Comments

David Thompson Posted:
So very, very true. It beggars belief that we consider ourselves to be a developed nation when so much of our economy is based on selling milk powder or logs. BTW, I own a Plinius amplifier (my second) that drives a set of Theophany speakers.
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David Thompson Posted:
A robust but sobering report. It concerns me that confidence is rising, yet sales and exports are down and "manufacturers and exporters are still lagging behind other sectors". Surely we should wait until we're earning more money before we start spending more?
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siemens Posted:
Yes true! The only thing that will never die in this world is the nature and its science behind it. Great post.
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Kieran Ormandy Posted:
Thanks for the question Steven, Germany has seen increases in manufacturing employment since 2009, and Switzerland has had stable manufacturing employment between 2006 – 2011, even in the face of ongoing Euro-zone issues. Korea has seen increases in manufacturing employment since 2008 and Israel experienced large increases since 1998, while being stable over the last 4 years. Singapore has had increases in manufacturing employment over the last two years. These countries all value their manufacturing sectors and work to protect them, this is reflected in the above numbers and their performance through the GFC. Note data around the above examples was sourced from OECD labour market stats.
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John Walley Posted:
Point one: you should have no doubt what our Association says publically represent the views of our members. Point two: we don’t knee jerk responses, if you trace back our comments around NZPower you will see them link all the way back to our research in 2004 and 2005. All that material is fully linked from our comments above. Point three: you will note our comments on major users, sadly the same advantage does not accrue to smaller industrial users. The perverse incentives of the LRMC approach in all this are well known. Point four: the NZMEA is not like any other Association in New Zealand we admit only manufacturers and exporters into membership, and our public expressions are the views of that restricted membership.
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3/5/13

Scorn or debate - what NZ Power might mean?


Print-friendly 21 comment(s) Posted in: In the media

Since the release of the NZ Power proposal there has not been a solid, logical debate about what NZ Power might mean, and the current problems inherent in the electricity market say New Zealand Manufacturers and Exporters Association (NZMEA).

NZMEA Chief Executive John Walley says, “What we witnessed this month in New Zealand politics reminded me of a line from Bob Edlin in Management Magazine a few weeks ago, Bob said “If scorn is better than robust debate at shaping good policy, we are in good hands.” That pretty well summed up the Government’s response to the NZ Power proposal from Labour and the Greens. Business New Zealand has urged Labour and the Greens to revoke the policy in an open letter. The letter reads to say that higher electricity prices would better serve New Zealand businesses incentives to innovate. Would this really be the case? These are echo’s of the comments made by the same group before the unbundling the local loop.”

“Sadly scorn, distortions and exaggerated characterisations, heaped on ideas and individuals seem to be an ingrained response from many; dismissing any new ideas at odds with the status quo.”

“Take a look at http://en.wikipedia.org/wiki/New_Zealand_electricity_market you don’t have to read very far on that link to see there is already a single regulator that balances supply, demand and price. Not very different than NZ Power as we read the proposal. The key difference is the pricing mechanism, not the entire system. Currently we have a Long Run Marginal Cost approach (LRMC), where the regulator balances the market in terms of supply and demand and pays all generators according to the highest cost generator required to supply in the market. Prices escalate based on the cost of new generation and fuel; higher electricity prices justify ever higher prices for electricity. It is clear that those generators who burn fuel to generate electricity have higher operating costs than the hydro, geothermal and wind generators, nevertheless, all are paid the highest price. The intention of the current pricing is to avoid stranding the assets that burn fuel and so cost more to generate electricity. Or put another way, LRMC guarantees that all generators are profitable, and low cost generators become super profitable. This is important when new generation is in the hands of the market, and/or reserve margins are small; it is less so otherwise.”

“LRMC introduces some perverse incentives, bid less volume and make more money by ensuring the highest cost generators remain in the market and over time tend to run the market towards a supply deficit. These are gaming opportunities (ship less make more) that tends to bias incentives away from new large scale low cost electricity generation. These are perverse outcomes that have the opportunity to damage the rest of the economy because electricity costs more than might otherwise be the case.”

