The electricity market is failing consumers - here’s how we can fix it

Consumer NZ's own research reveals nearly one in five households struggle to pay their power bills, while 11% are living in cold homes after reducing heating to cut costs.

In our recent quarterly sentiment tracker survey, energy costs emerged as a top three financial concern for the first time.

New Zealand’s electricity retail market is supposed to be competitive, offering consumers choice, lower prices and innovation. But, while energy retailers continue to post record profits, the only choice many families face is between heating their homes or putting food on the table. And with double-digit power price increases looming for many, the situation is set to become even more dire.

This is a shocking situation for a country as wealthy and energy rich as New Zealand. How did we reach this point, and what can be done about it?

Around 25 years ago, bold and sweeping reforms of New Zealand’s electricity sector promised consumers more choice and lower prices. However, even after adjusting for inflation, residential electricity prices today are a staggering 38% higher than they were before the reforms.

We now have around 30 electricity retail “brands” to choose from – but around 85% of households are still with one of the original, large “gentailers” (a company that both makes and sells electricity): Contact, Meridian, Mercury or Genesis. New entrants, often with more competitive pricing and innovative offerings, have struggled to gain traction.

Yet the gentailers are reporting record profits. In the last financial year, they posted a whopping $2.7 billion in operating profits – $7.4 million in profits a day. That’s remarkable for a country of just over 5 million people!

The industry claims these persistent high profits are necessary to stimulate investment in new electricity generation. Yet, the anticipated investment in new generation capacity has not materialised at the levels required. In fact, over the last 25 years, New Zealand's total generation capacity has only increased by around a modest 15%.

At Consumer, we are concerned that the price paid for electricity in New Zealand has become increasingly detached from the actual cost of producing that electricity, undermining consumers’ access to abundant, affordable renewable energy.

The chronic lack of investment in new generation has seen us lurch from energy crisis to energy crisis.

We understand power companies need to make fair profits: a healthy industry depends on this. However, companies should not be allowed to exploit their market position for excessive gains.

A sufficient share of power companies' profits needs to be invested in new capacity to avoid shortages, not just distributed as dividends to shareholders.

Some in the industry believe that high prices are an unfortunate and unavoidable necessity to increase the electrification of the New Zealand economy. But this perspective is hard to accept with the current gentailer profit levels and is detrimental to both consumers and the broader New Zealand economy, with more families in energy hardship and more businesses struggling to remain viable.

We need an electricity market that prioritises consumer and wider economic outcomes: the current market settings are causing harm, and it's imperative we change them. Here are three steps we believe are needed to make this happen.

First, we need to increase supply. While some investment is happening, it’s not enough. Contrary to its intended design, the market’s structure seems to be deterring timely investment in generation, instead incentivising scarcity of supply and leading to elevated prices.

Second, we need to break up the gentailers’ market dominance. The fact that just four companies control 84% of the market is a huge problem. It’s hard to see how this can be called a competitive market when such a small number of players hold so much power. We need to create a level playing field that encourages independent retailers.

Third, we need to empower consumers to find cheaper options. As a start, we could standardise power bills to make them easier for people to understand and use to compare options. Too many households are unaware they are paying more than they need to. The average annual household saving from switching to a cheaper power plan via Powerswitch is now around $500.

Unfortunately, with shareholders to appease with large profits, there is a clear incentive for the gentailers to resist any meaningful change. New Zealanders, especially those in vulnerable communities, are paying the price for a system that is too focused on profits and not enough on people.

We need a fairer, more transparent energy market. Politicians and the regulator need to act to ensure that energy is affordable, reliable and accessible to all New Zealanders.

Originally published at The Post