6. What Are the Benefits of More Efficient Pricing?
If prices are more efficient, then customers will not pay any more than they should and market participants will have more confidence in likely future prices as they will be determined by a market rather than by one dominant entity.
In the long run, if prices are on average too high, then new power station capacity may be built too early or older less efficient plant encouraged to remain in service. This would result in direct costs to the New Zealand economy. Surplus capacity would also increase the risks to the environment because of the likelihood of additional base load thermal generation and extra hydro spill.
On the other hand, if prices are on average too low, sufficient new generation capacity might not be built when required. The risk of electricity shortages in the future would increase. This scenario could also be harmful to the environment by placing hydro lake levels under severe strain and/or resulting in the use of alternative and potentially costly energy sources.
In the long run, efficient price signals are necessary to ensure that the timing of new investments is appropriate. Trends in day to day prices over time must provide appropriate signals to new investors and the owners of existing plant.
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