Transcript: Dame Jenny Shipley - The full interview - Consume This podcast
In this exclusive episode, former Prime Minister Dame Jenny Shipley shares her insights on the Bradford reforms, gentailers, and the need for a more sustainable energy future. She also weighs in on the controversial issue of nuclear power, and offers her thoughts on how New Zealand can meet its energy needs in the years to come.
Jon Duffy: Hello, it's me Jon Duffy here. How are you doing? Our podcast producer Tom is away for the month, so to fill in the gap we've put together this special bonus episode. Consume This episodes are usually honed from hours and hours of interviews and recordings. Once it's released, well, we kind of bury all that unused tape on the Consume This hard drive and move on, but today I've fired up the disk to bring you the full conversation Tom and Powerswitch manager Paul Fuge had with former Prime Minister Dame Jenny Shipley. We originally recorded this at the end of 2022, sat on it for a few months and finally used some select cuts for the recent electricity podcasts. Here it is in full for your listening pleasure...
(🎶 Intro Music)
Tom Riste-Smith: So prior to when you became PM you were Minister for State Owned Enterprises, which would have meant you were quite involved in the electricity sector anyway. Because I guess a lot of people don't become PM and think straight away "electricity reform, that's what we need to do". Was that already quite in the front of your mind when you took over?
Dame Jenny Shipley: During the 90s there were a series of programmes right across government where we were looking at several things. How we could improve competition and the appropriate tensions across multiple markets, of which the electricity sector was one. In the early 90s there were very significant fiscal pressures so we were looking at the benefits of public and private ownership, and in the selling down what benefits, if any, flowed from it. That certainly was a factor when Contact was spun out. There were competitive and fiscal benefits there. And as we went into the latter part of the 90s there were increasing questions as to whether a single or two companies could deliver everything across their transmission system, generation system and customer service system. That backdrop led us to split up the system further and establish three companies at that time. There was a lot of debate as to whether the Crown should stay in or not. Obviously that's history. But yes, I was SOE minister and I was very involved. There was a team of us - so Max Bradford as Minister of Energy, myself as minister of SOEs - in the 96/97 period where a lot of that work was done, and then when I became PM we most certainly continued to focus on that. Interestingly, it was also a priority of the coalition of which NZ First was also a part. They also agreed to the opening up of that system.
Tom Riste-Smith: Ok, let's go back a bit and put ourselves at the time of when these reforms were happening. Obviously, colloquially we called them the Bradford Reforms, I think other people did too. Is that really reflective of the time? Do you think Max was the driver of that, or was it more that he was the public figure so he just got the name?
Dame Jenny Shipley: Well, the latter is of course true. Mother of all budgets and Ruth and myself and welfare reforms. Uh, it's a lazy media technique, branding these things and it's frankly unintelligent. If you can in any way imagine, or certainly in that time, if you in any way imagine ministers sitting in their office by themselves and cooking up some idea that they then impose on the economy without connection with others, you simply don't know how either our government or good government works.
We always ran teams. And there would be a lead minister who was the public facing element of that and Max did a very good job. He also had huge intellectual input, so let me be clear he was the lead minister and he understood the sector inside out. However, as SOE Minister, we had the stakeholder interests of the Crown and whether those assets against paying down debt, so the Ministers of Finance were in the room as well.
The Prime Minister always has to be able to sell these reforms, so there's always an element of that. Most teams would be three to five. In this case, it was definitely a five minister team, but Max was the industry facing and the public facing person. But I remember, for example, just to illustrate, when it finally came down to completely and utterly bringing the ECNZ apart, having the chairman and the CEO in my office and, you know, they were still putting up very strong arguments why they didn't want change, and, that was elevated to the Prime Minister's office - my just simply saying, you know, I appreciated their opinion, but we were going to proceed. So it's always a team and there's key stakeholders, all of whom have to be both informed, supported, but then managed politically. And the whole team did it.
Tom Riste-Smith: On that, do you remember where the specific kind of driving force for the reforms as they eventuated came from? Like, who was behind that, who was like, this is the way that we should do it, you know?
Dame Jenny Shipley: No, that's not how it works. In government, we, if you go back and look right across the 90s, we did a whole series of things. The labour market, taxation, infrastructure. How to deliver social services, how to deliver health services more effectively. In health, we decided we didn't need to own all the rest homes. The private market could supply, so we altered all that. And energy was just one of many. So, it's completely incorrect to elevate the energy sector as if it was something special or isolated.
This was a transformational period in the way in which New Zealand delivered government in order for the the economy to grow larger. And I mean, history speaks to that. And New Zealand's economy is much larger today than it was then when the government dominated the provision of most services.
Tom Riste-Smith: That's an interesting thing, right? Because it was a whole period of transformation.
Dame Jenny Shipley: Mm-hmm.
Tom Riste-Smith: So I think, what me and Paul talked about the other day is like, how much of these reforms were driven by looking at specifically the electricity market and saying, okay, well, we could do this better, we could do this better, this is not working well, this is working well, and what can we do about that?
And how much of that was driven by there was a kind of momentum of a general societal set of reforms in place and it was a natural follow on from that to apply that to the electricity market?
Dame Jenny Shipley: What you've just described is correct. So again, you have to go back. Taxpayers, the top tax rate in those early days of that transformation was 66 cents on the dollar.
Now people get pretty knacked off when they're paying two-thirds of what they earn to the government. And, over time, the tax system altered. Many, many pieces of analysis went through. And this was both the Labour government and then the National government. It wasn't just us. So, you're talking about the mid 80s through to the end of the 90s I think can probably be described as the, the reform period, of which each government delivered particular elements. And the... chunk of the whole economy that the government dominated over that time diminished. But interestingly, the tax take increased, it didn't go down, and the size of the economy grew.
So if you ask about why we were doing this, it was very clear that as we gave people clear signals that if they invested their capital, human capital and financial capital, they could be sure of the rules and they'd be rewarded. The electricity reforms were just part of that conversation. So it was assets, it was systems, it was governance, it was how you deliver it, it's where there were shortcomings.
