Electricity prices

What’s the truth about rising electricity prices?

13may electricity prices hero

It’s good news from the electricity chiefs: the market is thriving and consumers are being offered a wide range of competitive deals. There’s never been a better time to crank up the heat pump. But if you’re still reeling from the latest power bill, your view may not be so upbeat.

Despite another round of electricity price hikes this year, Energy and Resources Minister Simon Bridges remains determinedly optimistic. He’s declared the electricity market to be “more competitive than it has ever been” and boasted the government has halved the steep price increases seen under the previous administration.

While the pace of price rises has slowed, rates continue to outstrip inflation and push-up the cost of living. So how much faith can we put in assurances the electricity market is working for consumers? We look at the claims and the evidence:

Claim: It's a competitive market

While the pace of price rises has slowed, rates continue to outstrip inflation and push-up the cost of living.

The Electricity Authority’s annual review paints a picture of a flourishing market where new entrants are winning customers from the old guard and consumers are being deluged with cash discounts and other deals.

It’s true there are now more players but their inroads have so far been small. Despite regional changes in customer numbers, the overall market share of the incumbents isn’t much different from what it was in 2010 when the last round of industry reforms started to kick in.

The authority’s data show 93 percent of the market remains in the hands of the big five: Genesis, Contact, Mighty River Power, Meridian and Trustpower. Genesis – the largest retailer – Meridian and Trustpower have all increased their customer numbers since 2010.

Only Contact has suffered more than a 1.5 percent drop in market share – a slide that dates back to at least 2008 when the company drew flak over plans to increase its directors’ fees.

Among the smaller operators, Todd Energy (owner of the Nova brand) and Pulse Energy have had the most success at winning new customers. But they remain minnows, holding 3 percent and 2 percent of the market respectively.

King Country Energy, majority-owned by Todd, has lost customers since 2010.

The rest of the market – under 5000 connections – is spread thinly among a handful of newer entrants with limited geographical reach. Of those advertising residential tariffs, Hunet Energy operates only in the Auckland region; Opunake Hydro mainly in Taranaki; and Payless Energy in Dunedin and Central Otago.

You’d get long odds that these companies present a major threat to the dominance of the big five, which are backed by significant generation assets that help insulate them from market fluctuations.

Claim: Attractive deals are on offer

The inroads made by smaller players haven’t been enough to hold prices steady, let alone force a drop – something consumers might reasonably expect in a genuinely competitive market when demand is flat and wholesale electricity rates have fallen.

Last year, the Electricity Authority reasoned that weak demand coupled with a sharp drop in rates on the futures market raised “some prospect of flat or declining retail prices”. That never happened. Statistics NZ figures show electricity prices rose 3 percent in 2013, nearly double the 1.6 percent rate of inflation.

This year, the authority has suggested official statistics may be overstating price rises because they don’t capture the discounts companies are being forced to offer to attract and retain customers. The authority believes some of the best deals may be offered via door-to-door selling (see "Marketing tactics" below).

There’s anecdotal evidence that retailers may be more prepared to offer sweeteners to keep customers as electricity demand ebbs. But these sweeteners aren’t necessarily available to everyone. Customers who are high users and good payers are more likely to be given preferential treatment.

For households struggling to pay their power bill, discounts are unlikely. Exercising any choice in the market is becoming more difficult for these customers as retailers take a harder line with late payers. Last year, 41,085 households had their power disconnected for failing to pay their bills.

Electricity companies have no obligation to supply – and they can refuse to reconnect customers they judge to be a credit risk. To get back on the grid, the only option for these households may be to go on to a pre-pay meter and accept a more restricted electricity service.

Claim: Companies are only passing on costs

This year’s price increases have been accompanied by the usual finger-pointing by electricity retailers and lines companies over who’s to blame. While both have claimed they’re only passing on increases in operating costs, Statistics NZ’s Producer Price Index shows input costs in the sector have fallen in the last two years.

Despite the system being flush with regulators, price transparency remains elusive.

Lines companies and grid-operator Transpower are subject to price and information disclosure regulation. But the Commerce Commission stated last year that it's not yet possible – because of gaps in disclosure requirements – “to draw any firm conclusions” about whether lines companies are operating and investing efficiently.

Analysis by the commission has shown lines companies' revenue has increased at a faster rate than expenditure. Between 2008 and 2011, revenue from line charges increased by 2.6 percent a year while total spending rose 1.8 percent. "Non-network" expenditure also increased at a faster rate than network expenditure.

