Market power

By Rebecca Macfie

Tuesday 1st July 2003

A month or so ago Energy Minister Pete Hodgson put out a press release that generated almost no interest. No one took any notice because he was pledging a pathetically small amount of money to a concept none of us could understand: demand side participation in the electricity industry. We were far more interested in his associated announcement that the government will save us from power price spikes by taxing us to the tune of $200 million a year to pay for dry-year reserve power plants that will be used once every 60 years. This was something we could understand: more power stations. Bring it on.

Yet the contradiction between the two announcements - and the differing level of attention each received - tells us a great deal about what's really wrong with our much-maligned electricity system. The problem is not, as some would have it, that market forces have failed in the electricity market; it is that we haven't had enough of the right market forces.

Hodgson's announcement that $1.15 million would be spent over the next two years on setting up electricity demand exchanges is a baby-step towards addressing that deficiency. In simple terms, demand exchanges are markets where electricity consumers (mainly large industrial users) can sell back electricity that they don't need. They work something like this: the operators of the exchange (usually electricity retailers) let consumers know, a day or so ahead, that the spot price is expected to go through the roof, and then put offers into the market to buy back consumption. The consumer - for instance, a large inner city building owner - can respond to this information by, say, arranging to turn off lights that aren't needed during the period that the price will peak. The consumer can then sell the power it doesn't use back into the market at the current spot price.

It's a cunningly simple idea with two key benefits: in the short term the property owner gets some extra cash; and if a whole lot of consumers do the same thing it reduces power demand, which - hey presto! - reduces the spot price. It's easier on the environment, too, because it lessens the pressure for new power stations. It's so clever you'd wonder why no one thought of it earlier.

The thing is, they did (and the technology needed to drive the system is made by Wellington company Energy Intellect). But here in New Zealand we prefer to just dam another South Island river or burn more fossil fuel when power prices peak than to grapple with tangential notions like intelligent energy use. The fact that Hodgson is committing just over $1 million to create demand exchanges and $200 million a year to power stations that will only be used once every 60 years says it all. Yet energy efficiency is as legitimate a source of supply as new power stations. According to the Energy Efficiency and Conservation Authority, the energy savings that could be made by the 300 biggest industrial users, through effective demand exchanges, could be worth $100 million to the economy each year - that's a lot of dosh to free up for more productive investment.

Yet, while Hodgson acts with one tentative hand to promote more intelligent use of electricity, he snuffs it out on the other with a giant bureaucratic fist. For demand exchanges to work, price signals need to be unimpeded. But Hodgson's proposed dry-year reserve stations are intended to insulate us from those signals. The idea is that these Kyoto-offending gas and coal-fired stations will be switched on once the price of electricity reaches a yet-to-be-determined point. Much as Hodgson tries to deny it, the prospect of this reserve generation being flicked on by a central bureaucracy will hang over the market like a lead weight. It will inevitably mess with market signals and act as a disincentive for consumers to invest in the expertise and technology needed to make smart mechanisms like demand exchanges really hum.

You don't have to be a paid-up member of the Green Party to support systems that reduce waste and save power. You just have to be rational.

A tribute
It is impossible to comprehend the grief enveloping Crop and Food Research in the wake of the death of seven of its top science managers. To have so many taken so suddenly from a single community is an enormous tragedy - for their families, for the organisation, and for New Zealand. These men and women were at the cutting edge of the Knowledge Economy, helping New Zealand build on its traditional agricultural strengths, and bringing science and business together in an exciting new climate of collaboration that promised to take the nation forward.
They leave an enormous gap, and an important legacy.

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