And this wasn't in an environment where the public had got the stitch with big energy development. And we were worried because even though we didn't need growth at that stage it was very obvious that over time, as New Zealand's population grew, and it has, and also as new energy demand grew, that we would have to have a very responsive system.
I think the question now is, is that going to work?
Tom Riste-Smith: So if you had to kind of, you know, pin it down as the exact motivations for doing separation at that time, like what would you say for you the most important of those was?
Dame Jenny Shipley: Having a small board that was not controlled by the government, controlling what was such an essential service. The Labour government had put in ECNZ, and it had a private board, and they dominated every aspect of the energy sector, and that concentration simply was not in the interests of New Zealand from our point of view. While as part of the Labour government reforms it was a step forward, because it had got it out of an old electricity corporation, sort of, state sector environment. And they were starting to look and recommended that Contact be spun out. So, they had started to look at how to introduce competition. It was our view that that hadn't gone far enough. And that there were very significant inherent risks in leaving some of those elements entrenched in a single organisation. I mean, around the world, you look at New Zealand like for like, and I would still argue on others' analysis, not mine, that we still have one of the most efficient energy sectors in the world.
And it's quite proper that we discuss the detail of what would work better, particularly with a future focus. But from my point of view, I think they very much met a series of the requirements. And then I subsequently chaired Genesis Energy for nine years after I left politics and watching how the sector interacted and responded to challenges, you know, that's worked.
Some of the deals that we did when government wanted Comelco to be supported, private companies stepped in and were able to do commercial transactions of a variety of types to make the system work. Commerce and good regulation does allow problems to be solved.
Tom Riste-Smith: So I guess on that, like obviously because we're Consumer, you know, it's kind of in the name.
Dame Jenny Shipley: I agree with that.
Tom Riste-Smith: So we are kind of focused on consumer outcomes, ultimately. And so coming from that perspective, it's kind of interesting because at the time, it was like lot of the public facing statements were about this will lower prices, competition will mean you get a better deal on your energy and all of these kind of things and it feels like it was sold on the idea of consumer outcomes. But what you've just said suggests that actually the outcomes were secondary to the methods that were going to achieve them. So introducing competition was the goal and if you produce better consumer outcomes that was like a byproduct of that.
Dame Jenny Shipley: No, competition is a means to an end. Competition in its own right is lacking in merit. The evidence was that if you have multiple players you will have a different outcome than if you have a monopoly player. Remember, at the very beginning, the monopolies were needing the support of taxpayers. What our objective was, was to get a much better balance so there'd be new investment. And the pressures to keep prices down.
I have sat at the board table, and been in many situations with Genesis, where you literally look at what the cost structure's gone up over the year, and what price you think the market can bear. We have held prices. You know, different companies make rational market decisions about whether they'll pass on costs or whether they'll hold because of the competition in the market.
You want to hold your customers and the switching system puts good pressure on that so that you know that you're sitting in a market where people are well informed. It's not true that there's just a, oh, let's pass on costs, and they have to make decisions on a monthly basis or an annual basis as to how they'll do that.
Tom Riste-Smith: Hmm, that's interesting. There's a couple of things you mentioned there, I guess. The idea of like, you know, you wanted to increase competition and things like that, right. The obvious question is why did you want to do that, really?
Dame Jenny Shipley: Well, you have to go back to the 90s and see how inefficient the government sector was across the whole of the New Zealand economy.
Taxpayers were propping up multiple entities for no good reason. And so we had a look at what elements of government service the Crown had to continue with, because, in fact, they were monopolies. And the transmission sector, the national grid, is a very good example of that. There was no competitive benefit in breaking that up, however, the distribution off the main trunk, there was plenty of benefit in leaving a diverse range of suppliers, albeit that they, in some instances, were monopolies within their own map.
There were many, many reasons. I mean, when you are fiscally as constrained as we were, long before many of the generations who are alive now, New Zealand had had 17 years where we were spending more than we earned as a nation. And we'd racked up a debt of over 50% of GDP. You don't sit there and do nothing when you're in those circumstances, and so you start looking at how do you improve the productivity and effectiveness of the New Zealand economy and we went systematically through the whole economy of which the energy sector was one.
I think there was also an understanding in that group that historically the Crown had invested in what they called the Think Big Projects. These slogans amuse me in retrospect. But had that not happened, who knows where we would be now because that infrastructure has laid the groundwork for what New Zealand is.
And I think we're right at the next point of whether the companies or the Crown and how they're going to work together to get the next chunk of generation capability particularly with the reduction in emissions pressures. This is a big economic question that over the public and private sector is going to be a huge debate, whoever is in government in the next five to 10 years.
Tom Riste-Smith: Yeah. I mean, I think that's interesting. And I guess you see that with like the Lake Onslow things that are going on as obviously there's huge debate about that. Is it cost effective to do that? Is it not?
I guess the idea of privatization of parts of these what were formerly state owned enterprises was to remove some of the investment need from the Crown, right?
Dame Jenny Shipley: Of course.
Tom Riste-Smith: So now we get to this juncture where there have been smaller projects built in the time and stuff like that, but there haven't really been any huge, huge new generation projects built.
Like hydro is actually down from capacity down from 98. Geothermal is way up. There's actually weirdly more thermal generation than there was then. Do you think that that investment has materialised, basically, is what I guess what I'm saying?
Dame Jenny Shipley: Well, I don't think it's fair to say there's been no investment.
I mean, the geothermal is a very good example of how a range of new investments have been able to emerge. And they're actually outstanding collaborations, some of them with Maori incorporations and commercial generators. If you probe into how some of those were put together and brought to market I think they're extremely interesting.
The hydro, it's not so much a lack of investment. It's a lack of willingness of New Zealanders to make available rivers and water. And I do think we'll have to come back to that, by the way. A lot of the stalling of investment in hydro coincided with a genuine concern amongst many urban people about the use of rivers and blocking off major catchments and so on.
