The profits of the large, incumbent electricity gentailers have ballooned since COVID-19. They’re making record profits at the expense of energy affordability and the wellbeing of Kiwi households and businesses, writes Electric Kiwi CEO, Luke Blincoe.

I’ve never been more convinced that now is the time for the government to act and introduce long-overdue industry reforms, especially as consumers continue to face high energy bills and other cost of living pressures, while the big gentailers rake in the cash.

• Genesis reported its highest operating earnings of $440m since it was established two decades ago. Its net profit was up by 600% to $222m compared to $32m last year.
• Mercury reported it had more than tripled its net profit to $469m.
• Meridian’s net profit was $664m, up 55% from $428m last year.
• Contact made a profit of $182m, down slightly from last year but 50% above the profit they made in 2020.

All up, the big four’s net profits nearly doubled in the last 12 months, rising from $788m in aggregate to more than $1.5billion.

To put those numbers into perspective, Meridian’s profit went up by $640 for each of its retail customers. That’s money we reckon would be better in the hands of Kiwi families and businesses.

What explains the record profits?

The record profits have nothing to do with providing better value services to consumers. It’s all about leveraging their legacy generation assets and record wholesale prices.

Collectively the big four earn over 95% of their EBITDAF (that’s what the accountants refer to as earnings before interest, tax, depreciation, amortisation and fair value adjustments) from their wholesale businesses. Contact and Mercury’s wholesale businesses both earnt more than their entire operations, meaning the rest of their business was run at a loss.

Wholesale electricity prices – the price gentailers get paid for generating electricity and supplying it to the national grid – have been at record high levels since 2018.

In the last year, wholesale prices averaged $176/MWh. The average was $166/MWh over the last two years. The industry regulator, the Electricity Authority, has looked at the numbers and couldn’t explain the $40/MWh excess. The Authority has been somewhat cautious in its views because it has only reached preliminary conclusions, but commented that “we observed some evidence to suggest that prices may not have been determined in a competitive environment”.

These prices contrast with an average price of $75/MWh from 2012 to 2018.

Using generation assets to shield profits from competition

While the big gentailers are making record profits, the independent retail sector has all but disappeared, with 12 retailers exiting the market in the last three years, taking with them any meaningful retail competition.

That’s because there has been a shift, with gentailers now earning most of their profits from their generation businesses.

This is off the back of the generation assets they inherited, built by our great-grandparents for the benefit of all Kiwis. That’s why the sector is in a situation where Genesis announces record profits but is still going to increase retail prices for households. Using generation assets to shield profits means new retailers won’t be able to compete by offering lower prices for households and businesses. That’s good for gentailer profits but bad for competition and bad for consumers.

Up until now, smaller business consumers and households hadn’t seen the impact of the record profits and wholesale prices with these increases being mostly offset by reductions in the regulated prices the Commerce Commission sets for the electricity networks that transport electricity to the consumer’s front door.

Retail competition is being hurt

As an independent retailer, Electric Kiwi has been on the receiving end of these pricing arrangements. Record high wholesale prices have squeezed our margins and forced us to increase prices to our loyal customer base. That’s the last thing we want to do. It has also meant we haven’t been able to take on as many new customers as we would like.

We have prided ourselves on being a price leader and saving our customers over $34m in the last seven years.

Electric Kiwi and other independent retailers have been calling for the Electricity Authority to undertake price squeeze testing common in other jurisdictions. Price squeeze testing would determine whether the gentailers’ retail arms would be profitable if they had to compete on the same basis as the independents and weren’t propped up by their generation business profits.

So what needs to be done?

The government eventually got fed up with Telecom’s antics. Wholesale price regulation was introduced, and the government forced Telecom to split its wholesale and retail businesses into Chorus and Spark. We may see similar intervention in supermarkets. The government is introducing a new supermarket regulation run by the Commerce Commission. It’s also looking at whether to break up the supermarkets to provide more choice for consumers.

Electric Kiwi considers ‘what is good for the goose, is good for the gander’. The telecommunications reforms have been very successful and enabled new entry and stronger competition, driving down prices and resulting in far better service. There is no reason why consumers couldn’t benefit from similar reforms for supermarkets and electricity.

Electric Kiwi has long advocated for reform to deliver more competitive and affordable electricity for long suffering Kiwi households and businesses. Wholesale regulation should be introduced to ensure independent retailers can compete against the incumbents on a level playing field.

If the government wants to lower the cost of electricity, it needs to be bold and adopt structural reform, starting with breaking-up of the largest and most profitable gentailer Meridian.