Hartwich on the power plans
A must read column on the Greens and Labour power policy is by Oliver Hartwich. He cuts through the rhetoric to focus on some key issues.
Leaving the emotive language aside, will the opposition’s plans actually work? Will they achieve the stated goals of providing secure and more affordable energy to New Zealanders? And what are the potential side effects?
Good questions.
It should be noted that the power proposals are not quite as outlandish as they may first appear. A number of Eastern European countries have also implemented single-buyer schemes where all wholesale electricity is purchased by a government authority before being sold on to distributors. However, in the Eastern European cases this market arrangement followed from a completely nationalised energy sector as a step towards liberalisation. In New Zealand’s case, however, it is a move in the opposite direction.
This is a important point. In assessing the desirability of a policy, you need to look at what the current arrangements are. A single seller policy may well be sensible when you are moving from a point of the Government owning all the generators. But less so when you have 14 different generator companies already operating.
If you were designing the NZ power market from scratch, I think you could have a reasonable debate about the pros and cons of a single buyer model. Personally I’d still be skeptical but there are pros and cons. But we already have 14 companies who have invested in NZ power generation, and the impact on not just them, but also investor confidence more generally by unilaterally imposing a monopoly government buyer on them is huge and bad.
On the plus side, a single buyer can more easily match physical electricity generation to demand. Such schemes also allow governments to regulate markets effectively because they have direct control over both prices and capacity. After all, this is why the Greens and Labour are proposing their scheme.But it is precisely this strict control by the government over the market that is the greatest disadvantage of the single-buyer model. The core problem, as with other centrally planned regimes, is that it decouples economic incentives from decision makers. This means that the proposed new Crown entity tasked with deciding on the right capacity for electricity generation does not itself bear the consequences of over- or underinvestment in the industry. This may in turn lead to an unprofitable energy sector – or to blackouts. Older New Zealanders may still remember the experience of electricity rationing when the state controlled the market in the 1970s.
Despite some appealing theoretical advantages of a single-buyer model, ultimately the government could achieve far more by facilitating effective competition at the generation and distribution stages. Nationalising the wholesale market, on the other hand, is likely to create more problems than it might solve, beginning with decisions on capacity.
In any case, if the intention is to support low-income earners with their power bills, wholesale nationalisation is a sledgehammer to crack a nut. It would be much more straightforward to provide direct support to affected households instead of playing havoc with the structure of the market.
Even if the Greens/Labour plan actually achieves what both parties promise, which is dubious, it is still an example of how not to make policy. This is not because of its alleged economic merits but because of the way it was announced.The strong public reactions to the proposal, as well as the substantial losses for energy companies listed on the NZX, show what a bombshell of an announcement it was. Practically from one second to the next, and with no previous warning, let alone any kind of meaningful stakeholder consultation, the rules of the energy market were called into question.
International investors looking at New Zealand can only draw one conclusion from this episode: that their investments here are not as secure as they previously believed.For an economy reliant on international capital markets, this loss of investor confidence is significant. As First NZ Capital’s chief executive Scott St John says, the intended $300 reduction in household power bills could be easily offset if the Greens/Labour power plans led to a perception of greater sovereign risk. Indeed, if capital funding costs increase, households will directly feel the effects in their mortgage payments. This is almost certainly an unintended consequence – but a negative consequence it is.
As economists are aware, regulating network industries is fiendishly difficult. No matter where you stand on the single-buyer model and whether it could be made to work, shocking markets and investors with populist proposals (provoking equally populist responses) is not the way to go about it.