New Zealand’s parliament will today debate urgent reforms to the Electricity Industry Bill despite comments by Energy Minister Pete Hodgson that the country is not facing an energy crisis. The proposed amendments would give the government powers to regulate, if the industry cannot do so itself, but in any event, consumers are being urged to cut back on electricity usage.

New Zealand therefore appears to be willing to undo aspects of the deregulation of the electricity industry which it began to institute in 1992 but which is now being blamed for a supply shortage, enormous volatility in wholesale prices and damage to New Zealand’s industry.

The immediate cause of the current problem is the low level of rainfall experienced by the country during late summer and early winter, leading to depleted lake levels and reduced output from the hydroelectric power stations on which New Zealand’s electricity industry so relies.

The South Island hydro systems normally provide the bulk of the country’s generation with power flowing from the South Island to the more populous North Island by the HVDC link between the two islands. This year however, for many weeks the flow has been from the North Island to the South Island overnight as the South Island generators struggles to maintain reservoir levels.

Power prices in June and July were five times those of the same period last year due to low hydro-electricity lake levels. Last week’s prices at Transpower’s Haywards’ station peaked at more than NZ$700 per MWh. Prices in June and July have been more than $200 MWh on average, more than five times usual levels.

The introduction of open competition in the generating and retail sectors should have at least brought stability to pricing with customers free to change suppliers. This has not occurred, and instead the industry is being accused if market manipulation and failure to allow consumer choice.

New Zealand’s industrial leaders are up in arms about the situation. One of the country’s largest companies, wood products giant Carter Holt Harvey, claimed yesterday that its electricity bill was NZ$2-3 million ($800 000- 1.2 million) per month higher. It said that spot prices were unsustainable and that those businesses that were not fully covered by long-term hedge contracts would be severely damaged. Another victim is Aluminium producer Comalco, which has cut back production by five per cent, costing it NZ$50 million in lost exports.

New Zealand’s Energy Minister Pete Hodgson believes that the problem is not widespread. He told Radio New Zealand, “The fact is that 10 or 20 businesses in New Zealand are significantly hurting because of their exposure to the spot market. Most of the productive sector and all of the domestic sector are not exposed to the spot price, and therefore have not to date seen a price increase.”

Hodgson said the current situation was not as bad as the electricity crisis in 1992, again caused by extremely low hydro levels. He did express concern that forecast weather patterns indicated no significant rainfall due, and that a situation like that in 1992 could develop. As a result, Hodgson has been urging consumers to cut back their electricity usage.

“At that stage, it seems to me that we’re going to have to contemplate a massive conservation campaign across the country and bring on every spare diesel generator and so on,” he said. “Diesel generation was still available in reserve – even Parliament had its own generator – and it could be used sooner rather than later.”

Since the electricity crisis in 1992, the monopoly generator has been broken up into four competing companies and three gas-fired CCGT power stations have been commissioned. Despite the additional plant and the fact that hydro levels are not currently as low as in 1992, the increase in demand has reduced the dry year margin.

The opposition has accused the Government of making money out of the crisis, saying state-owned electricity generators were “stuffing the Government’s pockets with cash”, while some businesses were facing a six-fold increase in electricity prices.

During angry exchanges in Parliament, opposition energy spokesman Tony Ryall said the three state-owned electricity generation companies were profiteering from the crisis. But Finance Minister Michael Cullen said the Government was not acting to protect national grid operator Transpower’s revenue.

The power market regulator has just concluded an investigation into the skyrocketing wholesale electricity prices following complaints that the low hydro levels were being compounded by transmission constraints and the bidding behaviour of some generators. The conclusion by the Market Surveillance Committee that there has been no manipulation of the market has not satisfied critics.

National Gas Corporation (NGC) has said that the electricity market does not provide adequate competition and this week took the decision to exit the electricity retail market in the face of mounting losses. Earlier this month, NCG sold its South Island customers to Meridian Energy, a government-owned generating company and on Wednesday said its North Island business On Energy, would be sold to Genesis Power, another state-owned company.

NCG, once the country’s biggest electricity retailer, has faced heavy losses because it lacks generating power and is therefore vulnerable to the volatile wholesale price variations.

With retailers exiting the market and business consolidating in the hands of a smaller number of players, the scope for choice and competition diminishes. Customers hoping to switch supplier were dealt another blow last weekend, when Meridian Energy, New Zealand’s biggest generator, announced it would stop taking new customers until at least October.

The state-owned company said the ban on new customers was needed to allow it to consolidate its customer base, which had doubled in the past months.

Meridian’s decision follows similar moves by rivals TrustPower and FreshStart, which placed temporary bans on new customers last month.

TrustPower indicated that it might accept new customers from the end of September when it expects wholesale prices to fall as snow melt fills the South Island hydro lakes. FreshStart had not given a time frame.

Consumers Institute chief executive David Russell said earlier this week that the deregulated market was clearly not working and there is no longer any real competition in the sector with consumers now limited to switching to only a few, mainly small, suppliers.

Russell said, “This is very worrying. The whole idea, the principle, the philosophy behind the great reforms that have taken place was to create a competitive market to allow consumers to have choice. Now, at the first hint of supply problems the companies are retrenching. The market is not performing in the way that it was expected to.”

Russell said the high wholesale price did not appear to have sufficient justification. Inadequate governance rules needed tidying up to ensure all suppliers were playing the same game, and now the biggest supplier was shutting its doors to new customers.

The rise in wholesale prices has benefited companies such as Meridian which generate more electricity than they need for customers, but has prompted two power retailers short on generation – NGC and TrustPower – to post earnings warnings.

Undoubtedly, New Zealand’s deregulated electricity market is not providing all the hoped-for benefits in the face of a predictable weather-driven challenge. Both the government and opposition parties agree that the reforms are in need of attention. Unlike California, New Zealanders have not experienced any blackouts – nor are they expected to in the immediate future. The market has so far been able to meet the above average demand, In these circumstances, the challenge will be to provide an incentive to domestic consumers to reduce consumption.