Government Faces Challenges in Overhauling Energy and Supermarkets

Growing concerns about competition in essential markets are prompting renewed government efforts to address issues in the energy, supermarket, and banking sectors. On Wednesday, Energy Minister Simon Watts announced a series of reforms aimed at reducing electricity prices and ensuring “abundant and affordable energy for next winter and beyond.” However, responses from industry groups indicate a widespread skepticism about the effectiveness of these measures.

The Auckland Business Chamber, the Major Electricity Users Group (MEUG), and the Employers and Manufacturers Association expressed disappointment with the proposed reforms. Independent retailers such as Electric Kiwi and 2degrees cautioned that households and businesses may continue to face high energy costs and potential factory closures. Market reactions were telling, as investors marked up the shares of state-owned energy companies Meridian, Mercury, and Genesis on the New Zealand Stock Exchange (NZX), raising questions about the anticipated impact of the reforms.

Reform Promises and Persistent Challenges

The current government’s commitment to enhancing competition in the supermarket industry has similarly faltered. Previous administrations, including that of former Prime Minister Jacinda Ardern, pledged to improve competition to help lower grocery prices. In August, Finance Minister Nicola Willis promised an “express lane” for new supermarkets to enter the market, yet these initiatives have not sparked significant change in competition levels. The situation in the supermarket sector remains stagnant, and hopes for improvement appear to be dwindling.

The banking sector presents its own set of challenges, as the four major Australian-owned banks maintain a stronghold on the market, largely insulated from new competition. The political landscape is becoming increasingly complex, with tensions rising between parties like New Zealand First and the ACT Party regarding government intervention in energy policy.

Could competition policy in energy, supermarkets, and banking become a decisive factor in coalition politics? As the next election approaches, the potential for fractures within the center-right coalition is growing, potentially steering New Zealand towards a future of minority governments.

Conflicting Goals and Historical Context

Watts has emphasized that the government’s primary focus is ensuring energy security and affordability. While these objectives may seem complementary, they are often at odds. The World Energy Council identifies an “energy trilemma,” highlighting the trade-offs between maximizing renewable energy, lowering prices, and minimizing the risk of power shortages. The government’s recent measures, including support for liquefied natural gas (LNG) imports, primarily address energy security rather than fostering competition.

Political ideology further complicates the issue. The Green Party advocates for renewable solutions, while the ACT Party tends to support less regulation. Watts himself noted that he belongs to a center-right party and prefers a non-interventionist approach, which may hinder effective competition reforms.

Leadership is another critical factor. The entrenched problems in these sectors are not easily resolved. Many towns have reached a saturation point in supermarket numbers, limiting opportunities for new entrants. Similarly, power generation has long been concentrated among a few companies, making competition difficult. Historical attempts to resolve these issues have often relied on existing institutions, rather than bold, independent leadership.

There is a tendency among political leaders to rely on advice from industry insiders, which can skew their understanding of the market. For example, former energy minister Simeon Brown cited concerns from Contact Energy regarding the viability of new projects, without considering dissenting opinions from other renewable energy advocates.

As MEUG chairperson John Harbord pointed out, the narrative that gentailers are under-investing due to government concerns does not align with the reality of their significant dividend payouts.

Current State and Future Directions

Despite these challenges, there are some positive developments. Watts recognized the need for greater “firming capability” to manage dry years, a sentiment echoed by the previous government’s exploration of projects like Lake Onslow. Both administrations seem to agree on the fundamental issues at play, yet the path forward remains unclear.

The government is considering underwriting the construction of an LNG import facility at the Port of Taranaki, which could be funded through a government advance. While there is a valid case for importing LNG, relying on it for power generation could be costly for consumers. The government is also discussing a regulatory framework to incentivize building firm generation to mitigate dry-year risks, but these plans are still in the early stages and lack clarity.

As the government prepares for its next set of promises, it remains to be seen whether substantial progress can be made in addressing these persistent market challenges. The ongoing discourse suggests that while there is a recognition of the problems, the solutions may require more than just policy adjustments; they may need a fundamental shift in how these markets operate.