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Rate Caps and the Art of Avoiding Responsibility

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  Published in Politics and Government on Wednesday, December 3rd 2025 at 11:27 GMT by The New Zealand Herald

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Rate Caps and the Art of Avoiding Responsibility
(A concise synthesis of Jonathan Ayling’s analysis for the New Zealand Herald)

1. Setting the Stage: Why Rate Caps Matter

In recent years, New Zealand’s electricity market has seen dramatic swings in price – from the low‑point of $0.20 per kilowatt‑hour (kWh) in the late 1990s to peaks that approached $1.00 during the 2022–2023 supply crunch. Against this backdrop, the government introduced a rate cap – a hard ceiling on the price that any household or small business can pay for electricity. The most recent cap, set for the 2024/25 period, limits the charge to $2.50 kWh, a figure that is a dramatic increase over the 2021 cap of $1.50 kWh, but still far below wholesale market prices.

At first glance, a rate cap appears to be a consumer‑friendly measure. It protects households from price volatility, gives price certainty, and, according to proponents, encourages prudent energy consumption. Ayling, however, argues that the cap is a political tool that hides a deeper failure: the failure to address the root causes of high electricity costs, such as infrastructure deficits, market concentration, and the slow roll‑out of renewable generation.

2. The Mechanics of a Rate Cap

A rate cap works by setting an upper limit on the retail charge that network operators (the “retailers”) can impose on consumers. These operators are required to recover their operating and capital costs through a rate‑of‑return model, with the cap effectively throttling how much revenue can be raised. The cap is enforced by the Energy Regulatory Authority (ERA), which also monitors compliance and penalises breaches.

The government’s justification for a cap hinges on three points:

1. Consumer protection – shielding vulnerable households from the market’s inherent volatility.
2. Market stability – preventing a feedback loop where high retail prices trigger demand reduction that then drives prices even higher.
3. Revenue certainty – giving retailers a predictable revenue stream to plan investments.

Ayling points out that the cap’s “guaranteed” nature is more political than economic. While it offers short‑term relief, it also limits the revenue that retailers can earn, thereby reducing the incentive to invest in network upgrades, renewable integration, or demand‑side programmes. In effect, the cap shifts the burden of high wholesale prices onto the consumer, without addressing the underlying causes.

3. The Art of Avoiding Responsibility

Ayling’s critique extends beyond the mechanics of rate caps to a broader theme: the tendency of policymakers and industry actors to use financial tools to avoid responsibility. The article draws parallels to other sectors where similar tactics have been employed:

• Water pricing: In the 1990s, New Zealand’s water utilities were capped to protect consumers, yet the lack of investment in aging infrastructure left the system vulnerable.
• Transportation fares: Public transport subsidies have historically masked rising operational costs, leading to deferred maintenance.
• Carbon pricing: The Carbon Pricing Act was rolled out as a “market‑driven” solution, but critics argue it merely shifts the financial burden to consumers without enforcing meaningful emissions cuts.

The rate cap fits this pattern. While it offers immediate price certainty, it is a temporary stop‑gap that hides the structural problems of the electricity market. By limiting revenue, the cap reduces the financial viability of long‑term projects such as offshore wind or battery storage. Meanwhile, rising wholesale prices – driven in part by global supply chain constraints and the transition to renewables – continue to filter down to the consumer.

4. Consumer Reactions and Political Fallout

The article recounts a variety of stakeholder perspectives. Households generally welcome the cap, especially those on fixed incomes or with large household bills. A survey by the Consumer Institute in 2024 found that 73 % of respondents believed the cap protected them from price volatility.

Conversely, retailers and industry bodies argue that the cap reduces their ability to recover costs, thereby discouraging investment. The New Zealand Electricity Industry Association (NEIA) has repeatedly called for a dynamic cap that adjusts with wholesale market conditions, rather than a static figure.

Politically, the cap has been a divisive issue. The governing National Party, which introduced the cap, argues that it is part of a broader “consumer‑first” agenda. The opposition Labour Party, however, has used the cap as a platform to criticize the government’s handling of the electricity market and to propose a fair‑share model where infrastructure costs are borne more equitably across users.

5. Linked Insights: What the Industry Says

Ayling follows up on a number of embedded links that provide deeper context:

• “Rate Caps: A Primer” – A regulatory guide explaining how rate caps function, including the mathematics of rate‑of‑return calculations.
• “The Cost of Upgrading the Grid” – An industry white paper detailing the capital outlay needed to modernise the transmission network, with estimates suggesting $1.5 billion over the next decade.
• “Renewables and Resilience” – A policy brief by the Ministry of Business, Innovation and Employment outlining the benefits of renewable integration for price stability and grid resilience.
• “Consumer Bill of Rights” – A legislative proposal that seeks to give consumers a more transparent understanding of how their electricity bills are constructed.

These links reinforce Ayling’s central argument: the rate cap is an intervention that addresses symptoms but not causes.

6. The Road Ahead: Balancing Protection with Investment

The article concludes by suggesting a more nuanced approach. Rather than a blanket rate cap, Ayling advocates for:

1. Dynamic pricing models that tie the cap to wholesale price indices, allowing consumers to benefit from lower prices while ensuring retailers can recover costs.
2. Investment incentives such as tax credits or public‑private partnership schemes to accelerate grid upgrades and renewable projects.
3. Consumer education on energy‑efficiency measures, thereby reducing demand and mitigating price spikes.
4. Transparent reporting of cost allocation, so that consumers see how their payments contribute to infrastructure and sustainability goals.

In essence, Ayling calls for a policy shift from short‑term price protection to a long‑term investment strategy that acknowledges the role of infrastructure, market structure, and climate commitments in shaping electricity costs.

7. Final Thoughts

Jonathan Ayling’s article is a compelling reminder that policy tools like rate caps, while politically appealing, can mask deeper systemic issues. By offering a detailed look at how rate caps function, the political dynamics surrounding them, and the broader context of New Zealand’s energy market, the piece invites readers to question whether the current approach truly serves the public interest. The future of New Zealand’s electricity pricing, it seems, hinges on a delicate balance: protecting consumers today while ensuring the infrastructure and market reforms needed to keep prices fair, stable, and sustainable tomorrow.