Vertical integration and consumer benefit in the New Zealand electricity sector

In response to the 9 August 2021 electricity outage in New Zealand, some commentators blamed vertical integration—where companies own both electricity generation and retail arms—as a root cause. However, these claims lack published analysis. While the Electricity Authority has raised vertical integration as a potential barrier to new entrants, it has also noted this may be becoming less of an issue.

This Sapere report by Kieran Murray, Toby Stevenson and Michael Young, reviews global and local evidence on vertical integration in electricity markets. It finds that such integration often arises as an efficient response to real-world market imperfections, such as information asymmetries and investment risks, rather than as a way to undermine competition. Extensive theoretical and empirical research, particularly in electricity markets, supports this conclusion.

The report makes two key points:

1. Vertical integration in electricity is an economically efficient structure that helps manage imperfections in wholesale and retail markets. Regulatory restrictions on it could raise electricity costs for consumers.
2. Greater competition, driven by market reforms that reduce imperfections, will naturally reduce the need for vertical integration. However, forcing de-integration through regulation will not create more competition and could be counterproductive.

In essence, vertical integration should be seen as a solution to, not the cause of, market challenges.