Breaking up NZ’s power gentailers sounds appealing. The consequences may not be

Breaking up New Zealand's electricity gentailers may sound appealing, but the consequences could be significant. The idea of separating generation and retail businesses has gained traction ahead of the upcoming election, with both New Zealand First and the Greens advocating for it. However, the appeal is based on the notion that independent retailers could negotiate better terms with electricity providers, leading to lower household power prices.

Yet, the reality is more complex. Nearly half of the recent increase in electricity costs is attributable to higher network charges, rather than generation costs or retail margins. This is despite the fact that National's latest energy policy focuses on addressing network costs, rather than breaking up gentailers. Finance Minister Nicola Willis has cautioned that such a move could result in "massive instability".

While I have spent decades studying this issue, a review I conducted reveals some often-overlooked consequences of separating generation and retail. One key point is that integrating generation and retail gives electricity companies a vital advantage: protection against fluctuations in wholesale power prices. A gentailer can supply customers from its own generation while only purchasing or selling electricity on the wholesale market as needed.

A standalone retailer, on the other hand, must secure all of its customers' electricity through purchases or contracts, which can become problematic when wholesale prices surge due to factors such as low hydro lakes, gas scarcity, or high demand.

Another consequence is that separate retailers may struggle to secure long-term contracts at competitive rates, as they lack the same level of leverage as integrated companies. This can limit their ability to manage risk and invest in new generation projects. Separating generation and retail could also lead to double marginalisation, where both the generator and retailer add a margin to the same electricity, ultimately burdening consumers with higher costs.

While breaking up gentailers could potentially encourage competition, it also risks creating two separate entities each adding their own mark-up to the same electricity. This "double marginalisation" can be avoided through integration. Moreover, separating monopoly electricity networks from businesses operating in competitive parts of the market, as recommended by the OECD, may prove more effective in curbing potential harm to consumers.

Ultimately, any potential benefits of breaking up gentailers must be carefully weighed against the risks to risk management, investment, and wholesale prices. The onus is on those advocating for separation to demonstrate how independent firms would effectively manage wholesale price risk and sustain investment, ensuring that any gains from competition translate into lower bills for consumers.