Labour, when in government, had "never been convinced we had adequate competition but at that time, the primary concern was security of supply."

The current over-supply of electricity, reflecting new generation construction but almost no demand growth for five years, meant such a change could be planned in current circumstances.

The next general election is scheduled for November 2014.

Shares in NZX-listed Contact Energy, which is watched as a proxy for the soon to be partially privatised MightyRiverPower, recovered in afternoon trading, down 1.7 percent on the day at $5.37, after falling further in early trading.

BusinessDesk.co.nz

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