Now we do have to increase our capacity and so it's not just who funds it and whether the public or private sector gets into it. Consumers are going to have to really debate, are they interested in the new crack technology available in nuclear? I mean, many countries around the world are investing in very clean, small nuclear projects, which when you line them up against all other energy investment, they stack up extremely well.
Some will argue they are the cleanest and most sustainable investment model. Now that's a big question for New Zealand, where people like me voted for a nuclear-free environment. But we're confronted with entirely different issues now. So water and water catchments and other technologies have to be right on the agenda. Particularly those that you can describe as baseload.
Because it's all very well to talk about wind and sun. And they're both very important elements. When I chaired Genesis Energy, we invested and explored lots of prospects around how to move into that area as we wound down Huntly. You can't be agnostic about the difference though between base and additional load because the sun doesn't always shine and even in New Zealand you can't rely on wind, and as we've seen in the recent months, sometimes the pressure comes on and we have to go right back and dive into coal and gas in order to meet the consumer's expectations.
I hope that as part of conversations like this it's not a matter of just did the reforms work, but what next? Because we were trying to achieve a lot of things; the growth in the energy supply, getting some money coming in from, not out of taxpayers pockets, but rather the market itself.
And that question is sitting there right now, who will pay for Lake Onslow? And right now, I can tell you that the generators are sitting there saying, we're not going to invest anything new until the government makes clear what they're going to do. Because if they're going to proceed with Lake Onslow, well that's, you know, a right of any government to choose that. But you can't expect private investors to take a risk unless the investment environment is certain.
So I think we've got some big questions in the next two or three years that are not only to do with the efficiency of the current sector, but actually how you meet public expectations of the lights being able to be turned on when they expect to do so, because demand is going up.
Tom Riste-Smith: Okay. Well, I guess there's an interesting thing there. So if we go back to like the 1998 separation of generation and lines, which is the key thing that kind of came out of the key things.
Dame Jenny Shipley: Well, one of the key things.
Tom Riste-Smith: Sure. Like, I guess in retrospect, when you look at that, based on the idea that now we're going to need more, maybe local networks, more to support solar, to support wind, to support local energy storage and stuff. Do you look back on that and go, that maybe is not the right way forwards in the current environment? I mean, now in retrospect with the way that our electricity needs have changed, is actually taking that back into the community? Where we need to go from here.
Dame Jenny Shipley: Well look, I don't think you can unwind history. I think it's probably unfair and unreasonable, sort of 25 or more years on, to say, well, now that new technology requires a different network structure, that should we have done something originally.
I certainly supported the splitting of the RIB network, which we now know as Transpower, and the local distribution. And there are some local distribution networks that have become quite innovative, and do allow different collaborators with them. So I'm not sure that you can say, you know, a reform structure is an impediment.
I would still argue that if the investment environment is clear, and these organizations are well governed, and mindful of what they need to do to keep maintaining a distribution network, that platform still has great potential. I would have preferred that there weren't as many lines companies, but politically it was not deliverable.
And I can tell you, you have to live within what you can do. And interestingly, that was one of the most political elements of some of that reform, not the big network questions that we're discussing here.
Tom Riste-Smith: Mm. And I guess just, so the interesting thing there about lines company is you say you would have preferred fewer.
Dame Jenny Shipley: Yes.
Tom Riste-Smith: But that wasn't deliverable.
Dame Jenny Shipley: Politically deliverable.
Tom Riste-Smith: And is that because communities felt such a sense of ownership of their own assets that they didn't then want to merge them with other communities? And, like, what were your political issues there?
Dame Jenny Shipley: They were exactly that. You know, some of these companies gave out very small amounts of money to important local communities as part of their dividend structure and they were highly valued by communities, it wasn't a broader macroeconomic debate that they were looking at. It was very much a local community and many of the members of Parliament felt keenly about that. And so when you are working out a policy framework trying to bring efficiency to the market there are always trade offs and that was one of them. We didn't constrain them being able to merge in the future, and as you know, a number of them have merged over time. But at that time, that was the imperative. And that's why so many of them were left.
Paul Fuge: Do you think it's holding us back now?
Dame Jenny Shipley: It's, it's a... It's interesting.
Paul Fuge: Um, there's still 28. You know, we see two on the West Coast, we see two in the Northland.
Dame Jenny Shipley: I, in a broader sense, I think it is. I do think you need to look at them case by case, and if literally maintaining them across a complex geography is not either practical or deliverable, the answer's no. But I certainly think we have more than we require. I don't believe in a monopoly system by any manner of means, but consolidation may well deliver benefits.
Paul Fuge: That community, that does seem quite strong still, when we have suggested amalgamation or consolidation, it does raise, you know, people get quite animated about that.
Dame Jenny Shipley: I think you've got to go back and share the information before you rush to the conclusion, right? And I think these are good pause moments of; well this is where we were. This is where we are now and let's stand back and say well we are where we are and in order to adopt and invest in the innovation that we're talking about, and has to come- by the way, if we're going to have smart metering to the extent that it gives people genuine choice and the investment and assets in their homes, these line companies are going to have to be extremely agile to accommodate that. It's not just what the gentailers or the smaller companies do in providing electricity. The infrastructure has to maintain that, and support it. So yes, consolidation would be helpful.
But the trade off of the dividend not being sent back, which is a small amount of money and people often are amused when it comes in, but they have a sense of connection with it against if that was available to do the next thing. I think that needs to be explained again in the current context.
Tom Riste-Smith: That's interesting, right? The idea was that there was this natural monopoly of local lines companies, right? And that they shouldn't be allowed to own generation and or retail because those are both theoretically , well, not theoretically, very practically, potentially competitive industries, right?
And there's the whole risk of cross subsidization of lines businesses and generation businesses and things like that. That sort of makes sense if you think of that as having the potential to become like a large monopoly within an original area. But in retrospect, do you think that actually allowing the big generators to also become retailers just kind of created a different type of monopoly that took the place of that instead?
Dame Jenny Shipley: Well we didn't prevent other people coming in. The wholesale market and the retail market do work. I know that there's debate about whether it's fair or not and I noticed small players arguing that it should be broken up but they should have thought about that when they set up their business model.
