By Bruce Wills*
Cynics may say the next general election is shaping up as the power bill when the last was the milk bottle.
While power has an undeniable populist appeal to it; who doesn’t want cheaper power?
That appeal wains when you start adding up the pluses with the minuses.
Coming after the gleeful “Hey Clint!” misstep by the Green’s Gareth Hughes, it was disappointing to read "hyperbolic claims” as the latest Green response to an open letter from businesses about their power policy.
While Federated Farmers wasn’t a signatory to this letter, our views were made clear within days of the policy’s release.
You see farms are big energy users so we have a lot of interest in anything that may save or add to its cost. The average dairy and arable farm will use $25,000 worth over a year but for some, the bill is much higher.
Yet for low volume electricity users the line charge now makes up a significant percentage of the final bill.
There are no alternatives being proposed for that which seems odd.
Is it also no wonder why our energy spokesperson, Anders Crofoot, has described the Labour/Green policy as “Robbing Peter to pay Paul”.
Online, Federated Farmers asked a reasonable question of senior Labour MP Annette King. We simply wanted to know what costs a Labour/Green Emissions Trading Scheme (ETS) would add to domestic and company power bills.
Disappointingly, what we got back was something out of the ‘attack is the best kind of defence’ school, “I get it! It’s an attack by the Feds on ETS don’t worry about the cost of power bill on the householder!”
Funny, farming families happen to be householders too.
Helpfully, for us at least, the business journalist Rob Hosking answered the question we had put to Annette King; “In 2008 [Labour’s David] Parker costed ETS as adding $140 million to costs of [the] generation sector.”
Suddenly those ‘savings’ drop like stones because that was five years ago. What a hybrid Green/Labour ETS will cost can only be guessed at, ‘higher,’ seemingly a safe place to start.
As for the pro-jobs argument of their combined power policy, that must be measured against a more strident ETS.
Labour’s 2008 ETS would have increased the farming bill tenfold to some $40,000 per farm; imagine what that would do a primary sector employing almost 150,000 New Zealanders?
Imagine what that would also do to the likes of the Tiwai Point Smelter or small engineering firms too.
Yet the idea that a single power purchaser could become an energy Pharmac does not stack up. As our Anders Crofoot observed, “Pharmac purchases medical products from the global market whereas the proposed buying agency is limited to local power generators. Unlike with pharmaceuticals, there is no such thing as ‘generics’ when it comes to electricity. Nor can we do what happens overseas and ‘import’ power from other countries”.
Britain imports electricity from France, Ireland and the Low Countries. Occasionally, it has managed to export some back but the bulk purchasers there have not just national choices, but choices from Europe too.
In the United States, some can ‘buy’ power from other states or ‘import’ power from Canada.
California has been put up as a Labour/Green exemplar but California is wracked by poor infrastructure and unreliable energy sources. There is speculation it is now perilously close to blackouts last seen a decade ago; something which got the Wall Street Journal writing about it in February.
California’s over reliance on renewables is one factor, but controlled pricing is another.
Controlled pricing does not produce innovation or encourage private sector investment in electricity. There is also the high risk of stopping any innovation which may increase profit margins.
Stopping innovation in an economy like ours is a strange message to send.
Forsyth Barr’s Andrew Harvey-Green has further estimated that the Labour/Green power policy could wipe up to $1.4 billion off the values of Contact Energy and TrustPower alone. Wiping that sort of value implies you will wipe more than a few jobs too.
Remind me again, where are KiwiSaver funds and the SuperFund invested?
Not only that but the rebate cheques and community support provided by the likes of the Tauranga Energy Consumer Trust will be hit for six.
The most damming comment I read was from Steve Morris in the Bay of Plenty’s Sunlive; “The loser is the little guys working for the Tauranga community who depend on the Tauranga Energy Consumer Trust funds, and consumers relying on their annual rebate”.
Given StatisticsNZ data indicates the rate of power price increases has slowed in recent years, so long as you exclude the ETS, there are bigger domestic cost fishes in the sea.
If only Labour and the Greens could focus their gaze upon near triple digit council rate increases since 1998.
Perhaps then we could start reigning in the less productive non-tradable sector.
