goonix

In defence of the New Zealand wholesale electricity market

/18 Comments/in , , , , , , /by

Recently the New Zealand electricity sector has been taking a bit of a hammering. According to a Commerce Commission sanctioned report, consumers have been overcharged by $4.3b over a six year period (how’s that for a headline!). More specifically, the report concluded each of the four big generators – Meridian, Contact, Genesis and Mighty River – has been exercising the power the market’s design gives them to command unjustifiably high prices, at least during years when inflows to the hydro lakes are low as they were in 2001, 2003 and 2006.

New Zealand has two markets in electricity – the wholesale market and the retail market. The wholesale market is where generators sell their production to retailers (often the seller and purchaser are one and the same). These prices vary significantly depending on the conditions of that particular period (for example, how dry Southern Lakes are or whether a generation unit is out service). That’s why, as a consumer. it’s clever to be informed with details like Business Energy costs.

The second market is the retail market, where retailers sell electricity to consumers. Prices here are typically very stable, with consumers seldom exposed to the vast variation that takes place period-on-period in the wholesale market.

In the long-run, the prices in the wholesale market feed through to the retail market. In other words, if a generator/retailer found themselves short of generation and thus had to buy excess generation on the wholesale spot market at relatively high rates, they would eventually pass through these additional costs to their consumers in the retail market.

The report is essentially saying that generator/retailers were able to use their dominance in the wholesale market to push up prices during periods of constrained supply, which consumers then ultimately had to pay for in the retail market.

The report also says that pricing in the wholesale electricity market is, in the absence of dry periods, typically competitive. A very important point made in the report is that no market is ‘textbook’ perfectly competitive and this is certainly the case in electricity, given its unique characteristics (in particular the need for supply to continuously meet demand).

Indeed, I would say that the wholesale electricity market is working almost exactly as intended. Pricing is commonly competitive except at times of tight supply, when generators are able to reap higher rewards that incentivise continued investment in generation (which is extremely expensive) so that ever-growing demand can be met into the future. And the Commerce Commission determined that the generators’ actions were a “lawful and rational exploitation of the opportunities the market gave them”. I doubt you’d be able to make nearly as impressive a headline out of that though…

Matt Nolan

Cruelty to pigs, willingness to pay, and intrinsic animal rights

/40 Comments/in , , , /by

Brad Taylor has an interesting post discussing how New Zealand pig farmers are using the issue of stall vs non-stall pigs as a way to increase protectionism in the New Zealand pork industry.

Now if all that matters is how humans value the issue then Brad is right – the efficient solution requires no regulation.

Why? If people value pigs not being hurt, they will be willing to pay to eat non-stall pigs. If all overseas pigs are stall pigs (as the farmers are saying) then this creates an opportunity for NZ farmers to differentiate and tap into this market. If people aren’t willing to pay sufficiently enough more, then there is no market for it.

As a result, as long as all that matters is how humans value and the choice of conditions is observable there is no need for “protection against overseas pork”.

However, we may instead believe that animals have some intrinsic right not to be tortured. As pigs don’t actually have a choice in the matter we may require regulations if we want their rights to be valued.

In this case, a tax on stall pig meat that captures the value of the pigs suffering WOULD be the solution – as there is a clear externality on pigs that cannot be solved through Coase bargaining.

As a result the key question we have to ask is, what intrinsic right to the lack of torture do pigs have?  If we can define that then a mixture of clear labeling and a tax on pork from stall pigs could be the solution.

Matt Nolan

Responsible credit?

/4 Comments/in , /by

Kiwiblog has an interesting post on the Credit Reforms Responsible Lending Bill.

The post tackles the four main outcomes of the policy. I agree with what David Farrar has to say – and would only add that the maximum interest rate cap is very stupid, as it is the same as setting a lower than market price for some types of credit, which will lead to a suboptimal amount of lending to people who value short-term credit very highly.

My interest lies with what such a bill is missing. Education and information.

The current issue in New Zealand credit markets is illustrated by the recent Morningstar ratings that gave NZ’s fund management industry a D-. A big problem here was a lack of transparency and information.

If the government pushed organisations to provide clear, concise, and easy to digest information on risks then it would greatly reduce abuse in the whole industry.

For example, when these firms say “only 8% interest” they are confusing people – as they are charging 8% per week, when people are used to hear about the amount of interest per year. The best way to fix this is the make it that firms HAVE TO write down interest charges in per annum terms.

Education and information are far better solutions than price caps and restrictions on the ability to enforce contracts – and that is why this responsible lending bill should be heavily changed from its current format.

Update:  Paul Walker takes the interest rate idea to task here – completely agree with him.

Matt Nolan

NZ budget 2009: Most important since 1984?

/5 Comments/in , /by

Kiwiblog brings up some great points about the importance of this years budget.

It turns out that the head of Treasury stated that this was the most important budget since 1984.  Wow.

So he’s saying that this is more important than the “mother of all budgets“.  When National came to power in the early 1990’s they faced threats of a credit rating downgrade and forecasts of huge budget deficits – which forced them to cut spending sharply.  In conjunction with HIGH interest rates (even in real terms, we are talking like 8% real!!), a lift in petrol prices because of the gulf war, and weak other commodity prices, this saw the New Zealand economy suffer a huge contraction and unemployment went over 11%.

Now, real economy prospects aren’t quite as bad this time.  Unemployment is at 5%, relative to 7% at the start of the 1990’s.  Real interest rates are very low (hitting at around 1-2%).  Some of our commodities are doing well, and even though some have experienced a sharp fall in price oil prices have also tumbled.

However, obviously there is a feeling that the threat on the currency from government policy is at its highest level since we floated the currency – intense.

Matt Nolan

iPredict return on investment

/16 Comments/in /by

iPredict just added a “return on investment” ranking – so that we can see who made the most out of their limited capital.

Although I am not on the list (Note: I wonder why, was my initial investment too low to be included?), I noticed that “Economist” is number 1. Furthermore, I’m relatively sure that the person currently in 3rd place is an economist.

Constantly economists are put down for their lack of forecasting ability – however they seem to be doing pretty well when their is money on the line 😉

Update:  The next day it was updated to include Goonix and myself.  Goonix is 8th, and I’m 19th.  I wasn’t involved in the election trading though so I’m not taking this as evidence of me being the worst economist 🙂