The wholesale price does vary and every company has to measure and manage that. That pressure is usually generated by climate and the seasonal weather more than anything else.
Should it have been left together? I remember that being discussed, but on balance we decided that we would leave them able to be run. There was a discussion as to whether the gentailers should be generators and retailers and keep it separate.
If I have any regret, and it's a easy observation now - smart metering. So whether people having access to their own information and that information being available to the market independently. The technology wasn't quite there.
In my view, that's the single thing that gives gentailers - well, any company - a lot of control. If the band of meters were owned by an entity that did not have an interest in supplying generation, or servicing customers, as I look forward particularly, that's one thing that might be worth exploring further.
As people talk about future demand, they often go to the supply side. You know, how will we generate this and that? Unless you give people the tools to be more efficient, then you're going to have to keep producing more and more without necessarily knowing how well it's used.
We did some trials with Genesis where we supplied smart meters. We actually gave these families in the Wairarapa a lot of money. They bought solar panels and batteries and this and that and did a quite sustained trial to see whether it would change their behavior. And it was very interesting and very variable. Some families became very focused on turning the washing machine on in the middle of the night and realizing that they could bring their power bill down and it was a novelty. But I wasn't, well, indeed the company was not convinced that at this stage it was on a sustainable basis.
I think one of the things future going forward is how do we create a culture where every household can not only benefit personally by using smart meters and knowledge and good actions, but whether you can effectively create another power station. By saving, you are reallocating what's available. Or not using what's available.
Coming back to the smart meter and who owns that, as opposed to it being incidental, I think is an interesting debate worth having.
Tom Riste-Smith: I mean, I'm sure Paul, you've got something you want to pick up on that probably.
Paul Fuge: Lots of things on that.
One thing as part of the research when we started looking at this, it stood out to me that a lot of consumers may not be aware of is going back to when there was a monopoly, local monopoly. The MBIE data says that the commercial price was actually higher than the residential price. So consumers may not realize that there was a lot of cross subsidization going on.
So, while there's no question that, you know, residential prices increased for a variety of reasons, but part of that was an unwinding of cross subsidizations that people may not even be aware of.
Dame Jenny Shipley: The government used the monopoly to try and generate growth in the economy. And you know governments do make those interventions. We held the view that people should invest on the basis of a return, not on the basis of a government subsidy. And cross subsidization, while it sounds theoretically fair, and in equity terms you can argue it is, in my opinion there's no justification for industry being supported by low cost energy when retail households are paying the opposite. It has leveled out a bit. I mean, it's now far more balanced than it was.
Paul Fuge: I mean, it's interesting what you were saying that the Bradford reforms... so, you know, everyone mentions the Bradford reforms whenever we say anything about electricity, were a culmination that's sort of from the labor reforms of the late 80s, which is sort of a culmination.
And it kind of went a bit quiet after that, and we didn't split generation and retail, and there was a reason for that. I think on balance they decided that there would be more likely to be investment and generation if those two things were together. Now that we've got sort of 25 years on, do you think that the reforms have kind of reached the end of their, their kind of zenith?
And the next series of reforms is now required, with technology change and the new investment required. So do we need that next step? The next reforms to start the kicking has been a long time since...
Dame Jenny Shipley: it is look you're right and and I mean the word reform was used very widely in that period, and it was used in the context of the government being dominant to a New Zealand broadening its approach to markets.
That context is very important. I mean, we had simply got away with supplying Britain. They effectively paid us, and we lived happily ever after. They booted us out of the nest when they joined the EU, and a whole lot of things became a realisation. We weren't earning enough, we got into debt as a nation, heavily into debt, the World Bank was over our shoulder, and you don't sit there and do nothing.
So the reform environment then is different to the reform demand now. I think that we are sitting in an entirely new spot, but it's going to require a massive response. We've got a desire to drive emissions out of the electricity, or the energy sector. But I'm focused personally on the electricity sector in this instance.
To do that, we're going to have to innovate. This is not straightforward. And there's still a debate to be had whether a 100% target is actually achievable for New Zealand. I don't think we should be naive or unrealistic, because people like the idea of being 100% great. We're already 85% renewable, I think, and that's very high relative to others around the world.
We can do a far more, but I also know politically New Zealanders will not tolerate cold showers. We have to have this discussion, you know, what's tolerable and actually what's deliverable. So the baseload argument and then supplementary energy and what else we can do in terms of intelligent use all should be on the agenda.
As I said earlier, I think we do have to look at being a water rich nation. What are we willing to compromise in that area for public good? These are reform questions which I don't think a government should rush to proceed to impose. I think that there's literally a wānanga requirement where people sit down and share genuine information.
I mean, I respect the consumer interest here, but actually this is a whole of New Zealand, a whole of government, a whole of the private sector, a whole of public interest, public use, and then multiple demand from large and small.
You can't tell Fonterra to get out of the coal use if there's not alternative supply. You've got to go through this. What do we do with coal and gas? Gas is cleaner than coal. What's our tolerance level of continuing to use? So, I mean, I... presided over shutting down of turbines in Huntly, because this is directional, the question of what do we want to hold, as a backstop and who pays for it? Because in the market, if we don't need it, we don't need it. I mean, the company could shut it down and probably do better. However, you've got to weigh up the public interest around, and we get high prices on the odd day. But we have to hold these turbines warm for if they're required if there's a public interest in doing that we should debate that. It's like Lake Onslow. Are we going to do this? So it's an underlying guarantee and who's going to pay for it. Those questions haven't been answered properly yet.
Tom Riste-Smith: That's an interesting thing I actually did want to ask you about, which is probably a bit of an aside and Paul can wrangle us back into the right kind of ballpark in a minute, but you've talked about electricity as a public good...
Do you feel like it is a public good that people have a right to, and it is a job of a society to provide to all members of that society?
