Energy policy as a new policy issue!

So we’ve had Labour and the Greens make the cost of energy the first big pillar of their upcoming election campaign.  The energy industry is important in a large number of ways, is something people care about, and is definitely policy relevant – so it is a good pick.  I’d note I don’t talk on “political levels” (my own failure to be sure), but it is a good area to discuss in terms of the policy society desires.

Now I’ll be honest that given this I was heavily disappointed with the analysis done by the Greens and Labour. There have been two good posts discussing the issues – Lance Wiggs and Seamus Hogan.  This isn’t going to be one of those posts.  Instead I’m going to complain about something.

I’ve seen lots of people on twitter bang on about “ideology“, “starting a debate”, etc etc … but the fundamental number they provided of an average household saving $230-$330pa is what MOST of the public cares about.  I respect the dudes and dudettes that have been saying “hey let’s just discuss energy policy”.  But I’ve just spent the last few days listening to a large number of my non-economist friends going on about how they like the idea that Labour is going to give them this money …

And that figure is a load of complete crud.

Ignore the BERL report here.  I have no real criticism of them – they were VERY transparent with their assumptions so I knew from the start that:

  1. They had assumed the energy boost was a given – they were told it by Labour and were just running a scenario,
  2. They had excluded government dividends,
  3. They had assumed persistently deficient demand.

Yes all these assumptions will in turn increase the size of the result – but none of them are actually too relevant to the claim that Labour and Greens are selling the most, that is will improve the money in your pocket.

Instead I get the feeling that Labour seems willing to ignore capital costs (I’d note the Greens do talk about the LRMC).  When looking at the electricity industry, we want to think about long-run marginal costs rather than short-run marginal costs – given that we are talking about an industry with massive fixed costs (huge costs of investment).  Kiwiblog suggests that this important point may have been put by the wayside, the use of the Wolak report gives further fuel to this fire, and finally via the Labour site:

Hydroelectric power makes up almost two-thirds of our electricity, and it costs next to nothing to generate because it uses free water and dams that were paid off years ago.

This is what the site says now – when it first came out it said “free water and dams”.  The change doesn’t matter though – as you still need to invest in new capacity as demand rises and you need to maintain the current capital stock!

Now, there are things that I would like to see work on (given I’m not an industrial economist, I don’t have the research and evidence in my head that other true industrial economists do).

  • Why has the relative price of residential power risen so quickly (relative to commercial and residential),
  • Why has investment in the industry seemed patchy at best?

Given that the electricity industry is probably the second most regulated and researched industry in New Zealand (I’m putting it behind telecommunications – although I may well have them the wrong way around!) the answers are probably out there, and ways to improve current regulation probably exist.  As a result of all this, the Labour-Greens decision to pick only a single report, misuse the figures, ignore the criticisms of those figures, and then publish a policy impact that is effectively a LIE is all the more disgusting – frikken ask some of the myriad of experts out there for some help making policy, hell some of them are Labour supporters and will likely to work at a cut price.

Sidenote:  National doesn’t get off for free here – socialism, communism, really?  In of itself a monopsony buyer is not something you can just rule out due to “ideology”.

UpdateThis will teach me for commenting on blogs on a Saturday morning.  I didn’t mean to use the c word (not the really bad one), I’m trying to cut back on my swearing.  I do essentially think that the promised boost to income to people is a lie though – and I mean to use that as a loaded term – so I’ll live.

  • Ok, contrarian take here.

    Right now, it’s next to impossible for the SOE generators to get the lousy RMA approvals for new dams.

    4-5 years after a state monopsony buyer, the brownouts start.

    And then we get public pressure for new generation.

    Right now increases in demand are accommodated via price movements because quantity can’t really move. Voters don’t make the link between high prices and inability to increase supply. But brownouts make it the connection more obvious.

    • Is the RMA causing insufficent investment in energy generation?

      Is there insufficient investment in energy generation (I’ve heard the claim, but it’s not my area so I can’t claim to know)?

