The marketing campaigns waged to induce customers to chase around between electricity companies in a frantic search for savings has always looked like a diversion. Yet according to RNZ this morning, we’re about to see more being spent on this kind of marketing by energy companies.
Thanks to the government’s asset sales programme, ordinary citizens will not only be paying for that extra marketing via their power bills, they’ll also be getting a smaller share of the state energy company dividends, from the likes of Meridian. (More of these dividends are going straight into the pockets of the tiny minority of private investors able to take advantage of the energy company selldown.)
As we look towards winter, it may pay to ask some basic questions about the direction in which power bills are headed. In one small column, I’m not presuming to provide a comprehensive overview… yet arguably, the energy companies that currently dominate the electricity market are in a sunset industry. And since wealthier users will be better able to afford to move to the new technologies (eg solar) the poor could well be the last, sitting ducks left on a national grid system that is busily trying to maximise its returns in its golden autumn years.
As that scenario plays out, there will be no point looking to the Electricity Authority to protect the consumer. Sure, it has a statutory obligation to protect the ‘long term’ interests of the consumer, but its more pressing obligations are to protect the investors, by delivering them ‘certainty’. Section 2.2 of its 2010 Consultation Code document said so, explicitly:
The primary purpose of the principles is to provide industry participants with greater predictability about decision-making on likely amendments to the Code, to maximise investor certainty.
1.Why are fixed charges, if anything, always going up ? The fixed charges element on your power bill is – beyond a few soothing catch phrases – one of the bill’s more mysterious components. Down the years, consumers appear to have derived no benefit at all from technological advances, which should have seen the fixed charge component decline. Yes, there has been some re-investment in the grid; and in some years, that has been considerable. Demand though, has been flat-lining since the GFC, so capital investment in new plant hasn’t been a pressing priority for quite some time. As one investment analyst told RNZ this morning:
Yes, these [electricity] companies do generate strong cash flows. A lot of that is due to the lower level of maintenance [and] capital expenditure they require, versus depreciation.
Clearly, the price benefits from this situation aren’t being passed on, beyond the superficial smokescreen of the artificial ‘competition’ occurring within fixed boundaries. (Much of these savings are derived from the minor differences between companies over the variable rate ie the cents per unit, per kilowatt hour.) Meanwhile, the energy companies remain coy about how their entire fixed charge income stream is broken down, and justified.
The prominent role played by the fixed charges mean there is less incentive to restrict electricity usage – since that isn’t reflected as much as it should be in the power bill. More flexible, more interactive pricing models would reduce demand, and the related need for capital investment. But that’s the problem: companies have a vested interest in their customers using more electricity, not less.
That’s one reason why they like fixed charges, which ensure a predictable flow of money in the bank. It is very much like a supermarket charging you the moment you walk in the door, irrespective of how much produce you put in your trolley. Supermarkets can’t do that, but energy companies (and to a lesser extent, phone companies) can, and do. Clearly, there should be more regulatory oversight of the energy companies to limit the extent to which their fixed charge regimes are extortionate.
2.Is there worse on the way ? Yes. For a couple of years now, the Electricity Authority has been examining variations on a new end-user system of transmission pricing, which will essentially be based on the distance from the point of generation.
Quite accidentally I’m sure, the end result of one of the options on the table would be that the Tiwai Point smelter will enjoy a massive cut to its power bill – of anything up to $50 million a year – while consumers situated in New Zealand’s far flung and impoverished regions like Northland and West Coast (and also BTW, Auckland) would see a large hike to their power bills.
For Coasters this would be a double whammy. Since 2011, they have also been paying for the gold-plated 110kv line capacity installed to service the now-defunct Pike River coal mine.
3. Are there power companies operating with a model that responds more directly to actual use?
Yes, the explosive growth of Flick Electric has been largely driven by the way that its pricing mechanisms expose its customers to the gains – and to the risks – of price fluctuations on the electricity spot market. If you’re willing to use smart metering to track your usage and tailor it accordingly (while riding out the spot market peaks as thriftily you can) the returns are claimed to justify the effort. As this report on Flick’s recent foray into the sharemarket says:
Flick charges customers the wholesale price of electricity, plus a defined profit margin. This means that a customer’s bill could fluctuate substantially from day to day depending on events influencing the national grid, but overall Flick claims to save its customers ion average 18 per cent. Some customers use the tariff structure to ‘game’ the system, by frequently checking the wholesale price and using their appliances at times of low prices, or cutting use when the price spikes.
Later columns will examine the transmission pricing options more closely. Overall though… extracting money from captive customers has been a feature of the economic reforms in New Zealand since the 1980s. In a situation where wages and benefits have been flatlining, it is little wonder that the social effects are becoming more evident, daily.
The Exciters, Twice
Brenda Reid of the Exciters was one of the best soul voices of the 1960s and the title of this track seems appropriate for this column….
For no logical reason at all, here is Brenda and the gang visiting the zoo in Vincennes, France, while singing their biggest hit “Tell Him.”