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Bruce Wills is the President of Federated Farmers. You can contact him here »
30 Comments
Well, privately owned Powerco, the second largest distributor of gas and electricity in NZ, apparently has a policy of hollowing out the company with excess debt. A 42% stake in the company is currently up for grabs. Once the company is finally gutted, I guess the government will be the only buyer - not that they wish to be, but there is not choice when critical infrastructure assets are at risk.
Of course, people say a dollar tastes like a dollar wherever it comes from, but Chalkie reckons overseas buyers of New Zealand assets tend to taint their acquisitions with a bitter tax flavour.
Powerco, for example, is a highly profitable business but has paid next to no tax for the last three years. Here are the numbers.
In the nine months to March 2012, Powerco reported earnings before interest and tax of $79.6m. The previous year to June its ebit was $118m and the year before that it was $136.3m.
Nevertheless, over those three years Powerco had an interest bill totalling $465m, which converted those operating profits into huge losses and obliterated its tax bill. Indeed, Powerco reported a net tax benefit for those years of $32m.
The arrangement is beneficial to Powerco's owners - Brookfield and Queensland Investment Corporation - because more than a third of the company's debt is related party, allowing owners to extract profits from the business as interest while paying no tax.
There are tax rules designed to limit the ability of overseas owners to do this, known as thin capitalisation rules, but Chalkie reckons they have been as useful as a fart in a fishtank.
For example, Powerco's debt at the time fell well within the allowable ratio of debt to total assets of 75 per cent, but that did not seem to hinder its ability to create large tax losses.
Another overseas-owned lines company, Wellington Electricity Distribution, has an even higher proportion of related-party debt than Powerco and in Chalkie's reading of its accounts has paid no company tax at all since its sale by Auckland-based Vector in 2008.
The tax losses came despite healthy profits at ebit level of close to $50m a year. Read article
The nation needs those foregone taxes to offset the future costs if and when the taxpayers are called upon to buy back previously sold state assets - think Air NZ and Kiwirail as previous examples.
as an interesting aside to your opening comment .. Centrelink .. the AU equivalent of WINZ .. data matches online real-time with the ATO .. and any beneficiary who has a negatively geared investment property is in trouble .. welfare wise that is .. Centrelink does not recognise interest on mortgages as an operating cost and adds it back and treats it as a capital cost .. different organisations .. different rules .. different drum beats
Bruce Wills wrote: "California has been put up as a Labour/Green exemplar but California is wracked by poor infrastructure and unreliable energy sources. There is speculation it is now perilously close to blackouts last seen a decade ago; something which got the Wall Street Journal writing about it in February." I criticized the way this article was being used to oppose government regulation of the electricity market last time it cropped up on this site, and I am really starting to feel like I am the only person to have read beyond the headline and opening paragraph of it (though clearly it is doing the rounds in some circles). Here is the thing, the article is talking about how, under the regulated Californian market, there has been so much investment in renewable generation by private generation companies in the past few years that California needs some load-balancing generation to smooth out the peaks and troughs of the renewables. Yes, that's right, California's problem is too much private sector investment (of particular types). Bruce Wills also wrote, of this article, "Controlled pricing does not produce innovation or encourage private sector investment in electricity." Er, the whole point of the cited article was that Controlled pricing had encouraged too much private sector investment in renewables.
One needs to be careful using California as an example of a straight forward electricity market. There is more to it than simply too much or too little. California was the target market of the infamous Enron saga, ripping off the populace of the largest consumer market in america for many years. Engineered blackouts, brownouts, followed by oversupply during non-peak periods. Reckon the consumer is still overcoming their prejudices towards electricity suppliers to this day. Hence the overwhelming move to self-reliance over the past 10 years in the form of renewables. In the wake of that, the Californian State govt encouraged the move by providing subsidies with a view to avoiding such a rort ever happening again. The problems with erratic supply by renewables should be viewed with scepticism. Thats the role of major generators. To smooth out supply. It is highly probable that the only people complaining are the "big business" generators who are lobbying government to cut the subsidies. Meanwhile the subsidies continue. There's more to it than meets the eye.
