The NZ Initiative's Jason Krupp says the Huntly power station decision endorses the current market-based electricity structure by showing that prices are the best means to determine the allocation of resources

By Jason Krupp*

Earlier this month Genesis Energy announced it was mothballing New Zealand’s only large scale coal fired electricity plant. The move, effective as of late 2018, will reduce the country’s total CO2 emissions by about 2.5%, setting the sector on course to produce 90% of the country’s electricity from renewable sources.

Green Party co-leader James Shaw hailed the announcement as welcome news. He then quickly used it as a stick to beat the government for not doing enough on climate change, saying the “Government’s failure to take action on climate change means that it’s up to companies like Genesis to make real change”.

That may seem a principled stand to take, particularly as the Greens view the Key government’s latest commitment to reduce greenhouse gas emission by 11% on 1990 levels over the next 15 years as an overly easy target.

Targets aside, this correspondent wonders if the Greens’ are not a little bitter over the Huntly announcement on a policy level. The reason is because Huntly was closed for purely commercial reasons, not because government fiat declared coal bad.

This announcement pours cold water on New Zealand Power, a policy launched by the Greens and Labour in 2013 to lower household power prices by restructuring the electricity sector under a single buyer model.  Under this scheme the government would act as a middleman, buying electricity from producers based on the costs of production, and then on-selling it to retailers.

The move would strip investment signals from the market by constraining demand-based pricing. The Greens and Labour hoped to overcome this by tasking government with the job of deciding when new generation plants would be needed. The building and operating of these plants would be outsourced to the private sector, with the plant type weighted in favour of renewables (of course).

Both parties continue to endorse this policy, but it was only the Greens who saw the Huntly decision as a repudiation of the current government’s policies.

The problem for the Greens (and Labour) is that the Huntly decision endorses the current market-based electricity structure by showing that prices are the best means to determine the allocation of resources. Electricity demand has been largely stagnant since the 2007/8 recession and firms have been responding by taking old and inefficient plants off line. In addition to Huntly, Mighty River Power announced earlier this year that it planned to close the gas-fired Southdown power station by the end the year. And just last week Contact Energy said it would scrap its Otahuhu power station, having effectively replaced it with the new Te Mihi plant.

These firms have been able to do this because of significant investments in renewable generation capacity in the early 2000s, specifically baseload geothermal but also windfarms. Those investments were made on the back of high prices at the time, again reinforcing the role of price signals in the market. That the government has set rules that allow the electricity sector to shift to a more cost efficient low-carbon production method without the intervention of bureaucrats is a good thing, not a failure as the Greens are attempting to suggest.

The last thing New Zealand needs is for government to continue meddling in the sector further, especially where the intervention is based on the most inefficient of resource allocation models: central planning. German government intervention along these lines via price guarantees and compulsory purchase rules for renewables has seen wholesale electricity prices collapse even as consumer bills have skyrocketed. Worse still, the country’s greenhouse gas emissions have risen even as the renewables generation base expanded. This is because relatively clean but expensive gas plants are uneconomical in the current environment, and dirty but cheap coal plants have had to pick up the slack. To quote the Economist: “It has in effect turned the entire German energy industry into a quasi-planned economy with perverse outcomes”.

New Zealand does not need government to play a more active role in the electricity sector than it does now. With nearly all of the country’s electricity coming from renewable sources, and more projected to come on stream in the future, it is fair to say that the generation and retailing side of the sector is far from broken. So why try to fix it?

This does not mean that New Zealand’s electricity sector is without its challenges. The Tiwai aluminium smelter contract keeps lurking in the background, as well as the potential for an undersupply of power, plus disruptive production technologies like home solar have yet to be addressed within the current 20th century business model. Nor should it be suggested that opposition parties or the government should remain out of matters of national significance like anthropogenic climate change and greenhouse gas emissions, be it in electricity or milk processing. But New Zealand will be best served by tackling these challenges through a market-based model rather than by letting politicians meddle in the primary functioning of a sector, especially where there is no evidence of market failure.

—————————–

*Jason Krupp is a Research Fellow at the New Zealand Initiative. This is its weekly column for interest.co.nz.