Guest Post: The Sale of the Power Companies

Could it be a Blessing in Disguise?

Many commentators, including this blog, have chastised the government for selling half of its power companies despite strong opposition from the general public.

In the early nineties, I myself was involved in a (successful) campaign to prevent the sale of the Manapouri power scheme to Comalco. Our reasoning was that the old hydro systems were a licence to print money. This is because, in our wholesale market, the electricity price for all generation is determined not the lowest but by the highest bidder. As new and more expensive stations come on line, everybody else then just hikes their price up to that new level. This is called shadow pricing, also well established in the market for crude oil.

Here is my prediction: This very convenient business model will fall apart during the next decade. Solar electricity will become even cheaper than it is now, so that more of the electricity demand will be met by roof-top photovoltaics (PV). Once that happens, the big power stations will progressively be mothballed or relegated to stand-by. This in turn will cap the price of electricity because the most expensive generation is retired first.

Up to now, electricity supply is from limited resources where increased supply results in ever higher cost: one has to drill and dig deeper for fossil fuels. It even applies to hydro, where the limited resource, of course, is not the water but the sites where hydro stations can be built profitably. The progress of PV then turns the supply from being from a limited resource into a truly unlimited resource for the next fife billion years: solar radiation.

In other words: The factor governing prices will no longer be the rising cost of new power stations and their fuel but the falling cost of PV.

Another point: For now, it does not make sense to disconnect an existing dwelling from the grid and use batteries instead. Being independent from the grid makes sense only if a dwelling is new, and the cost of batteries can be offset by saving the cost of the power lines between the grid and the new dwelling. However, as batteries will get cheaper and last longer, this too will change. At some point the monthly cost of batteries (depreciation) will be no more than the lines charge. At that point all hell will break loose. People will disconnect themselves from the grid in droves, which makes the supply charge rise for the remaining fewer customers, thereby accelerating the process even more. At the same time it will deprive the power companies of their last weapon against PV: the low credit for power fed into the grid during daytime.

Once the above events happen, the earnings and values of the power companies will deteriorate. In that view, one might have wished the government had sold not only half but all of the shares, and preferably to the Aussies.

Peter Kammler

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3 Responses to Guest Post: The Sale of the Power Companies

  1. admin says:

    Thank you for the Guest Post.
    Just one correction : This Blog has not ‘chastised the government for selling half of its power companies despite strong opposition from the general public’. This is the first time the issue is raised on this Blog.
    Interesting opinion based solely on the point of view of a power company shareholder.
    Are you advising all shareholders to sell now ?
    How about the point of view of the consumer paying the ever rising monthly power bills. Remember the great (and utterly failed) electricity market reformer Max Bradford famously comparing electricity to other goods like baked beans to be sorted out by the market ?
    There is still a wider debate to be had.

  2. Peter says:

    The comment of the administrator should not go unanswered. For the record:

    • On October 4th the administrator wrote.”…..Remember in the last election people voted for National despite disliking their policies like asset sales.” If that, in the context of his whole comment, is the administrator’s endorsement of the sale I stand corrected.

    • My post is not “solely the view of a shareholder”. My background is in engineering and economics. I have written the post for two reasons: To give consumers hope that the oppressive reign of the power companies will come to an end, and to show that there is another side to the sale, usually ignored by the leftish commentators.

    • I am not a financial advisor. Therefore, I will definitely not make any recommendation for people to buy or sell shares.

    • It was energy minister John Luxton, not Max Bradford, who famously laid his intellectually capacity open by saying that electricity is like baked beans.

    • admin says:

      Thanks Peter for your further comment.
      I indeed mention asset sales in a previous comment about the election results. The context however was that sometimes political parties – in this case National – get elected not because but despite their policies. This does not necessarily mean that the policies are good or bad only that the majority of the electorate doesn’t like them.

      Otherwise I hope that you are right ‘that the oppressive reign of the power companies will come to an end’.
      I’m sorry if I combined the two intellectual heavyweights of the National Party Luxton with his baked beans remark and Bradford who told us that creating an electricity “market” would solve all our problems.

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