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'It doesn't have to be that way. It's not a contradiction to have a market that looks after the low user that has difficulty paying.'

Gary Holden helped shape New Zealand’s electricity market. As the chief executive of Pulse Energy, his job now is to deliver sustainable profits, writes Rob O’Neill

GARY HOLDEN understands the public’s frustration with soaring electricity prices. He also understands why Labour and the Green Party are proposing a radical shift to a single-buyer model to rein in power costs.

There is a problem that needs to be addressed, he says. New Zealand consumers are facing the highest electricity prices seen in 100 years. After years of falling, prices have spiked sharply.

However, as chief executive of challenger electricity retailer Pulse Energy – and one of the team who helped design New Zealand’s electricity market in the early 1990s – he’s keen to inject a different market reform option into the debate.

Holden wants to make electricity cheaper for a particular group of people: low users.

Further market reform should focus on this group because they are most at risk from price hikes, he says. They are often retired, on fixed incomes or burdened by poor credit records.

Many of them prepay for their electricity. Paradoxically, that means they are paying higher prices than just about anyone and have faced the brunt of the price increases seen over the past few years.

To understand what has happened to our electricity prices, you have to wind the clock back. In revisiting his 1990s role as a member of New Zealand’s Wholesale Electricity Market Development Group, Holden is taking the argument for reform back to basics.

That group, he says, considered two models for reform: the wholesale market we have now and a single-buyer model, along the lines proposed by Labour and the Greens.

‘‘Twenty years ago the debate was had and we chose a free market,’’ Holden says.

If we are now to ‘‘relitigate’’ that, he says, it’s important to ask why.

There are three parts to the electricity market, Holden explains: wholesale, distribution and retail. The Labour and Green proposal takes a crack at two elements of the wholesale market by writing down the value of hydro assets and going to tender for supply.

‘‘It could work okay. It’s not a terrible idea, but it has some inherent weaknesses,’’ he says.

And there are options not currently featuring in the debate.

graph.pngNew Zealand does not necessarily have a power pricing problem, he says. But often people who are frugal, on the lowest incomes or who have poor credit, pay by far the highest prices (see chart).

‘‘It’s worth drilling on why that is,’’ he says. ‘‘It doesn’t have to be that way. It’s not a contradiction to have a market that looks after the low user that has difficulty paying.’’

A normal reaction is to write the customer off, but they have to go somewhere, he says. Right now, the answer is a prepay scheme such as Glo Bug – but that means paying among the highest electricity prices.

Speaking to a recent building symposium, Holden presented analysis of the electricity market stating that prices started to rise in the early 1990s, after 50 years of low and falling prices. That was because the depreciated cost of hydro assets could not be maintained due to the need for more supply and therefore more investment.

The Wholesale Electricity Market Development Group considered the model Labour is proposing and decided the Government could set rules for the market, but not pricing.

The breakup of ECNZ and the creation of the market worked, he says. The market read the signals and multiple new power plants were built to deliver the needed supply. Retail competition also began to emerge.

Consumers paid more as crosssubsidies from commercial users were removed, but overall the market held prices reasonably well – until around 2001.

After that, GDP grew again and so did demand. At the same time, gas reserves diminished and had to be replaced by higher-cost generation.

‘‘The importance of depleting natural gas supply was quite monumental,’’ Holden’s analysis says. ‘‘The market in effect is indexed to the natural gas price.’’

Because the market was designed to minimise gas use, gas prices are a critical input in determining hour-to-hour electricity prices. Between 2000 and 2008, gas prices nearly doubled, in turn doubling the wholesale electricity price.

The upside was that wind and geothermal power became more economic and, once again the market worked. Investment followed.

At the same time, transmission infrastructure required major investment. In the decade since 2011, an additional $10 billion was invested and had to be recovered from consumers.

