Electricity revolution: Power to the people

by Pattrick Smellie / 10 June, 2016
Thousands of Kiwis have switched power companies, chasing cheaper rates. With solar technology improving, more choice is on the horizon.
Photo/Getty Images
Photo/Getty Images


Few claims raise a more emphatic “phsaw!” from consumers than a claim that the electricity market is competitive. It seems power prices have risen forever, with pro-market reforms blamed.

Yet in recent times, electricity prices on average have fallen – by 2.8% in the three months to September 30, 2015, according to the Ministry of Business, Innovation and Employment.

This is unusual. Electri­city prices almost never fall on an official measure. They’re one of the things that are assumed to just “go up”. Indeed, in the past few days, the Electricity Authority (EA) has ­proposed a model in which they will do both, depending on where you live, meaning a possible $140 would be added to Auckland households’ annual power bills by 2019.

Yet what’s largely unacknowledged and ­certainly unlamented, is that electricity companies have been doing it tougher than they did, say, a decade ago. Having spent the thick end of $5 billion on upgrading the electri­city system since the late 2000s, electricity ­suppliers have faced a wave of factors that are inhibiting growth. Cash washes through them still, but with very limited potential for increased earnings.

For a start, energy efficiency is kicking in, a response to higher prices and somewhat assisted by government policies.

The 2008 global financial crisis also put a spanner in the works of pre-2008 ­electri­city demand forecasts. Energy-intensive New Zealand manufacturing remains hollowed out, apart from milk processing, where ­processors often produce their own heat to turn ­liquids into powder for export.

Beyond Fonterra, New Zealand Steel’s Glenbrook steel mill looks secure, but the Tiwai Point aluminium smelter, using a ­seventh of the country’s total electricity load, remains on a commercial knife-edge.

Last but not least, regulators have spurred a competitive edge in New Zealand’s small, stringy electricity system and have arguably had some success.

Photo/Getty Images
Photo/Getty Images

FROM THE ROOFTOPS


For critics of a generation of electricity market reforms, this is the narrative: in the mid-1980s, the New Zealand Electri­city Department was told by those Tories in disguise, the Rogernomes, to be a business and it became Electricorp.

In the mid-1990s, it was split into supposedly competing state-owned enterprises with silly names such as Mighty River Power (MRP). Thank you, Ruth Richardson.

Contact Energy, presumed to be the worst-performing state-owned enterprise long term, was fully privatised by 1999 and went on to surprise everyone by being pretty smart.

In 1998, the National Party’s Max Bradford amputated customers from the benignly monopolistic, community-­owned electricity-distribution networks that used to bribe their electors with a dividend composed of their own money and gave them to the SOEs with the silly names.

Competent professional engineers who knew how to run electricity systems were now in charge of large numbers of actual real customers about whom they knew nothing. The customers were, by and large, unimpressed.

Photo/Getty Images
Photo/Getty Images


Meanwhile, New Zealand kept running short of electricity in winter. New generation was clearly required, but prices would need to rise to make that profitable. A semi-competitive market agreed without saying so that everyone would raise their prices to justify the investment.

As a result, electricity prices rose sharply in the 2000s ahead of investment in new power stations by the commercially oriented power companies.

At first, natural gas seemed the generation source of the future – low-carbon and cheaper than renewables. Contact Energy and Genesis Energy raced up and down the Taranaki coastline looking for a spot to build the world’s longest breakwater in the Tasman, one of the world’s roughest seas. Today, it seems daft. Then, it was serious.

Meanwhile, other generators established a solid wind resource for New Zealand at 8-10¢ per kilowatt-hour – competitive with mid-2000s gas-fired generation. The productivity of wind farms in this blustery country tends to blow international observers away.

Then geothermal steam began to be reassessed. Central North Island generators Contact and MRP, soon to be renamed Mercury, invested heavily not only in equipment but in their relationships with Maori. Geothermal energy doubled to nearly a fifth of the country’s electricity supply. At the same time, the state-owned monopoly running the national grid, Transpower, spent about $2 billion upgrading the Cook Strait cable and supply into Auckland.

Photo/Getty Images
Photo/Getty Images

SUNNY NEW LAND


After 16 years of wrangling about who should pay what for access to the national grid, the EA this week recommended charging less to consumers in many parts of the  South Island and lower North Island, while raising the price for Aucklanders, the Far North, the West Coast and the Bay of Plenty.  The EA says the overall cost for  affected consumers is another $11 a year.

Vector estimates the additional cost to Aucklanders would be $78 million a year if the pro­posals do take effect in 2019. Across the 558,700 households Statistics New ­Zealand projects will live in Auckland in 2018, that’s $140 a year added to power bills.

But the potential for massive price shocks has been largely massaged out of the EA proposals, and the outcome is a sunny new land of stable power prices and security of supply – not that electricity consumers see it that way.