It's not the private sector causing the problem. California power generation construction is centrally planned by the California Public Utilities Commission, just as the Labgreens are proposing NZPower would be centrally planning all new power generation here. So they have commanded a lot of renewables to be built, without building enough baseload and/or peaker plants to stabilise it.
If - when? the Lab-Greens canoodle (could we term this a Labragrinoodle?) lays an electoral egg, and some of these wilder fantasies about Taxing the Rich, and State-Run Power/Food/Shelter/Pharma spread through the business ecosystem (by then an Eeeek-o-system), I reckon John Galt ain't far behind. As I noted some years back,
"Takers in NZ outnumber and can thus outvote Makers, and this will not end well.
Because Makers are free to go Make someplace else; to Make less (just sufficient for their own sustenance - income equals expenses); or to stop Making altogether. In all three cases, tax revenues collapse, suddenly.
And, you cannot Make (coerce) the Maker to Make stuff. At least not in a country I'd want to live in.
Whereas Takers have irreducible, and often extensive, Needs."
Carefull wha'cha' wish for.......
I especially liked this comment.
Unlike with pharmaceuticals, there is no such thing as ‘generics’ when it comes to electricity.
I just cannot get my head around what they ment. Did I miss something? I am pretty sure that electricity when it arrives at your property is about as generic as something can get.
As a failed would-be Electrical Engineer, I feel superbly - er - qualified to answer this comment.
Melding disparate forms of generation is in fact a highly complex business. AC power needs to be run within extremely tight parameters in order not to generate unwanted results when consumed. As a simple example, letting the frequency drift, will cause induction motors to drift in speed: they are tied to that frequency.
And having different types of generation and consumption constantly varying, means that there is a constant balancing act going on between things like generation prone to quick drop-outs (wind, solar), generation which is always-on/spun up and running (thermal and some hydro) and consumption which can appear or disappear in volume and type (inductive versus capacitative).
That's why powerco's are chock full of SCADA and Big Data mining - this is all anything but simple stuff........
Pharmac can save money by buying cheaper "generic" Viagra rather than expensive premium brands like Pfizer. NZPower would have no such flexibility. Also, Pharmac doesn't get to set the prices of its suppliers' drugs based on the ingredients and the historic cost of the pill presses. MacDoctor rubbishes the Pharmac analogy more comprehensively here.
NZMEA Chief Executive John Walley says, “In 2006 we researched and produced a report “Will it take more Blackouts before we see the light?” that considered the electricity supply issues in New Zealand. This research was sparked early in the last decade due to our growing concerns of supply stability and cost of electricity. We identified three main concerns with the current system.... Read on. 'Scorn or debate - what NZ Power might mean' http://www.realeconomy.co.nz/347-scorn_or_debate_what_nz_power_.aspx "Since the release of the NZ Power proposal there has not been a solid, logical debate about what NZ Power might mean, and the current problems inherent in the electricity market say New Zealand Manufacturers and Exporters Association (NZMEA)." Looks like this is still the case then. Cheers, Les. www.changenz.co.nz
Mostly, sadly, red herrings from Bruce as usual. Does the current market work well; or will the market under the Labour Greens proposal deliver farmers cheaper power? If it does deliver cheaper power, who might be the losers in that equation, and why? Will it really threaten supply, and why? These seem the questions Federated Farmers should be asking, but Bruce hasn't at all. (Les Rudd and dh above explain why in fact more generation might come on with the new proposal, and Les' paper shows very simply why it should be cheaper. Stephen Hulme's link shows one of the losers; and I don't think as New Zealanders we should be too concerned there, given it is a foreign company gaming our tax system for all its worth)
There is one valid question regarding any changes to the ETS, and I agree that the Greens and or Labour will need to be clear what any proposed changes will be to that scheme before the next election; and am sure they will explain those.
Bruce Wills is either very brave or very foolish to publish his commentary.
He does however have wonderful entertainment value unless we take him seriously which i suspect is his actual intention.
Yes the bleating continues and I expect it to continue so the raw nerve must have been tweaked.
What we need now is a Labour/Greens housing policy which gets at the present inaction.
Perhaps also some action on exchange rates?
Two assumptions in that critique: that future generations will value fossil fuels as much as current ones do; and that we should value future generations' wellbeing as highly as, or more highly than, we do our own.