The combined impact of higher gas prices and increased transmission investment delivered price rises of ‘‘unprecedented magnitude’’, that have proved hard to explain to a ‘‘disheartened public’’, Holden’s analysis says.

Worse, low-use consumers have borne a disproportionate amount of that cost. A combination of structural changes could be used to lower prices generally, but given these are only a third of the cost of electricity, more would need to be done to target those most affected.

Holden says that, for example, more liquidity in the forward market would help reflect forecast future electricity surpluses in today’s pricing. Tiered transmission and distribution charges could be introduced favouring low users.

Separation of generators and retailers could feature without a single-buyer model being introduced, he says.

‘‘It appears a solution that is geared specifically at low users would deliver the consumer outcomes most effectively without materially impacting the value of any industry participant. A win-win is possible if we put our minds to it,’’ he writes.

Labour is aware of the idea, but Holden does not think it is persuaded yet. The suggestion needs to be put on the table and looked at from all sides.

A focus on the forward market is part of Pulse’s way of doing business. As a pure-play retailer intent on delivering the sharpest pricing around, it buys rolling windows of electricity in advance to manage the short-term price volatility that can be caused by events such as droughts.

Listed on the NZAX, Pulse is majority-owned by West Coast lines company Buller Electricity, which is, in turn, owned by a consumer trust.

Buller began investing in Pulse in 2009 and took a majority shareholding after an $8.3m recapitalisation in 2011. Buller also provided $9m in guarantees to support bank facilities and securities to the wholesale electricity market and electricity lines businesses.

The company appears to know its market and approach it in creative ways.

Pulse offers not just cheap power deals but, under the Pulse Energy brand, new ways to buy and manage electricity consumption, for example by using smart meters. These allow customers to monitor electricity usage and take advantage of discounted rates at off-peak times.

Holden, who was appointed chief executive of Pulse in March after the resignation of Dene Biddlecombe, happily touts another disruptive market move, a partnership with Grey Power.

Last month, Grey Power and Pulse inked the deal to give Grey Power members access to low-cost power, easy-to-read bills, and a dedicated New Zealand-based call centre, all to be delivered through an entity called Grey Power Electricity.

Holden is especially keen on the new bills, which have been custom-designed in consultation with Grey Power.

The deal should help Pulse continue to boost its revenue, he says, at around the rate it achieved over the last financial year, 28 per cent.

But coming straight after the company posted a $9.3m net loss for the year ended March 31, shareholders will want to see bottom-line improvements to match Pulse’s impressive top-line growth.

Arguably, if Holden has a primary mission at Pulse, it is to deliver sustainable profits so the company doesn’t have to keep tapping its shareholders for equity and guarantees.

After its 2013 annual meeting in September, Pulse issued new shares to raise $2.9m in cash and to capitalise a $500,000 loan to boost working capital.

Pulse clearly wants to emphasise its achievements – the $9.3m bottom-line loss isn’t mentioned directly by either Holden or chairman Joseph van Wijk in their annual reviews published in the company’s annual report. Instead it is a positive EBITDAF – earnings before interest, tax, depreciation, amortisation and ‘‘fair value movements’’ – of $828,000 that is highlighted as a critical milestone. On that measure, progress has been good, with Pulse moving into the black from a $5.27m loss in 2012.

But it was one of those fair-value movements – a loss of $7.9m on electricity hedge derivatives – that caused 2013’s bottom-line damage.

In 2012 it worked the other way: a fair-value gain of $4.4m in 2012 helped push the company to a slim $163,494 profit.

Pulse is already buying electricity for 2016 and 2017 and full hedging will continue to reduce pricing volatility, Holden says.

He denies any suggestion the company is buying market share. Pulse is simply going through the standard phases start-ups experience, he says. Achieving positive cash flows from operations is one of those.

‘‘There’s so much transparency, everyone’s prices are available for everyone to see. Pulse has a low cost base as a start-up and that is an opportunity to offer sharp prices and attract customers.’’