But there’s just one problem: the world has now changed. Another sunny new land is emerging, one where power stations are redundant, replaced by rooftop electr­icity production that’s stored in batteries in the basement. It’s one where wall paints, windows and roofing materials on every imaginable building will produce electricity.

Whether they believe it or not, New Zealanders are already behaving as if the electricity system is competitive. The rate of customer switching is among the highest in the world and industry participants reckon the number of competing companies for electricity supply will grow from about 30 now to as many as 50 in a few years’ time.

Compare that with supermarket chains where just two providers – Progressive Enterprises and the Foodstuffs co-operative –  fight it out, or petrol stations, with half a dozen or so competitors. At the very least, there’s a great deal of choice for electricity consumers.

Julian Cardos of Electric Kiwi, an online power company.
Julian Cardos of Electric Kiwi, an online power company.


In the past, that choice was more limited. Four behemoths – Contact Energy, Genesis Energy, Meridian Energy and MRP’s Mercury brand – bestrode the customer landscape. At their side was a wily fifth wheel, Trustpower, consistently charging more than others thanks to great customer service, Bay of Plenty loyalty and being smart.

So where is the cutting edge of electricity retailing now? Newly launched Electric Kiwi offers a $200 savings guarantee in the first year – it’ll top you up if you don’t save that much – and a daily “Hour of Power” free, during the daytime and late evening ­off-peak hours. You have to choose your Hour of Power ahead of time, as Electric Kiwi is trading on the wholesale electricity market to buy power without being a ­generator. It needs to order in advance.

Your house will need a smart meter and don’t expect any discounts for prompt payment. This is an online company, so it will advertise through Facebook and TV rather than door-to-door and it would rather you didn’t talk to the call centre.

Flick’s proposition is even more ­tech-enabled and is for power users who want to save money and understand the system.

They will be earning a regular income, have no trouble ­­meeting weekly bills in full and be willing to take the currently tiny risk that one day the power price will go through the roof for short periods of time and cost a fortune. In return, customers get electricity at whatever the current “spot” price ­happens to be.

In recent years, it’s been between 5¢ and 6¢ a kilowatt-hour and is often far lower, between 3¢ and 4¢. Power companies charge bulk-buying industrial custo­mers 7-8¢. Residential consumers, who expect to have ­electricity first thing in the morning and in the early evening pay more again.

Flick is a no-frills company and puts the commercial risk of playing the electricity spot market with the customer, whereas the old generator-retailers agree to supply at a fixed – higher – rate no matter what happens to the 30-minute spot price of electricity. A decade ago, price spikes to hundreds and sometimes thousands of ­dollars an hour would probably have wiped out some Flick customers, if not Flick itself.

Today, a combination of regulatory changes to limit wild price gyrations and, more to the point, an oversupply of electricity mean the risk in Flick is very small. But whether that will always be the same is an open question. In the meantime, Flick is the fastest-growing electricity retailer.

The single biggest change to help make Flick and Electric Kiwi viable is the nationwide rollout of smart meters. Note: they’re not that smart. They’re of greater use to power companies than customers. On the other hand, they are letting new competitors think up ways to pay less for electricity.

Steve O’Connor chief executive of Flick, a power company that offers spot prices. Photo/Flick/Supplied
Steve O’Connor chief executive of Flick, a power company that offers spot prices. Photo/Flick/Supplied

DOORSTEP BATTLE


The big players have been slugging it out with discounts, special offers, telemarketing and expensive, risky door-to-door marketing to try to entice customers to switch provider.

When competitors try the same thing, they will pay substantial bonuses to make customers stay, as long as they’re profitable. People who pay their bills late are popular. They lose their prompt payment discount. People who don’t pay at all – not so much.

The result is a huge amount of marketing activity. An estimated three out of four homes had a visit from an electricity company salesperson in 2015, to the point where many power companies are pulling back. Customers are sick of it and the costs are rising.

A half-yearly report from Meridian Energy showed the “cost to serve” each customer in the six months to December 2015 had risen from $114 a year earlier to $129. Much of that was the cost of advertising and ­convincing  customers to either come to or stay with Meridian. Its competitors tell a similar story. And if that $15 difference doesn’t seem much, think again. Figures like these are the difference between big and small profits when multiplied by hundreds of thousands customers.

Whereas customer churn was a key measure two or three years ago, attention is turning to a competitiveness measure that assesses power companies’ ability to keep loyal customers.

Meanwhile, Contact Energy says more than three-quarters of its customers are on “non-standard” tariffs, most enjoying a 22% prompt-payment discount for paying their bills on time.

That big discount tells several stories at once: the size of the cash hit Contact had to take when its reputation was in the pan a few years back; the impossibility of unwinding such a large discount; and the foolishness of any householder paying the rate-card price charged by a major electricity retailer these days.

With marketing costs so high and profit margins under pressure, the big power companies show signs of wanting to call something of a truce on customer acqui­sition, but their more agile competitors will not be playing ball.

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