You don't and can't know the first; and the second is not self-evident. There are people less well-off than we are right now, in Bangladesh for example, and we're not transferring all of our wealth to them to make them better off. Are they less deserving than people in the future?
I can and do know the first.
Fossil fuels are stored solar energy, and we have no proven sustainable alternative to solar energy.
They will value energy more than us - because we took the best/easiest, because we didn't mitigate the resultant pollution. and because for a while there will be more of them than there are of us.
Yes, we have to have the second debate. I suggest that a course of action which eliminates/compromises your offspring is biologically abhorrent, whereas outflanking same-time competition is merely evolution in action. A survey of whether you would do something for your grandchild, before or after you did something for a Bangladeshi, would be 100/0 in NZ.
Apply that to a paddock currently supporting 7 billion inhabitants, carrying-capacity 2 billion. Ask Bruce - would he keep the overstocked paddock until they all died off in the dust, or would he send a truck to the works? If he was one of the sheep, would his grand-offspring be in the first truck or the last?
You are aware, aren't you, that "energy" and "fossil fuels" are not the same thing?
How can you possibly say that there is not (and by implication there never will be) a sustainable alternative to solar energy? In a country which already meets a substantial proportion of its electricity needs from wind, hydro and geothermal sources? In a world where the costs of utilising solar energy as it arrives continue to fall, and where not everybody shares New Zealand's aversion to nuclear fission? Do you know for a fact that fusion will never be made to work?
Fossil fuels are principally transport fuels, we have nothing else that energy dense of that scale to use and, never will have.. Its also feed stock into our chemical industry so the Q will be which outputs are the most important. We will have to triage, either that or its who can pay and I suspect most wont be able to.
Fusion is running up against time, us running out of fossil fuels and having to move to a less complex lifestyle. So its odds of ever being productionised is small IMHO. even if it is the scale of the project to get it to scale up to replace what we have would be of the order of WW2 or larger. So sure lets say the US can build some, lets say today it would work and be productionisable, we are looking at 10 to 20 years to build replacement plants. On top of that we have to make plants that will make H2 out of its output to use as transport fuels. The scale of this undertaking is frankly mindboggling, how many countries will be able to do it? 10? 20? say indeed its the G20, what happens to the other 130? Fusion isnt ready today of course, its 20 years away, even 10 is too long.
Frankly its scary...very scary.
regards
Future generations will value fossil fuels as much as current ones do unless the current generation sets an example now and teaches less consumption and how to have a standard of living with less.
Who says we have to transfer all of our "wealth" to future generations or those in Bangladesh. Why not just use less now? Why not pay the workers in Bangladesh the same wage as we receive here so they can afford the necessities? Will you pay double for all your consumer goods so they can be paid more? Your answers will indicate whether you value future generations or current ones even equally to yourself let alone more than.
How do you know that future generations will not develop cheaper and cleaner alternatives to fossil fuels?
Look at "futuristic" fiction from twenty, fifty, a hundred years ago. Do you really think that we can now state with confidence and certainty that we know what technological development and social preferences will and will not be possible in future?
There is absolutely no reason why we should not voluntarily reduce our standard of living so as to improve the standard of living of others. Some individuals do, of course. The fact is however that in general we do not choose to do so. It is not clear that the case for doing so for future generations - whose needs, wants and preferences we cannot know - is any stronger than it is for doing so for contemporaries - whose needs, wants and preferences are easily established.
"cheaper and cleaner" oh lets see, engineering, maths, physics, etc says they wont.
Obviously you are not in any way technical/scientific.
fiction is just that, fiction. The difference today to 100~200 years ago is our academic advancement means we know pretty much the mathematical theoretical limits that can be achieved.
"in the future", yes what you are living in today, 1900 to 2050 will be the highest civilisation this planet will see probably ever, give or take several hundred million years.....
The planet is a closed system so the carbon released today by us has to be put back in the ground and re-converted to fossil fuels. That will take one heck of a long time....I cant see humans being around for that myself.
regards
we are more a stitch in time saves nine...
or..
one years seed is seven years weed
http://www.nzherald.co.nz/opinion/news/article.cfm?c_id=466&objectid=10…
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