The ACT Party will be supporting the Electricity Industry Bill at its second reading. I am proud to say that I was a member of the Finance and Expenditure Committee that considered the submissions on this bill and deliberated on the Supplementary Order Paper put up by the Minister of Energy and Resources.
As the Minister explained, the fundamental objective of this bill is to create greater retail competition, particularly in the South Island. There are three or four key things that this bill provides. Firstly, it provides for the transfer of the ownership of the Tekapō A and Tekapō B power stations on the Waitaki River from Meridian Energy to Genesis Power. Secondly, it provides for a swap market—or a virtual asset swap, if you like—to provide forward electricity contracts for a further 15 years, or 15 years from the bill coming into effect. Thirdly, the bill makes it easier for lines companies to compete at the retail level.
I would like to step back and try to briefly explain to the House the structure of New Zealand’s electricity market. It was not something that I understood well before I came to Parliament, and as I have travelled around the country speaking on the issue of electricity prices it has been very obvious to me that New Zealanders also do not understand how the electricity market works. I guess in a way I will repeat part of what Kennedy Graham has just said. New Zealand has five major electricity generators, and they are all different. Of those five, three are owned by the State, or the taxpayer, as they are State-owned enterprises, and two are privately owned. The three State-owned enterprises are Mighty River Power, Genesis Energy, and Meridian Energy.
The make-up of those companies is fundamental to this bill, which is why I think it is important to understand what those companies are and where they operate. Mighty River Power is a company that is based substantially in the North Island. It generates electricity from power stations and hydro stations on the Waikato River, and geothermal stations around Taupō. So we can look on Mighty River Power as being a North Island power company, with 90 percent of its production being renewable. Only 10 percent is generated from gas, which comes from the Southdown generation plant in Auckland.
Let us compare that with Genesis. It is a company that substantially has as its major asset the Huntly power station, which generates electricity from the burning of coal and gas. Seventy-five percent of what Genesis produces comes from the Huntly power station, and up until quite recently most of what Genesis sold was sold in the North Island. Genesis was a North Island retailer, just like Mighty River Power was, but in recent times it has moved into the South Island. The Minister referred to increasing competition by Genesis as a result of its move into Christchurch, Dunedin, and Queenstown, and that competition has come ahead of this bill. Genesis has anticipated that this Parliament will pass this bill.
The third power company is Meridian Energy, which is 100 percent renewable. It generates electricity from the hydro stations in South Island rivers, the Waitaki River in particular, and it generates some renewable energy from wind stations in Wellington at the West Wind station at Mākara, and also up in the Manawatū. So there we have three Government-owned power stations. Mighty River Power is 90 percent renewable in the North Island, Meridian is 100 percent renewable in the South Island, and Genesis is essentially a non-renewable company.
We can add to that list TrustPower and Contact Energy. Contact Energy, which came out of the old New Zealand Electricity Commission, was privatised and sold off by the Government. So there are two privately owned generators and three Government-owned generators. This bill is transferring the ownership of two power stations on the Waitaki River, currently owned by Meridian, to Genesis. That will give Genesis, the company that operates predominantly in the North Island, two power stations on the Waitaki River. The bill will give Genesis generating capacity in the South Island, and this will make it much easier for Genesis to retail electricity in the South Island.
In the expectation that Parliament would pass this bill, as I said, Genesis has gone into Christchurch, Dunedin, and Queenstown, and has aggressively sought customers. It has underpriced the market, and gone in there and competitively bid for customers by offering cheaper prices. Contact Energy is a major supplier of electricity in Christchurch and Dunedin, and it has seen its market share undercut by Genesis coming in and anticipating this bill being passed.
I do not think New Zealanders fully appreciate the fact—and Mr Kennedy Graham referred to this—that the wholesale price of electricity is set every half hour. So 48 times a day the generators conduct a computer auction against themselves and against other retailers, and those generators offer electricity to the market. So 48 times a day a generator says that it is prepared to supply a certain amount of electricity at a certain price, that for a higher price it will produce more, and that at an even higher price it will produce even more. It is the balance between the retailers demanding the electricity and the generators offering to supply it that sets the market price. Once that market price is set, that is the price that all the generators receive. So Meridian Energy may, for example, offer to supply electricity at 6c or 7c a unit per kilowatt hour, and Genesis could be generating electricity from imported coal from Indonesia. If the price that Genesis offers electricity to the market is 10c a unit, and that electricity is demanded by the market, 10c is the price that all generators get.
I found it very interesting that Labour members in particular have focused on electricity prices.
- Sitting suspended from 6 p.m. to 7.30 p.m.
JOHN BOSCAWEN: Before the break we were talking about the structure of the New Zealand electricity industry. I was pointing out to the House that Genesis is our most expensive generator. Over 80 percent of the time it sets the wholesale price of electricity that all of the other generators benefit from.
When the emissions trading scheme came into effect on 1 July, Genesis’ cost of production could have been expected to have increased by about 5 percent in order to cover the costs of the carbon emissions it has to pay for burning that expensive coal and gas. There are only two things that have stopped Genesis from increasing the price of electricity on account of the emissions trading scheme. The first is the 1 million tonne stockpile of coal that Genesis is sitting on. I understand it will take some months to burn through that, but by the end of the year Genesis can expect to be paying the 5 percent surcharge for burning coal. The second thing, which people have not been alluding to, is that Genesis put through a 4.5 percent price increase in June. One of the things Genesis put that price increase down to was the increased cost of producing wholesale electricity. Genesis is waiting 6 months for its emissions trading scheme price increase, but it put through a 4.5 percent price increase before 1 July.
It was very interesting that Nanaia Mahuta said that Kiwi households are asking how to get the price of electricity down. Of course, there was a howl of outrage from the National MPs, and well they might be outraged. We should all remind ourselves that had Labour been returned to office, its emissions trading scheme would have come into effect on 1 January, and the electricity price would have gone up by 10 percent. For Nanaia Mahuta to fake concern about electricity prices just defies logic, because if Labour was in Government we could have expected electricity prices to be 10 percent higher.
It is not surprising that Mr Brownlee is not prepared to guarantee that these reforms will reduce the price of electricity, because he knows that although there was not a 10 percent increase, the emissions trading scheme we have will have a 5 percent increase. When we add to that the 2.5 percent GST increase, we can reasonably expect electricity prices to increase in the next 12 months by about 10 percent.
Finally, Mr Hipkins referred to renewable energy. He said it is a good thing that we have put more wind generation into the system. This country has spent hundreds and hundreds of millions of dollars, if not billions, building wind generation. The blunt reality is that that is extremely expensive—probably two or three times the cost of gas electricity. That is the reason that electricity prices have increased by as much as they have. Thank you