The Labour and the Green Party announced plans to establish a new agency, New Zealand Power, which would act as a single buyer of wholesale electricity. The plan would cut the nation’s power bills by up to $700 million a year, lowering household power bills by up to $330 a year, and giving the economy a $450 million annual boost according to Labour and Green Party analysis. This analysis is naïve and does not take into account the full direct and indirect costs.

NZ currently has $253bn of external debt and each 0.01% movement in the cost of debt adds $25m in interest payments. The uncertainty caused by the Labour/Greens Nationaliation by stealth policy is likely to add up to 1% to the cost of debt for New Zealand, due to lenders requiring an increased return for lending to a nation with political and economic instability. The cost of capital for all New Zealand companies will rise due to the same factors. A 1% increase in debt servicing costs for New Zealand’s overseas borrowing, in time would add up to NZ $2.5bn a year to the debt bill.

In addition to higher financing costs for the economy as a whole, the Government would receive around $450m a year less in dividends from the state owned power companies. The state owned power companies would need to write down asset bases by around 30% on an asset base of $15bn. This equates to $4.5bn of capital destroyed.

The flow on effects to New Zealand’s listed power companies is just as detrimental. Analysis suggests that share prices for Contact Energy, TrustPower and Infratil could on average fall by 20%. This is around $1bn loss of wealth for New Zealanders when adjusted for overseas ownership of these companies. On top of this there will be a cut in dividends for the listed companies of say 20%, further reducing returns to New Zealand shareholders. This will adversely affect many KiwiSaver schemes that have direct exposure to these companies.

It seems inevitable should the Labour/ Greens proposal be enacted that the listed power companies would take legal action, based around property rights. This is likely to be lengthy and costly with the Government footing much of the bill.

In conclusion, to save $700m per annum from our total electricity bill the direct and indirect costs of such a scheme would be in the order of the following; $2.5bn in additional debt servicing costs, $450m reduction in dividends, $4.5bn asset write-downs from State owned enterprises, $1bn of capital destruction of the listed power companies and a reduction of $100m of dividends per annum to New Zealand shareholders. In addition, there will be highly skilled jobs lost as power companies reduce capital expenditure and development. In the short term this will not be an issue whilst demand catches up with supply but by the time supply and demand are in balance it will be too late to add additional capacity in a timely manner.

Rolling blackouts anyone?

Mark Warminger

Portfolio Manager

The views expressed are not necessarily those of Milford Asset Management Ltd.  Milford Funds Ltd on behalf of clients owns shares in Contact Energy, TrustPower, and Infratil.