The electricity market in New Zealand has been making headlines lately, and it's not for the right reasons. The big four ‘gentailers’ (those who generate and retail electricity) - Contact, Genesis, Mercury, and Meridian - have recently reported record-breaking profits. While these numbers may not come as a surprise, they are certainly shocking, especially when viewed against the backdrop of everyday Kiwis struggling to cover their power bills.
Electric Kiwi believes that it's time for the government to step in and address the excess profits these incumbent 'gentailers' are extracting from the electricity market.
Record-Breaking Profits Raise Concerns
The 'big four' gentailers have seen their profits soar since the onset of Covid-19. Year after year, they have reported record earnings before interest, tax, depreciation, amortisation, and fair value adjustments (EBITDAF), totaling a whopping $2.61 billion in 2023, compared to $2.28 billion in 2022. To put these numbers in perspective, that's over $7 million in profits every day, while many Kiwi households struggle to make ends meet.
What's even more alarming is that these gentailers' wholesale profits, derived from electricity generation, now surpass their company-wide profits. In 2023, wholesale profits reached a staggering $2.64 billion, exceeding the total company-wide profits. This shift has occurred due to two key factors.
Squeezing Competition through Subsidies
Firstly, the 'big four' have leveraged their market power to maintain high prices in the wholesale electricity market. This has allowed them to extract substantial profits from generation activities. Secondly, they have shifted profits from their retail businesses to their wholesale arms, essentially subsidising their retail operations with the excess profits generated from electricity generation.
For instance, Genesis reported a retail profit of $172 million just two years ago, significantly higher than its wholesale profit of $144 million. Fast forward to today, and Genesis's wholesale profit has ballooned to a record $520 million, while its retail business is operating at an $11 million loss. Sadly, these drops in retail profits have not translated into savings for customers but have instead fueled the wholesale business.
The Impact on Competition and Innovation
The consequences of this profit distribution scheme have been dire for competition and the retail market. Over the past five years, more than 20 small and independent retailers have exited the market. Without healthy competition, consumers can anticipate rising prices and declining service quality. History has shown that innovation and improved service often emerge from new entrants, but the incumbents, whose profits derive from generation, have little incentive to drive meaningful improvements in retail.
A Call for Government Intervention
Electric Kiwi firmly believes that it's time for the government to take bold action. One approach would involve divesting some of the generation assets from the 'big four,' leveraging the government's 51% ownership stake in Genesis, Mercury, and Meridian. This ownership stake, originally intended to protect New Zealand consumers, has been used more like a stealth tax. It's time to put it to better use for the benefit of all Kiwis.
Another option is for the gentailers to divest their retail businesses, forcing them to stand on their own without subsidies from their wholesale operations. Similar actions have been taken in the past, resulting in more competitive markets, as seen in the telecommunications sector.
We have lodged a complaint with the Commerce Commission under Section 36 of the Commerce Act. The Government made changes to section 36 of the Commerce Act earlier this year that make it more straightforward to identify a case for misuse of market power. We’re using this new provision because the Electricity Authority has failed to act decisively on any of these problems, but we have some confidence that the Commerce Commission will take the issue seriously.
At Electric Kiwi we are not afraid of competition, and we know a level playing field is exactly what the big four gentailers are desperate to avoid. We will keep fighting this, and in the meantime working on how we make it better for you and for our country. Government intervention, through measures like breaking up the gentailers, is necessary to restore competition, lower prices, and promote innovation in the market. It's time to prioritise the needs of Kiwi households over corporate profits.