Dame Jenny Shipley: Yeah. But not through the public purse. So, there are certain essential infrastructure that we all agree are going to be available. Connectivity, roads to get from A to B, electricity when the lights go on. That doesn't mean the government has to be the single supplier. It's completely ridiculous to suggest that that's the case. I can tell you that Wellington does not have the answers to everything, believe me. And the diversity of New Zealand is such that we actually have to take a much broader view around what's there, what the needs are, what the future needs are likely to be.
And actually there's a multiplicity... so electricity and water for example can't be separated because if you create generation capability you're often creating water reserves that then can be used on other multiple public good, benefits which allow recreation and agriculture and all these choices. So it needs to be brought into a broader context if you're going to address water.
Public good means meeting the public's expectation. It doesn't mean the government's got their hand in every taxpayer's pocket doing what they like with their money.
Tom Riste-Smith: Yeah, I mean, I guess that's interesting because when you talk about, you know, we need sustainable baseload and but also, we need, obviously, peaking capacity for times when, lakes are lower. That's very expensive for a private company, and I think you probably had this issue with Huntley in what, it would have been, like, the mid 2010s or something, where you get to a point where, for a private company, it becomes very costly to run it, and it is not an efficient thing for them to be doing, but at the same time, on a wider, societal level, it's still a necessary piece of infrastructure, just not maybe a profitable one?
Dame Jenny Shipley: Well, there's a genuine debate as to how many of the turbines. I mean, it's a big, in its full glory, it was, what, a thousand? You know, it was a very big chunk of New Zealand's baseload. As geothermal and others have come on, that baseload piece has not made Huntly as essential as it was, but it's a brave government that's going to say that there is no role.
And I respect the fact that future governments need to grapple with this, but it's not obvious to me yet where peak demand is going to be met from. I understand the Lake Onslow overarch, but I haven't seen what the cost benefit against other alternatives and what New Zealand's tolerance is. I mean what if we get to 95 and then still hold a five percent peak load that is gas supported or whatever. I think we should have that discussion so that we actually know what our choices are.
I also think we need to look over several years because there have been years where Huntly's hardly been called into the market and then other years where it's been absolutely essential in the market. So unless you look at at the use across other baseload years, when you see the climate fluctuating.. Uh More than demand, it's actually more, what the climate is doing that drives this and whether the lakes are high or low and, and all of that carry on where the Huntly is called in.
Tom Riste-Smith: Hmm. Who pays to have that as an option?
Dame Jenny Shipley: Well, I can tell you that as Chairman, I used to say, it's time we went to the government and said, if you want to keep this as a family pet tell us now because we're going to shut it down otherwise. Because on the, on the numbers, it would have been shut down some time ago. But it won't be, by the way. The government owns 51% of it. They've never rocked up in my period and said you must do this or you must do that. The board makes those rational decisions. The chief executive and others consult with the shareholding ministers regularly and the weighing up of their emissions targets against other options and offsets, you know, there's lots of things that company can explore.
I'm not involved in it now, so I can't comment on what they're doing.
Tom Riste-Smith: All right, Paulie, you want to wrangle us back on somewhere in the ballpark of on topic?
Paul Fuge: I've got a couple of questions just that have popped into my head. One of the cornerstones was that competition would be good for consumers.
Dame Jenny Shipley: Yes.
Paul Fuge: And, and, you know, the Bradford Reforms sort of unleashed retail competition. Do you think consumers have seen the full benefit of competition or do you think we still haven't unleashed that full benefit yet?
Dame Jenny Shipley: I always try and weigh this up with how much consumers use the switching.
Tom Riste-Smith: Yes.
Dame Jenny Shipley: And I'd be very interested in the next 12 to 18 months as cost of living pressures come on people's households. As to whether they really do have to go in and see where their cost centers are and think, gosh. I mean if things are going well, we tend not to go worrying about the last dollar. Uh, when pressure is on, then, you know, your mortgage cost and your power cost and your telecommunications... competition, which is available in the market, unless you've got an imperative to go and explore it, or you're keen to do so, often you don't utilize the platforms. So I think the competition in the market, or the competitive market, is available to consumers. It's up to consumers to explore how to utilize that to their own advantage.
Paul Fuge: So it's not being utilized to its full potential?
Dame Jenny Shipley: I think that we should have this conversation in two years and see whether switching becomes a major part of people's response to the current environment.
Paul Fuge: Because certainly that's what we see. Most switching occurs when people move house. That's 70% of when it happens.
Dame Jenny Shipley: We know that. Companies know that. And put a big effort into trying to hold their customers.
Paul Fuge: Yeah.
Dame Jenny Shipley: To help them when they move house.
Paul Fuge: Yes. So it'll be interesting to see. That's something we keep having a close eye on, is the switching.
Back to my further question before, any reforms you think that would help unleash the power further of retail competition?
Dame Jenny Shipley: My comment around smart metering. There would probably have to be a disaggregation of existing meters out of the hands of the current players. So it would be quite a significant reform. But if it was sold on the basis that if people have the power and know that it's independent, because people often worry that the gentailer or some other owner of a smart meter has got an incentive to still set different daily rates and things as opposed to let them genuinly see how their use as a consumer is being reflected.
Now, I worry that we're using a similar pricing platform as we've always used across a smart technology framework. And so if you're asking me my opinion on whether consumers can get the best benefit, I think neutral ownership of the um... and this may take 10 years. I mean, it may be a long term goal. You could argue that it could be put in the emissions package, because if you're going to shift control to consumers, so they genuinely have, uh, what are the companies offering me? How can I watch? How can I manage my household demand more effectively? How can I coach my children so that they know where the meters are? And what could we do in bringing the concept of electricity in the home as a cost management tool, not as an amusement tool.
They're far smarter than most of us are leveraging. But with a really strong consumer focus, if you have a smart meter and you know how to then utilize your in house, as opposed to the price point of where electricity comes in. I think the next big gains are somewhere in that interface.
I mean, I'm aware of how many times governments have come in and said they're going to look at the energy sector and consider further reform. And almost all of them have backed off and said, actually, like for like, it's a very efficient system.
