Meridian: Here's how households could save $180m

Monday, 12 November 2018

There are lots of components in a typical power bill.

Households could be hundreds of millions of dollars better off if the cost of electricity distribution was distributed more evenly.

Power companies have complained that the cost of distribution and transmission - getting the electricity from the power station to the network, and then to households - needs more attention.

In its submission to the Electricity Price Review, Meridian said distribution had been the sole driver of real power price increases since 2011.

It said the review of the transmission pricing methodology should be finished and distribution pricing reform expedited, if not through an industry-led process, with a deadline from regulators.

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'Without reform, consumers are likely to be paying hundreds of millions of dollars more for electricity than necessary.'

Over the years, residential customers had started to take more of the burden of distribution costs, and business customers less.

Rebalancing could save households $180 million. Meridian said there could also be $2 billion to $5b in efficiency gains.

Chief customer officer Julian Smith said, in the 1990s, businesses had been 'massively subsidising' households but that had corrected. 'Has it been overcorrected? This is an opportunity to check the allocation is fair.'

Smith said the distribution cost was a big portion of a household power bill. 'The cost isn't equally shared across the market.'

Electricity Authority chief executive James Stevenson-Wallace agreed it was problematic.

'Distribution networks take power from the main grid to the place where it's used. They contribute 27 per cent to the cost of power for the average New Zealand household. It is in the long-term interest of consumers and New Zealand that the costs of distribution networks are efficient. By this we mean that pricing reflects the least cost of supplying electricity at a standard of reliability and quality that people want.

'The current pricing structures are not doing this and are giving incorrect pricing signals for investment. Looking to the future, with new technologies and business models, this will only get worse,' he said.

'The network companies and the Electricity Networks Association have been working on improving this. We need to keep the progress going with more urgency. We will publish a consultation paper by the end of the year, proposing amendments to the Distribution Pricing Principles and outlining how we propose to monitor progress.'

But Jessica Wilson, head of research at Consumer NZ, said retailers could not blame distribution entirely for price rises.

'According to the analysis done for the Electricity Price Review, retailing charges were the biggest component of residential price rises between 2004 and 2018. The review's data show distribution charges increased 23 per cent during that period, while retail charges rose 30 per cent.'

The electricity lines industry is regulated by the Commerce Commission because the operators have a monopoly in each area.

Commerce Commission said, across the country, revenue was up 4 per cent in the past year but the companies' return on investment was down 1 per cent and regulatory profit down 12 per cent.

Meridian also wants an end to the low-user scheme, through which households can opt for a lower fixed daily charge, and higher variable cost for the power used, if they use less than the median.

But Smith said it was not working as intended.

'[The] regulations were introduced assuming poorer households use less power, but this was never the case. All income levels have a mix of low and high users of electricity so it was always a blunt and ineffective tool.

'Some of our poorest households have high electricity use because their homes are poorly insulated, and they have many family members under the same roof. In contrast, some of the most well-off qualify for [low user] rates because they have well-insulated homes with modern appliances and perhaps only two people in the house.

'We've ended up with struggling families in South Auckland subsidising power for holiday homes in Pauanui. It's middle-class welfare and it's time we ditched it.'

Smith said the uptake of solar was exacerbating the problem by turning more well-off households into low users, shifting costs to and increasing bills for many poorer household, who had to pick up their share of the cost of maintaining nationwide distribution.

'Households that can afford new technologies will continue to benefit at the expense of the lowest-income households that cannot, and this gap will grow over time unless we do something about it.'