Data released last year under revised disclosure requirements indicate 22 out of 29 lines companies are forecasting continued growth in their expenditure. Fifteen companies are forecasting an average rise of more than 10 percent a year out to 2018.

According to figures published by the Ministry of Business, Innovation and Employment, lines companies were responsible for around 25 percent of the increase in average residential bills last year. However, electricity retailers can take the blame for over two-thirds of the rise.

Despite claims their costs are increasing, electricity retailers have been doing all right (see the pre-tax earnings table below). Four of the big five retailers recorded a marked jump in pre-tax earnings between 2010 and 2013.

Contact ended 2013 with pre-tax earnings of $541m, up from $427m in 2010. Genesis, Mighty River Power and Trustpower also increased their earnings over the same period.

Meridian is the only company to record a drop, partly attributed to the loss of revenue from its Tekapo power stations which were transferred to Genesis in 2011.

The Electricity Authority announced in March it was investigating companies’ justifications for this year’s round of price rises. Initial results of the investigation are expected to be released in June 2014.

Market performance

Debate about the performance of the electricity market continues to shed more heat than light.

Successive reforms have been justified on the grounds that a market where companies vie for customers will keep down prices. But prices continue to rise. Domestic consumers, responsible for only a third of total electricity use, have shouldered the burden.

Since 2000, electricity prices have risen by 46 percent in real terms. The most significant impact has been on low-income households which now have to spend a larger proportion of their income to keep the lights on. Last year, the lowest-income households spent 10 percent of their income on energy while the highest-income households spent one percent.

With further increases in the pipeline, bills will be going up again this winter.

Our view

  • Despite over two decades of reform, consumers are yet to get reliable assurances that the market model is supplying electricity at a reasonable price.
  • Legislation has failed to ensure adequate price transparency, leaving regulators struggling to gauge whether prices are fair.
  • With more households struggling to pay their bills, electricity regulations need to be reviewed to protect the interests of vulnerable consumers.

Report by Jessica Wilson.

Marketing tactics

Marketing tactics

Marketing tactics

As electricity demand has flat-lined, retailers have used more aggressive marketing tactics to build their customer base.

Complaints have inevitably followed.

In February 2014 we reported that the Commerce Commission had issued compliance-advice letters to both Nova and Pulse following complaints about alleged misleading price claims. A compliance-advice letter’s used when the commission believes the company’s actions may be in breach of the FTA but it won’t take the matter further.

Mighty River Power has also received a warning from the commission following a complaint about misleading price claims made by Salmat Salesforce Limited reps, who were acting on the company’s behalf. A warning’s issued when the commission believes that – although the evidence is strong enough to take legal action – the company’s behaviour can be changed without going to court.

Lines charges

Lines charges

Lines charges

A recent High Court judgement has questioned whether the weighted average cost of capital (WACC) inputs – used by the Commerce Commission to set lines charges – could result in consumers being overcharged.

The WACC is a critical part of the calculation of the maximum average prices that lines companies can levy. As natural monopolies, the companies are regulated under the Commerce Act. The commission is responsible for determining average prices under the Act.

As a result of the judgement, the commission announced in March it’s doing further work on the WACC. The review is due to be completed before the commission confirms how average prices for 2015 to 2020 will be set.

Customer numbers

Companies 2010 customer connections 2014 customer connections
Genesis 528,766 535,806
Contact 478,894 451,117
Mighty River Power 408,002 387,849
Meridian 268,280 282,421
Trustpower 222,465 225,229
Todd Energy 43,509 64,767
Pulse Energy 18,998 47,302
King Country Energy 18,604 17,488
Simply Energy 69 1165
Opunake Hydro 23 125
Hunet Energy na 2195
Prime Energy na 962
Payless Energy na 210
Flick Energy na 17

Pre-tax earnings

Companies 2010 ($)[width=medium] 2013 ($)[width=medium] % change
Genesis 248794000 336449000 35
Contact 427000000 541000000 27
Might River Power 327788000 390477000 19
Meridian 641700000 584800000 -9
Trustpower 273881000 294756000 8

Opposition plans

The Labour and Green parties in 2013 announced plans to create a single buyer of wholesale electricity, a move they calculate would cut domestic electricity bills by around $300 a year.

Under the proposed model, the single buyer would pay generators a price based on their actual costs of production and sell the electricity to retailers through long-term contracts.

It’s an idea that’s been around for a while. When market reforms were being mooted in the 1990s, we co-sponsored a study which recommended the establishment of a trust that would act as a single buyer, contracting for fixed-price electricity and distributing entitlements to retailers.

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