But you asked me earlier around, is it time for the next set of reforms? In this instance, I don't think it's a, let's unwind what's been done. Uh, there's no way the New Zealand economy's got the money to nationalise anything.
I think that the intelligent space where consumers could really benefit is an area where radical redevelopment, uh, I think reform is actually an unhelpful word because it doesn't get us to where we need to go. And maybe radical is unhelpful as well, but you know, where's the next big step change where people could be in control of their energy use and have far more visibility on price input, so switching would have far more information on not just what you can currently offer them, but far more data on the input and then how they could manage their household. I think this is essential, by the way, to meet future demand, because the longer we can delay putting the next big mega power plant in, the better it is for all of us, albeit that I think we are going to have small and large investments that will need to flow through here.
Tom Riste-Smith: Well, just coming from a purely, consumer point of view, I guess my take on that is, part of me is excited by the idea of having those kind of nerdy demand side response techniques and all that kind of stuff, and then part of me goes, Oh, fuck, I don't have the time to want to deal with this. I don't have the information to be able to deal with this.
It's just, it's putting a lot of pressure on individual consumers to manage that. I don't know. I just, this is just my personal thing is looking forward I'm like, yes, I want more demand side information. And yes, I want to be able to control... okay prices are high now. I'll put the washing on now where I want to be able to look and have like, okay, well we're a hundred percent renewables now so this is the time I'll use my tumble dryer. Cause then I'll feel good about that decision. But at the same time, I'm just very daunted on a consumer level by the whole process of having to take that much ownership of something that basically is kind of a mystery that just comes into my house.
Like if I go to the supermarket, I want to buy some canned tomatoes. I can see 10 different options in front of me and they've all got prices on them. I can say, I'm going to pick this one or this one. Whereas with electricity, you kind of don't have that option, you know. Like you might get a plan that will fluctuate at different times of day and things, but you don't really have that kind of granular control over price decisions in the same way.
Dame Jenny Shipley: Look I completely understand what you're saying, but we can't wish ourselves wealthy without producing wealth.
Tom Riste-Smith: I've tried.
Dame Jenny Shipley: Uh, we all have. I don't think we can wish ourselves 100% renewables by just dreaming. If we're serious about this stuff, this is where the rubber hits the road. So when you ask me what change is required as opposed to, you know, a reform often implies the winding back. And some governments have said they would, the minute they looked at the market they changed their mind . So, I don't think that's going to happen. On the margin, there are things that can improve. I mean, if you want a disrupter, I think that the three SOEs that are there, the government as a 51% shareholder is going to have to decide even whether they will invest at the rate that is required.
So, you know, you can go to your 49% shareholders and say, we're going to build our next dam and your dividend is going to be less than it was last year. Uh, the government's going to have to decide, is that a lever that they're willing to support? Because if they want to hold their majority shareholding. Or will they go down to 25% in order for capital to flow into the sector? I think it is the right time for these conversations to be had. And it's not actually a privatisation market. It's a, the energy sector needs investment, and who's going to put their hand in their pocket to do that?
So, again, Father Christmas doesn't exist. You either go into all taxpayers pockets, and you've just told me, people are already struggling to make meaning of this, or are there people who like investing in the energy sector and are we prepared to give them an 8% dividend for paying for that? This money has to come from somewhere, and I do think the three SOEs and their ability to do the investment exists. I'm absolutely clear that they know their networks.
They know how to generate. They've got high quality staff. They're very experienced in the market. I don't think we've got a single weak one. They're interesting in so far as they're highly complimentary. I have heard people argue that we should only have two. Should you merge them? These are not debates for me.
I mean, they are long standing debates in the market. But I do think the question of where the money comes from, from the next set of big ideas, that might empower consumers, because there will be infrastructure costs. You can't go and get a smart network in a single entity like Transpower and disaggregate current ownership. You'd be buying it off gentailers or these are where big changes have to come from in order to make a market work like that.
But I do think because of the way in which energy is being used in the future, if we're serious about empowering consumers, these are things worth talking about. I think that if people are treated with respect and informed properly, they do have the capacity to understand this complex issue. So I'd love us to have someone start talking about, are we ready to talk about which rivers or which catchments, we could harvest water and then release it to generate more electricity in the future and create other amenities, because that's been the reality of some of the dams.
We were against stuff, but once it's done, you know, look at the catchments in the Central South Island and in the North Island. These are some of the biggest recreational areas and many of this generation can't remember what they looked like before these were changed. I do think it's the right z` time. There are other catchments that could be looked at, in my opinion. And they are a great investment in the future. And they have multiple public and private benefits by taking those decisions.
I'm not sure who's going to do it. Maybe it's Consumer's role to actually raise the big questions on behalf of consumers.
Paul Fuge: That's right.
Just get back to the reforms. I mean, that's what I hear a lot, any electrictiy issue it's become a catchphrase... They go, oh, the Bradford Reforms. I don't think consumers fully realise what the Bradford Reforms were.
It's become a catch all for the general reforms. So do you think they've been unfairly maligned? Because if you look at the deeper dive we've done since 25 years... there were a lot of cross subsidies that have been unwound. We have put in a lot of power stations, the National Grid's been basically rebuilt, well a lot of money's been spent in the National Grid, the era of cheap, cheap gas ended. So, correlation is not causation.
So, sure, the price has increased, but you can't just say that with the Bradford reforms. So do you think the reforms have been unfairly maligned in people, in consumers heads? That they've put all that stuff onto the reforms when it probably wasn't necessarily the cause of all those things?
Dame Jenny Shipley: Look, I think many of the reforms in the 90s were unfairly maligned. And heaven knows what New Zealand would be like today had they not been done. I think the Bradford reforms have been unfairly maligned. And Max for a period of time was personally unfairly maligned. But it takes courage and character to do some of these big leadership projects, and Max had that in bucket loads. As did the other ministers who sat round this table and diligently unpicked the complexity of what we faced. And now we do have a properly maintained national grid. I worry that if we left it as it was, it would just be patched up. The last breakdown would be mopped up.
