Election Economic Misconceptions (8) Electricity Competition Failure

Politicians continually gripe about lack of competition in the electricity sector, despite this being an artificial market that the government created. Half a dozen electricity providers compete with each other to supply electricity to businesses and households. The government has set up tools that make it easy for consumers to switch providers, but electricity prices continue to rise, and electricity retailers continue to make massive profits. This is another market where competition has not brought benefits to consumers.

When I grew up in the 1950s and 1960s, electricity supply was not an issue. New Hydro and Geothermal power stations were constructed by the Ministry of Works. They were operated by the Electricity Department. It managed the operation of the power stations and the grid to ensure consistency of electricity supply. Supply to households and businesses was managed by local-authority-operated power supply units. They managed the construction and maintenance of electricity lines and operated the metering and billing system of customers. This system functioned very effectively, and new generating capacity was planned well in advance.

Much later, the government decided to privatise the electricity sector. They sold the electricity generating companies to private, profit-making companies. They set up an artificial market, where electricity supply companies were supposed to compete with each other. They established profit-making lines companies to build and maintain power lines. This change was ideologically driven. There was no evidence that the existing system was not working, or that a system managed by profit-seeking companies would be more efficient. The main reason for the change was that the government wanted to extract some money from the electricity system that had already been paid for by New Zealanders.

The privatisation of the electricity industry has not made things better. Big generation companies have been able to manipulate supply to increase their profits. Electricity has become expensive, and many people cannot afford their power bills. Sick people have had their electricity supply cut off because they are unable to pay their electricity bill.

The reason is that electricity generation and distribution is an engineering problem. Generation needs to be constantly adjusted, so that it exactly meets demand, which is constantly changing. If electricity demand falls because people have turned off their electic heaters, someone has to decide which generation will be cut back to match. If a surge in demand occurs, because people turn on their air conditioning on a hot day, someone has to decide which generation can be quickly brought back online. This is a difficult engineering problem that constantly needs new solutions. Failure to get it right can cause burnouts or dangerous power surges.

Back in their day, the Electricity Department and the Ministry of Works were managed by engineers. They skilfully managed the generation and supply of electricity so that it was available when needed.

The modern electricity companies are managed by financial experts and corporate managers who are skilled in making profits. Not surprisingly, if you put the wrong people in charge of an industry, they control it to achieve what they are skilled at doing. The government is constantly changing the market rules in order to make the electricity market more efficient, but consumers are not seeing the benefits.