Wolak says Labour/Green energy policy bad for competition

Frank Wolak from Stanford University has been held up by Labour and Greens as the reason for their nationalisation policy for electricity. They always cite a report he did in 2009 that said the energy generators were making “super profits”. So bear in mind this is a professor whose work stands at the heart of their case for change.

So with interest I read an article in Energy News (not online) which states:

Moving to a single-buyer market for power generation would do nothing to improve competition, while a cost-based approach to pricing output also runs the risk of under-valuing water resources, a visiting US academic says.

Stanford University’s Professor Frank Wolak says he can’t see why New Zealand would want to turn its back on the electricity market structure it has now.

Markets are always improving and evolving, but he says he can’t see any benefit from moving to a single-buyer model. Cost-based hydro systems, like those in Chile and Brazil, also have their challenges and are not well-suited to a market like New Zealand where generation and retailing is integrated.

“It’s like rebooting your computer and starting out with all the same problems again,” Wolak said at a seminar in Wellington last night. “Why do it? If you’re this close to the finish line in terms of the actual market, and you’re this far away from the cost-based market, why would you want to do that?”

This is a devastating blow to Labour and Greens. Wolak’s research has been held up as their rationale for their policy. And he has said their proposals will do nothing for competition, and he sees no benefit from them.

The reality is that since Wolak’s report in 2009 (which is controversial), there have been significant changes to how the market operates, and price increases in the last few years have been much lower than under Labour previously.

Wolak says cost-based systems like those in Chile and Brazil have been successful in sustaining investment in new generation. But he says they don’t naturally encourage long-term contracting, which helps to put downward pressure on short-term prices. Nor are they well-suited to integrated generator-retailer markets like New Zealand.

In cost-based markets, governments or regulators have to set minimum hedging requirements, which also requires them to put a price on the cost of shortages. Given that is a political decision, those have tended to be set too low – about $300/MWh in the case of Chile – which has in turn kept prices low, encouraged the use of water for generation, and resulted in power shortages.

Now again – this is the view of the man whose research is constantly cited as reasons for the Labour/Greens policy.

Also note that Labour and Greens always say that his research showed generators made billions of dollars of excessive “super-profits”. Well again he is quoted as saying:

Wolak told the audience he never said New Zealand generators were making excessive profits. Such a calculation is “extremely difficult” without knowing the cost of capital of the businesses involved.

Will Labour and Greens now attack Wolak, after citing his work religiously? Or will they drop their dumb destructive policy?