Now Transpower has an obligation to keep a national grid network available and flexible all the time. Now why wouldn't we do something where the entity is completely focused on that, as opposed to, you know, trying to do 25 things at once. I think it was a gift to New Zealand, which only over time will be realised.
And every time I've seen a government come in and say they're going to review the electricity sector only to proceed to do nothing, I think it's an endorsement of the reforms that Max as Minister, along with the team led.
Tom Riste-Smith: It leads me to... I guess this is kind of a big question. ...With the benefit of hindsight did the reforms work in the way that you anticipated?
Dame Jenny Shipley: Unquestionably, yes. I mean, had we not done them, I don't think we would have anything like the reliable electricity infrastructure that we take for granted every day. That's not where we were heading. You know, we had a, a splendid monopoly that kept buying very expensive art and hanging it in their corridors.
And were part of a corporate sector who thought that it was just fun to run a very large company. I'm being cynical. But electricity and the infrastructure and the importance of it to the New Zealand economy is something that governments have to worry about. And in the 90s, there were a lot of reasons why it was clear that if we got the levers right private sector investment would flow in across all of the economy and we would see a shift from just debt and deficits to investment and growth.
That's what we succeeded in doing. With the exception of the 97 / 98 Asian crisis, where we fell into deficit for six months. That period and that degree of change, which continued, Helen Clark inherited a surplus and 4. 5% growth rate when we finished in office. Many of the changes to do with the electricity sector and the confidence it provided where people knew the rules, they knew where investment was going, they knew what the government was going to do and what was an opportunity for the private sector.
Those floats were hugely successful. Lots of people didn't think that the private sector, you know, mum and dad would want to invest. They flooded into those floats and said, we see that this is an important part. And they've done well from them.
Tom Riste-Smith: Hmm. I guess my concern about that would be that in real terms, electricity prices are now about 50% higher, give or take, than they were Before the reforms took place in 98. And I mean that...
Dame Jenny Shipley: you go and check anywhere in the world and compare like for like. There is nowhere. This is 25 years on or tell me a service... actually, there are very rare services that have dropped in price, but they are generally not services that require massive ongoing infrastructure investment and complex network maintenance.
Remember that every bill a consumer gets, you have the blinking lines company and their either efficiency or inefficiency reflected in that bill. Dear old gentailers and, and the retailers, they have to take all of these costs and pass them through. So, those people are not having to be held to account. That is one of the things, by the way, that worried me. I mean, you'd be a genius if you could read your own power bill. You get your power bill and so many elements of it are just buried in it . Even I look at it and my eyes glaze over. And we've tried and tried in Genesis to make it more transparent, but, you know, you've got a whole lot of other inputs that you don't control that you have to present in your accounts to consumers, and that makes it very difficult.
We never did work out how to do that better. On the other hand, we were determined at the time not to make people's lives miserable, and to have to pay seven or eight bills to different providers in the electricity sector. I haven't turned my mind to what the solution is there, but disaggregating it would be entertaining for some officials, and consultants would make a lot of money. But I think that the transaction cost of still having to pay the overhead of the lines company to send the bills, you know, this doesn't take you anywhere. So you have to be careful what you wish for.
Tom Riste-Smith: I think Paul might have some questions on that.
Paul Fuge: Well they did try that and there was one lines company who was sending their own power bills and it was very unpopular. And they've stopped doing that.
But we are doing a big research project on power bills. And that gets back to a previous point about the market itself. You know, does it behave in the same way as markets for other products like tins of tomatoes etc. Um, and we see evidence that things could definitely improve there. That consumers, despite seeing large savings, are not switching the numbers you'd expect, and that indicates to us that there are some issues there that need addressing.
Dame Jenny Shipley: Oh, and look, all that type of research is valuable. Holding the market to account.
I mean, markets are markets. But within markets, they only perform if there are appropriate constraints and pressures. And consumers come into this. As long as they're well supported with good research they'll have an influence on what companies do.
Tom Riste-Smith: All right, well, I've got two things then, basically. One - and this comes back to, again, your Genesis time is - do you think from that experience that there's actually an incentive for those gentailers to compete seriously for more customers than their own generation load? Is there a point where actually having more customers becomes more of a liability than a benefit?
Dame Jenny Shipley: I don't think it's a common circumstance, even in the existing market. Um, however, when other companies got out of certain types of generation, the market did respond with products and they came to us more than we went to them actually, simply because of the nature of our our generation capability. So, it's not so much a, will they go and try and get more customers than their current load can carry, but the confidence that they have in the mix of their load, that if it's vulnerable, they will take measures to cross purchase.
I haven't seen an example, I can't recall an example, where products or arrangements were entered into where a gentailer had more customers than they wanted, than the base load could produce. The smaller producers, obviously, and who are retailers only have a quite different need of what they're trying to buy both from the market all through particular arrangements, and there are a variety of those. I mean Trustpower's an interesting model that sort of navigated its own way in the market and has bought and sold a bit as they have worked out what makes money and what doesn't. But look even in the the years I was involved in Genesis both the market and the way the market responded continue to evolve. And I think that will continue.
I also think you might see some of the big customers, the ones who have been coal users, getting out. Where they go, whether they generate their own electricity, or come into arrangements, uh, some of them are big in their volume, and whether they will go to a mix of providers, or whether they'll enter into major arrangements these are new, they're not marginal. They are going to create a ruction one way or another through the market as they either produce or purchase. And I'm not on their board, so I don't know what they're working out, whether it's cheaper for them to go into generation of some sort or into some sorts of market arrangements.
All of these ripple through and affect customers, whether they're large or small, because it's a demand cycle question.
Tom Riste-Smith: Okay. And then the other thing, and I guess this comes back to Huntly in a way. How do you feel about the wholesale kind of capacity auction, the way it works, and the way it's determined by the marginal cost of production? I know obviously people floated like single purchaser and things like that, but like...
Dame Jenny Shipley: It's fantastic. We sweat- well, I say we, Genesis sweats when there's miles of water. You know, you get a season where we're going to have to carry Huntley, and it's a darling dinosaur on those years, and then for other years, it's dry and you can see there's a cycle that's coming, winter and spring, where there will be coal required.
