Negating Mega-Inefficiency

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Gareth Morgan, Director of Gareth Morgan Investments

Energy efficiency has been sidelined in the process of restructuring the electricity industry. It is a service industry, yet electricity is treated as though it is a satisficing good: the more you have, the better off you are. Reforms are biased towards reducing the costs of generation and delivery of electricity, when the customer is equally well served by opportunities to achieve more of the desired end result – heat, light, and the services of powered machinery and appliances – with the same or less electricity. A wealth of research points to large efficiencies in energy use being possible for modest investments. “Negawatts” (power saved) could be generated far more cheaply than megawatts, a violation of classical economic theory that the market will ensure that the highest yielding investments are made first. This market failure requires government intervention to redress the balance of investment so that the marginal returns are equalised. This can be done in two ways.

The first is to remove the institutional barriers which prevent a market for negawatts developing. Research has already been done in this country on how this can be done. The mechanisms must be embodied in the corporate structures and goals of the generation and distribution companies during restructuring to avoid establishing property rights inconsistent with desirable changes in the ground rules.

The second is to allow the true cost of the natural resources consumed in power generation to be reflected in the price. Oil, coal and gas prices need to reflect the externalities their mining and burning impose on the environment. Let the polluter pay. Water resources are also not free in an economic sense. Our natural heritage is despoiled by dams. Hydro resources are limited, yet supplied free to dam owners. That bypasses the price system as a means of distributing scarce resources efficiently. An appropriate price should be paid to the owner of the resource, whether that be the Crown or private owners. If a market in water resources can be developed in tandem with one for negawatts, a framework for a market solution to our energy inefficiency is established. Resource rentals will raise power costs, further tipping the balance in favour of high yielding, energy conserving investments.

Despite these measures the need for new generation capacity will still arise eventually. This requires the electricity price to have risen to the marginal cost of new production by the time that eventuality arises. Electricorp was right to propose an increase with that end point in mind. It would further improve incentives for energy efficiency, delaying even further the evil day when new capacity must Ire added. The price rise was objected to as it would generate super-profits for Electricorp or its successors on its cheap hydro power. But if the water resource was returning to its owners the economic rent they deserve, as proposed, this objection would not arise.

Negating Mega-Inefficiency was last modified: December 15th, 2015 by Gareth Morgan
About the Author
Gareth Morgan

Gareth Morgan

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Gareth Morgan is a New Zealand economist and commentator on public policy who in previous lives has been in business as an economic consultant, funds manager, and professional company director. He is also a motorcycle adventurer and philanthropist. Gareth and his wife Joanne have a charitable foundation, the Morgan Foundation, which has three main stands of philanthropic endeavour – public interest research, conservation and social investment.