Power poverty is affecting people globally – including here in New Zealand

Can New Zealand learn anything from the bumbling British energy bailout which sent bond markets and a prime minister tumbling?

British Gas wrote to me in early August: “Hello Mrs Starks ...” followed by a bold font: “Fix your energy prices for peace of mind.”

I almost pushed delete to escape whatever terrible kilowatt news they were about to bestow. But I didn’t. I kept reading.

This is the UK’s biggest energy supplier, and it provides both gas and electricity to my part-time home.

Hello British Gas, you sound chirpy but I’m sure the forward price of energy is looking a bit frothy at the moment.

Ukraine, Putin, Nord Stream and decommissioned nuclear plants flew through my brain. I couldn’t see this letter ending well. Sure enough, it went downhill.

Its fixed-rate offer bounced off the screen at a startling £6500 ($13,000) a year for power and gas combined. Staying variable was half this amount but subject to large unknown increases.

At that point I knew it was a good idea to turn off the hot water tank, along with every switch, and leg it home to hydropower.

The house is 140m² of living space, thick walls, windows the size of postage stamps, and it sits in a country where the minimum wage is lower than New Zealand ($19 an hour in the UK).

I didn’t click the $13,000 “switch to fixed tariff” button. It was a case of pacing for six weeks while Liz versus Rishi round one took place. A blindingly obvious government bailout was about to occur, and it duly came on day two of Liz Truss’s 44 days in power.

The Kiwi comparison

As recently as October 2021, the average British home was paying only $2400 a year due to the energy price cap. Company profits were limited to 1.9%.

The moans were deafening, and I have to admit to being a bit bemused by their reaction. It still felt cheap in a freezing country.

The war in Europe then sent prices stratospheric.

The Truss government brought in an electricity price cap equivalent to 67.6 cents per kilowatt hour (kWh) and $1.05 fixed daily charge. The average household would now pay $5000 a year. Bear in mind this is the bailout price and the market was far higher.

For comparison, Kiwi power prices are less than half at 32.5c/kWh (ranging from 28c in Invercargill to 43c in Kerikeri per kWh). UK gas prices are capped at 20.8c/kWh and 57c fixed daily charge. A quick comparison with one Kiwi retailer shows piped gas at 7c/kWh and a daily charge of $1.35.

The price-cap fiddle

Truss’s policy was a two-year bailout estimated to cost $178 billion. Spread over 29 million households it was roughly $6000 in each letterbox. Some estimates doubled this.

British Gas popped into my in-box again: “Hello Mrs Starks ...” Deep breath, let’s see how much the taxpayer will be indebting themselves to save me.

To be clear, I’m on a win here as I’m a Kiwi taxpayer. The news was good. Based on last year’s usage, costs will be $7680.

Like any dramatic British soap, good news is always short-lived. The mini-reversal-budget wiped out the two-year price cap and we are back at the market’s mercy in April 2023.

From then on, help will be targeted and means tested.

The Kiwi low-user problem

In New Zealand we have a more secure energy mix than Europe. Yet the politics of pricing run hot with the abolition of low fixed daily charges.

This was a structure built into legislation back in 2004 for those using less than 8000kWh a year.

Something is wrong with pricing when I qualify for a structure originally intended to protect against power poverty.

Those with holiday homes or expensive solar systems have low consumption, but they’re not hard up.

Those who use gas, use less electricity. Most of us have reduced consumption with more efficient appliances, heating, insulation and lighting.

There are many ways the 8000kWh net has captured a big market segment.

The electricity market has become lopsided

An incredible 60% of the country are on low fixed-daily-rate plans. While it sounds great, power distributors are forced into cross-subsidising acrobatics in favour of people who were never a target of the policy.

They’re also hamstrung and can’t implement other competitive pricing policies. If the networks can spread power usage over the day more evenly, they can keep prices lower (less need for extra infrastructure to deal with peak demand).

Incentivising people to use off-peak power is difficult to implement when 60% of your customer base is locked into a social incentive never intended for them.

These changes are not a back-door method to swell profits. They’re being made to allow distributors to make different types of offers and compete using different methods.

Low-income, low-use households will suffer as fixed charges rise and a new targeted social policy is desperately needed to help these people. This will free the market, add to fairness and stop this regulatory anomaly getting more bloated and distorted.

Opinions are a personal view and general in nature. They are not a recommendation for any individual to buy or sell a financial product. Readers should always seek specific independent financial advice appropriate to their own circumstances.