If there were any doubt that our country’s electricity generation market is badly broken, the recent report by the New Zealand Council of Trade Unions, Aotearoa 350 and New Zealand First Union should put it to rest. The report points out that since 2014, the three majority government-owned electrical power generators – Mercury, Genesis and Meridian – have paid out more in dividends to shareholders than they made in after tax profit. Really?
First of all, as any businessman will tell you, paying out more in dividends than you make in income can only be sustained by borrowing or selling assets. So, why are they doing this?
Second, and perhaps more importantly, these companies need to be ploughing their revenue back into new renewable generation projects to feed New Zealand’s growing electricity needs, not paying it out to shareholders. These companies are owned mostly by our government. Didn’t they get the memo that the country needs for more renewable energy?
The Climate Commission has said that national electricity generation needs to increase by 20% over 2018 levels by 2035 in order to meet the anticipated needs of industry and transport. Yet, according to MBIE data, wind and geothermal generation – two important renewables - have remained relatively flat in the 6 years between 2015 and 2021, growing by an anaemic 12% and 3%, respectively. Meanwhile, coal generation grew by a whopping 72%, making up 7.0% of the country’s electrical power in 2021.
This slowing of new renewable generation is hard to believe, considering wind generation grew by a phenomenal 280% in the decade before 2015 and geothermal generation grew by 140%. So, why the slowdown in investment in new power after 2015?
The Climate Commission has suggested that the hesitance of the generators to add new power is due to the uncertain future of the Manapouri power, if the Tiwai Point aluminium smelter closes down. Manapouri represents 13% of the country’s electrical generation and if diverted into the national grid would certainly depress wholesale electricity prices. They think generators are worried that if electricity prices fall they might not be able to recover their investments in any new generation. So, they are sitting on their hands.
The reason for the high dividends may be more subtle. When the three 51% government owned generators entered the share market, a significant portion of CEO and executive team pay was given as what are called “long term incentives”. This is basically the ability to purchase company shares at a discounted price if certain performance targets are met. This is a program that didn’t exist before 2013 because there were no shares to sell or give away prior to the public share sales.
Experience with this type of management pay in the US shows that it can have a perverse effect on company strategy, narrowing the focus of otherwise diverse company objectives to a single goal – to bring stock price up. And, one obvious way to do this is to pay large dividends to shareholders.
So, we’ve ended up with a near monopoly of three government-owned and highly profitable power generation companies with an obsession to pay large shareholder dividends and an apparent indifference toward investment in new renewable generation that the country desperately needs. Add to this a power market structure that incentivises electricity scarcity to raise prices, which has caused residential electricity prices to rise 20% faster than inflation over the last 14 years!
With a power generation system this dysfunctional, it is little wonder that Meridian Energy is promoting a project to send excess Manapouri Hydro Scheme power overseas as green hydrogen, while Transpower, the government-owned electricity system operator, warned us of power shortages last winter. Our electrical power system is clearly not acting in the best interests of the country.
Solutions are readily in hand. In 2014, the Labour party, while in opposition, presented a power plan that would create a government company to be the single buyer of power generation that would then on-sell this power to retailers. This company would negotiate fair prices for existing and new power generation and make sure Aotearoa New Zealand has enough renewable power to decarbonise its energy needs.
Earlier this year, the deregulated power market in Australia, which is similar to ours, was taken over by the government market operator, in a manner similar to what Labour proposed, in order to prevent a system crisis. Our government could easily do the same thing and get the country’s electrical power system back on track.
When is this government going to recognise the problems with our electrical generation system and do the right thing for the people, the economy and the country’s low carbon future?
These are a collection of opinion articles principally written by CKM member Tom Powell for the Marlborough Express. Tom is a retired geologist who came to New Zealand in 2004 to work in the geothermal industry on the North Island, is a New Zealand citizen and now lives in Blenheim. Some articles have been written by other CKM members, and their names appear with those articles.