Industry, regulator at odds about how best to fund New Zealand power supply

Friday, 2 August 2019

There are lots of components in a typical power bill.

Lines companies in the north of New Zealand have added their voices to calls to reject the Electricity Authority's proposals for a new approach to fund the country's power grid.

Auckland and Northland power customers would end up paying more – and the Tiwai aluminium smelter less – under proposed changes to transmission pricing for electricity.

The Electricity Authority is consulting on its proposals to move to a benefit-based approach to pay for the cost of transmitting electricity around the country.

It says the current model is inefficient use of, and investment, in the transmission grid. It wants to encourage the right sort of investment to cater for future need, and direct the cost more closely to those who benefit.

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'Consumers should pay for the transmission assets they benefit from, and not pay for those they do not. That's not how the current charges work,' the authority said.

It proposes two new charges to replace the existing system - a benefit-based charge to recover the cost of new grid investments and the depreciated costs of existing investments, and a residual charge to cover any remaining transmission charges.

The initial average increase for those paying more would be $21 a year.

It said these would minimise inefficient grid use and inefficient investments. 'The charges would send better signals to consumers about the economic cost of using the grid, without distorting grid use or investment in grid-connected generation and transmission alternatives.'

Chief executive James Stevenson-Wallace said the proposal could generate a benefit of $2.7 billion over the next 30 years for New Zealand, and the proposal would allow the sector to 'get ahead of' investments needed between now and 2050.

'Current charges spread the costs of regional transmission investments across all New Zealand consumers. This means some are paying more, while others are paying less, than the benefit they get from the transmission grid.

'Our proposal rebalances transmission charges so that those who benefit pay. It does not increase charges overall.'

Under the changes, wholesale market prices would work alongside the transmission pricing proposed to manage peaks, he said.

'The current peak charge sends the wrong price signals. Some consumers end up paying a premium when power is most valuable to them – even when there is plenty of transmission capacity available.

'What we're proposing is a more targeted and accurate way to signal grid congestion – with significant benefits for consumers. We estimate that peak prices would be on average 38 per cent lower over 30 years than they are now.'

Questions of how to manage power peaks are becoming more pressing as demand for electric vehicles increases. An increase in solar and other renewable energy production means generation is likely to become more diversified in future.

Stevenson-Wallace said everyone would benefit from the benefits-based charging regime over time.

The status quo could not continue, he said. 'We're seeing price shocks already.'

But a group made up of the Employers and Manufacturers Association (EMA), Horizon Networks Federated Farmers, Northpower, Norske Skog Tasman, Oji Fibre Solutions, Top Energy, Trustpower, Counties Power, Entrust and Vector, said the proposed changes would make power more expensive for customers in the north of New Zealand.

Spokesman Alan McDonald, at the EMA, said those customers would be put into a position where they would already have had to pay once for past grid investments they had no control over, and would then pay for future upgrades in their area.

'There is potential for ongoing price shocks.

'But when people in Northland turn their lights on when they get home from work they won't be getting any better service than people elsewhere. Yet their bills will have gone up.'

The authority's proposal includes a price cap for consumers and businesses connected directly to the grid to protect them from big price increases.

That meant that the Tiwai Aluminium smelter, which received a $30 million sweetener from the previous government, would get another $11.3 million in discounts a year.

By comparison, Northpower, Top Energy and Vector would pay an extra $10.5m, McDonald said.

The Tiwai Point aluminium smelter, which posted a $207 million pre-tax profit in 2018, consumes roughly 13 per cent of New Zealand's electricity.

It benefits from a deal with Meridian Energy, giving it prices which are suspected to be far below the market rate.

Entrust, the consumer trust and part-owner of Vector, says Tiwai has a 'sweetheart deal' on the power it uses.

McDonald said New Zealanders did not pay different amounts for their roads or telecommunications depending on whether they lived so it was not clear why they should pay differently for power.

Some of the most disadvantaged households in the country would end up paying more, he said.

Stevenson-Wallace said the initial average increase for those paying more would be $21 a year.

'Reform is urgently needed and it's time to agree on a new approach. If we don't do something now, consumers will get less benefit from the electricity system, and pay more for it, in the long-run,' he said.

'Transmission pricing is complex and there is no single option that will deliver a consensus, but we believe what we're proposing will deliver significant benefits – and solve some significant issues – with the current [system].'

McDonald said if there was to be a rebalancing of the national grid, that was not something a regulator should do. 'That's a political decision.'

But Stevenson-Wallace said the sector prided itself on being market-based. He said the Electricity Price review panel understood the Electricity Authority's concerns.

Consultation is open until October and regional meetings will be held around the country.