In recent weeks, media reports have highlighted two seemingly unrelated issues: a severe shortage of General Practitioners (GPs) and the closure of businesses due to soaring electricity prices.

While these issues may appear to be distinct, they share a root cause. They are both unintended consequences of well-intentioned government policies that neglect incentives.

A strong case can be made that such neglect has contributed to artificial scarcity in the provision of such important things for well-being as healthcare, energy, and housing.

The housing shortage is partly due to an artificial shortage due to zoning restrictions of land available for housing. Happily, this is now well-recognised.

The GP shortage has reached alarming levels. Reports indicate that hundreds of thousands of New Zealanders are unable to enrol with a GP.

This situation points to significant policy failures; both the supply of medical professionals and their pricing options, must be artificially constrained.

Affordability is an issue both for GPs and for those with high health needs. GPs need greater freedom to increase co-payment charges to those who can afford to pay. The government’s High Use Health card could be ramped up as needed for those who cannot pay.

Health sector experts, Des Gorman and Murray Horn, independently recommended making it easier for internationally-trained GPs with sound qualifications to practice in New Zealand. They also suggested more innovative approaches to healthcare delivery and workforce management.

Meanwhile, electricity wholesale prices have skyrocketed, spiking at $800 per megawatt hour this August – a stark contrast to August 2023 prices, which were less than $150. Even those were unusually high at the time. The price surge has forced some businesses to stop operations. Again, artificial constraints – in this case on energy supply – are partly to blame.

Prices balance supply and demand. They convey useful information about scarcity at the margin. High prices motivate a search for better options and reward investments in additional backup peak capacity.

There seems to be little disagreement about the proximate cause of the extraordinarily high August 2024 prices – backup capacity from thermal generation is limited and water levels in the hydro lakes are particularly low.

Politically, the devil is in the diagnosis. A populist interpretation of the inadequate backup generating capacity is that energy companies’ failure to invest more is a deliberate ploy to generate greater profits.

In fact, high prices must frustrate companies who cannot generate electricity because they are out of lake water or gas. So why did they or others not invest in more capacity earlier?

An alternative explanation is that the inadequate backup capacity is the unintended consequence of a policy environment that is too hostile to investment.

Potential impediments to greater past investment include:

• difficulties in obtaining resource consents for large projects,
• policy hostility to fossil fuel generation,
• uncertainty about future demand from major consumers like the Tiwai Point aluminium smelter,
• a general hostility to foreign direct investment, and
• pre-emptive capacity-enhancing initiatives by past governments, such as the Whirinaki Power station (2004) and the aborted Lake Onslow project.

Why invest in additional capacity if the government might unpredictably undercut you?

Currently, New Zealand’s system depends on backup generation using fossil fuels. The gratuitous ban on offshore oil and gas exploration in 2018 obviously made further investment in fossil fuel generation riskier. A further disincentive is the policy of “retirement of thermal generation” as documented in the Electricity Authorities’ 2023-24 Statement of Performance Expectations:

“Mass electrification, including that of transport and process heat, retirement of thermal generation, a volatile climate, and technological changes will put unprecedented pressure on the electricity system over the coming decades.”

Climate change concerns do not justify the “retirement” policy goal. New Zealand’s Emissions Trading Scheme ensures that net emission targets are achievable regardless of the amount of backup by thermal generation.

Blaming energy companies for high prices without due cause is likely to discourage them or others from further investment. “Sovereign risk” is investors’ term for political risk.

Another politically sensitive issue is that higher prices transfer affordability. The overall cost burden they reflect is unchanged. So, opposition to higher prices reflects a desire for someone else to bear the costs. Overall, it is productivity, not price, that makes the cost burden more affordable. Prices simply provide information and incentives.

Public policies should be evaluated to a greater degree than before from a long-term dynamic perspective. Ask in advance, “How will this policy likely affect willingness to invest, and could that be bad for the public in the future?”

This article may be published after the government has announced some electricity measures. Hopefully, any such announcement will do more good than harm and represent good progress towards eliminating the sources of artificial scarcity and low productivity.

To read the full article on the NZ Herald website, click here.