“On the consumption side, industrial users currently have the power to negotiate closer to actual cost, this power wanes for smaller industrial, commercial and domestic users and it shows in the prices paid. Moving from LRMC to average cost removes the perverse incentives and requires generation assets to stand or fall on their merits. From what I have read, generator prices would be subject to oversight by the regulator based on operating costs and a fair return on capital costs (similar to Transpower and the lines companies at present) and they would bid into the market much as they do now; the difference is they would be paid their bid price and the more volume they ship the more they would be paid. This has the impact of removing windfalls from the low cost generators and ensuring the lowest cost available electricity is actually shipped. Industry should anticipate lower prices based on buying power and over time should see the lower price trend anchored average prices, not the LRMC of the last generation needed to supply.”

“The downside is that the assets associated with expensive generation might be more often pushed out of the market when the lower cost generators ship all they can. Returns on all generating assets fall to a level dictated by a competitive supply market, in volume terms, not one supported by the LRMC approach.”

“Under the LRMC approach all generators are incentivised to add small and expensive generating plant as the system makes more money when the most expensive watt is in the market. There is no incentive for large scale low cost generation that tends to be expensive to build but cheap to run. Managed by tender from NZ Power or left to the generators, the average cost approach tends to incentivise lower cost watts into the system.”

“It is not that difficult to understand that for electricity price and supply security the average cost approach intrinsically aligns incentives for the wider economy and the electricity system. The generator windfall of shipping less but making more is removed, but then that is the best outcome for the economy as a whole.”

“Note this analysis has nothing to do with the politics of left or right, or a retreat to the ideology of market primacy; absent competition markets need regulation. It is about balancing the trade-offs between a tendency to support the expensive generators and pass windfalls to the lower cost generators, or introducing a system bias to ship the lowest cost watts available to the benefit of the wider economy.”



tags: power, nz power, labour, greens, government, electricity, manufacturing, business

comments

5 Comment(s)



Scott Yates - 03 May 2013 at 12:11 PM
Great that this approoach will further encourage moving away from expensive and environmentally damaging fossil fuel options. For our economy to be internationally competitive and for our children and grandchildren's sakes every encouragement for renewable energy is a must and is non negotiable.
Craig Nelson - 06 May 2013 at 8:30 AM
So far we have seen NZMEA come out with a stance that is at odds with other similar groups and I doubt reflects memebrs views. Talk of single buyer being the solution to preventing blackouts and energy shortage is not supported by Fact. More and significant outages were caused by the old single buyer/government controlled model that NZMEA advocates a return to.

The one reasoned comment is that "Sadly scorn, distortions and exaggerated characterisations" and that is what we have seen from Labour/Greens in response to the numerous Analysts and Employer groups that have said this is a very bad idea.
Scott Yates - 06 May 2013 at 10:31 AM
Craig,
I am a member of NZMEA. I would welcom you to visit our factory and other NZMEA member's factories in other centres, Chch, Wellington.... whereever you may live.
We have a planned new panel product for the USA market.to compete with a Chilean product It is based on NZ produced MDF, to be machined, and then primed on the face, and possibly sealed on the back with a rfelctive paint for thermal and moisture reasons. Electricity is a significant cost in every process
Craig Nelson - 06 May 2013 at 13:54 PM
Thanks Scott, - I dont disagree with your view on renewable energy, and I dont disagree that energy costs are key to ensuring New Zealand remains internationally competive and I agree things can be improved - I just disagree with the NZMEA view that the labour Greens proposal is the solution - I do share the concerns of MEUG (who do also export) and I believe the proposal is based on flawed data, a model that labour discounted while in power for good reason and that it wont deliver lower cost electricity for Manufacturers in the medium term.
John Walley - 08 May 2013 at 10:18 AM
Point one: you should have no doubt what our Association says publically represent the views of our members.

Point two: we don’t knee jerk responses, if you trace back our comments around NZPower you will see them link all the way back to our research in 2004 and 2005. All that material is fully linked from our comments above.

Point three: you will note our comments on major users, sadly the same advantage does not accrue to smaller industrial users. The perverse incentives of the LRMC approach in all this are well known.

Point four: the NZMEA is not like any other Association in New Zealand we admit only manufacturers and exporters into membership, and our public expressions are the views of that restricted membership.

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