The boss of one of the country's biggest power companies has lifted the lid on unfair penalty payments and admits the industry has "dirty secrets" that needed calling out.

Meridian Energy chief executive Neal Barclay said the power industry hasn't been fair to New Zealanders and explained why his company was ditching prompt payment discounts.

"Let me be absolutely clear that these are not discounts in the genuine retail sense. They are penalties charged for late payment of bills, and they hurt those who genuinely
struggled to pay for their energy the most. That's unfair by any definition."

Meridian, the country's biggest power generator and 51 per cent owned by the Government, said the penalties generated revenue of $5 million.

While it was tough to admit the lack of fairness in the penalty system it was long overdue.

"I'm not saying we've been ripping people off. Power companies don't make excessive profits in New Zealand, but the industry still has a few dirty secrets and it's time they were called out."

Meridian scrapped the prompt payment system in the wake of the Government's review of the electricity sector which found low-income consumers miss out more often on prompt payment discounts – which can be as high as 26 per cent of the bill, and which budgeting and advocacy groups say are really late-payment penalties.

"Profiting from people's inability to pay a bill on time is something that never sat well with me," said Barclay.

It was not just unfair to households struggling to meet their energy costs.

"We know that roughly one in four people miss their payment date from time to time.
This can be due to a simple admin error that has seen customers pay more, just because they were a few days late."

Barclay said the mechanism was outdated and only councils also charged for late payments (one rates).

"They're a hangover from the days when power companies were regional power boards run by local government, and they have no place in a competitive market like retail electricity."

Barclay said not everyone was happy with the decision and there was a perception among some of our customers that they'll now be paying more for power, and subsidising vulnerable customers through this change.

The Benmore power station. Meridian Energy has a fleet of hydro stations. Photo / Richard Robinson

Nobody would be paying any more for power than previously. Meridian would be replacing the "'discount" with a credit for all customers.

The change came into force on October 1, which means everyone would pay the same price for their power, regardless if they paid this week or next.

"Yes, it means we lose $5 million a year in revenue. But that's a small price for knowing you're not punishing those customers that you should really be supporting the most. It's a no-brainer, and my only regret is not doing it sooner," he said.

Meridian's earnings in the year to June 30 were $666m, up 1.4 per cent on the previous year and it profit was up marginally to $201m.

Barclay said Meridian had been reviewing the system for some time.

"The [Government] review certainly gave us the kick in the pants we needed to take action, but the fact is we've been reviewing them for almost 18 months."

During the next few months, the company would take further steps to become a retailer that treated all customers fairly, "no matter how long they've been with us, where they live or how much they earn".

The preliminary review found that after adjusting for inflation, residential prices were 79 per cent higher than in 1990. Since 2000, New Zealand's residential prices have risen faster than most other OECD countries.

About 103,000 households spent more than 10 per cent of their income on domestic energy in 2015–16.

"People in this predicament are in what we call energy hardship. The picture is even worse if housing costs are excluded: the figure jumps to 175,000 households. Worryingly, children are over-represented in households experiencing energy hardship," the review panel said.

It found that a two-tier retail market appears to be developing: those who actively shop around enjoy the benefits of competition, and those who don't pay higher prices.

The average gap between the cheapest retailer's price and the incumbent retailer's price has increased by about 50 per cent since 2002, after accounting for inflation.

A final report, including recommendations on how to reform the industry, was due in May next year.