It's not straightforward. Huntly has to carry a very significant load of coal that they store. I can remember at one stage that the coal pile was a hundred million dollars of an overhang sitting there. Now, the dual fuel option with gas and coal is now very efficient. It's much more efficient than it originally was, but it's still a very expensive option.
It being bought into the market when it's required, somebody's got to pay for that. Again, they've been investigated several times as to whether it's price gouging, and I think, generally speaking, the market regulators have always concluded that it was justified. Peak is peak. And I know that some of the small retailers hate it because they went in thinking that it would be a very easy medium average, but that's not the nature of climate.
And you know, sometimes the climate's generous and so those retailers will do very well. They can set a wholesale price and manage the fluctuations without disrupting customer behavior. Other times you will get these shocks. And it's not a shock from a company, it's a company responding to a climatic shock and passing the cost on.
I don't know who else would pay that cost if you don't pass it on. So I think the market operator does work very well in those circumstances.
Tom Riste-Smith: I guess what I was kind of thinking is that obviously Huntly's expensive. It needs to be paid an amount that it needs to be paid to operate, for example.
But let's say Lake Karapiro is a much lower marginal cost generator, right? So I guess there's a perverse incentive to not compete. Like, if you think about competition in the way of power companies and generators, surely the competition on their side is, how can we generate the most electricity as cheaply as possible?
Because the cheaper we can generate this electricity, the better, because then we can undercut the other competition and we can do more and more of this, right? But the idea that everyone gets paid the highest marginal costs, in a weird way, kind of, to me, it feels like that would disincentivize that competition, because if you've got too much low cost... Your entire price suddenly falls through the floor.
Dame Jenny Shipley: Well, they manage that over time, but remember the operator, if I understand it correctly, he doesn't call in the highest price. They say how much demand is required, and you bid it into the market, and people make a rational decision. Now, it's not only whether water is in Lake Karapiro, or wherever it is, at that day.
They will not be looking on a daily basis. They'll look at the price on that day, but they'll be also considering how to generate a reasonable return over a long period of time, based on storage. You know, water in a lake is like money in the bank, and you don't spend it all on one day. You manage it in order to be able to deliver the return back to the taxpayer and to your shareholders.
Uh, so they're making rational decisions. But look, my observation is that the market operators, sometimes we just have to, uh, Genesis had to sit out of the market. Because we're not competitive. So we didn't put either water or... I mean, sometimes water has quite a significant differential. It might have poured with rain in the North Island and Waikaremoana and whatever are full and others are at a terribly low percentage of their capacity. And so you decide, heavens, I better hold that as backup. The traders make those decisions along with the board all the time. The board doesn't get involved in the daily, but they understand and expect the traders to manage the market so we don't create crises. But we also get good returns. I think it's worth investigating. But no, I don't think there's a big mischief there.
Paul Fuge: You don't think that the that market mechanism could be, is still fit for purpose, for the future?
Dame Jenny Shipley: Well look, the only alternative is to say to every generator, that if people don't like that you know, the very high prices, particularly that come out of a Huntly spike. And a Huntly spike is only a market that has not a lot of capacity, you know. So those spikes don't occur unless we're literally running out of water. There is an argument that everyone should... if you're going to keep all of these companies floated, there is an argument that if it's a backstop provider, you should have all of the companies contributing to the backstop.
So it's only the companies or the taxpayer, they're the only alternatives. So you're going to say, well, if you want to manage it in a different way and keep the price not showing the real cost of producing it on that day, which is what those sharp costs reflect you've got to make another intervention. At the moment I think the market is probably the best of the interventions.
They are a shock for the Flicks of this world who have said, you know, to take the daily price and then they don't like it when the daily price turns up and it's a whopper. And they've got a very low overhead and their business model is what it is. But you know, I think we've all got to look at the relative business models in the market and see how they speak to each other.
Tom Riste-Smith: So you don't think for example, there'd be merit in having a blended price, for example, across all generation?
Dame Jenny Shipley: No. Because we also need investment. So blending then diminishes the ability of companies to make rational future decisions. If we say, well, government's going to do all the future investment in the sector, and the retailers and generators only have to worry about the annual market you could go for a blended price. But you're asking these companies to make a lot of decisions around future demand, and they will respond. I mean, they will put the investment in if they think that there's both demand and in establishing demand, a return on capital and an ability to deliver a dividend over time.
I can tell you there's multiple pieces of analysis done and consent sought anticipating this stuff. So they're not sitting there doing nothing. They are looking ahead all the time, but unless they're confident that in raising the capital and deploying it they can get a return and that there are customers that will use that. It's always a judgment call.
Paul Fuge: Mm. Interesting what you're saying about the Lake Onslow being a cooling effect on those decisions.
Dame Jenny Shipley: Absolutely right. Well that's exactly the reason why you've got to be clear about why the government will be in the market. I haven't read enough, but I think it's quite an unproven model. It looks very expensive and again you've got to sit it against other alternatives. My worry is that if they do this... Well, the windfarm in the Wairarapa that Genesis has got consented, it's a very big... There's no way its going to be deployed because they've got quite a track to get to the transmission lines. All these things have to be weighed up. It's not just ploughing the capital into some towers. They've purchased the sites but they're sitting there. So there's a number of consented sites sitting there and the and the minute you start one of these they will just stop and say "well, we'll wait and see."
Paul Fuge: Thanks very much, that's very insightful.
Tom Riste-Smith: Cool. Thank you for that, Jenny.
Dame Jenny Shipley: Alright, my pleasure.
Jon Duffy: You've been listening to a special bonus episode of Consume This. Our thanks go out to Dame Jenny Shipley for taking the time to talk to us. If you've been enjoying the episode why not take a second to rate and review us in your podcast app now.
Consume This is brought to you by Consumer NZ. This episode was introduced by me, Jon Duffy. The interview was constructed by producer Tom and Powerswitch manager Paul Fuge.
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