      If both, then your contrarian take is that even though this isn’t nearly the best solution, actually having brownouts increases people will to invest in energy generation. If that is the claim some parties want to make they can go right ahead 😛

      • The generators keep having projects batted back for what seem to be fairly minor environmental considerations; the generators seem to think that they would do well by building more capacity but that they’re barred from building more capacity. I suppose there’s some chance that they’re putting up projects they know will fail so that they can blame that for price hikes, but that’s more conspiratorial than I’m inclined to believe.

        • Interesting. Policy issues are just far too complicated for me. I wish whenever an issue was discussed all the policy relevant elements were put together and discussed before a conclusion was given – instead of doing things the other way around!

          • Policy conclusions are a focal point for analysis and discussion. If it weren’t for the announcement we wouldn’t be seeing all of this debate.

            • Indeed, however surely there is a responsibility for the conclusion to have some connection to what would actually happen. A debate based on very misleading facts isn’t necessarily a good thing.

              • Well, there are low barriers to entry so maybe kicking it off with misleading facts isn’t disastrous. OTOH, maybe the misleading facts frame the entire debate that follows and act as a bad anchor for beliefs. Either way, the likely counterfactual is ‘no debate’ rather than ‘a highly informed debate with the sole goal of better informing the public’.

        • Kirk

          Not true, although several high profile hydro and wind projects have been turned down, over 13% or 1300MW of current capacity has been built in the last 10 years, 300MW of wind and geothermal is under construction and over 3000MW+ of wind, tidal, hydro, geothermal and thermal is consented.

          • Thanks Kirk, good to hear.

            How does that compare to the change in demand an depreciation – or should I stop being lazy and look this up myself 🙂

          • Elinor_Dashwood

            Capacity isn’t supply and it isn’t security. 300 MW of wind is a completely different proposition, when it comes to ability to instantaneously meet demand, from 300MW of fossil fuel generation. Tidal, hydro, geothermal are different again. Given that no amount of generating capacity will ever provide 100% certainty all of the time (and the more you have, the more it costs, in environmental as well as financial terms), you need a policy call as to what level of probability of meeting demand is acceptable, and then to ask – of that 300 MW, how much can be relied on, to that level of probability, to be available when needed?

      • Elinor_Dashwood

        Is there insufficient investment – That depends on how much you value security of supply, which is difficult for retail consumers to signal. In the UK, when they had something resembling an energy market, large/wholesale consumers (steel manufacturers, chemical plants etc) were able to signal how much they valued security of supply by how much they were willing to pay for guaranteed-supply contracts (as opposed to contracts for supply which could be curtailed when the supply/demand balance got tight). Retail consumers don’t have the option of paying less for less reliable supply; it would be interesting to see how many of them would take it if they did.

        • I was having a similar question about work regarding how to value security of supply. I’d like to see any cost savings that are said to come from changes in market structure to be compared to the change in the probability distribution for an annual browout. That way, we have the appropriate margin for asking the consumer “how much they would be willing to pay” for energy security.

  • Blair

    One possible dynamic is that when a government is finding it difficult to raise as much revenue as it likes, it becomes easier for an SOE owned by that government to engage in regulatory capture (e.g. gold plating the grid). In other words it becomes a form of stealth taxation.

    • Hmmm, I don’t like the burden falling too far that way. Seems too regressive.

      But I do see your point, just also makes me a sad panda.

  • You think “crap” is swearing? Oh, Matt. You need to watch Deadwood.

    • In person I use far more colourful language, I’m just trying to control myself. I also need to cut back on direct statements and accidentally implying policy conclusions – and I think swearing actually relates to that.

      All-in-all I’m trying to facilitate marginal improvements in the value of statements that come out of my mouth and fingers 😛

  • boristhefrog

    It really frustrates me how many people just assume away capital costs as a ‘sunk cost’- its like they have been talking to engineers or something… and of course there is no adjustment for maintenance capital spending in their thinking either…

    • As a general principle I find it weird when people use static models, and then comment on savings and investment. I struggle with time as well, but that is seriously messed up 😉

      • boristhefrog

        They know not what they do… confusion over stocks and flows is very widespread… Quite sad really….