Why Government may get cold feet over power price change

Friday, 4 June 2021

The Electricity Price Review described the structural separation of gentailers as unnecessary, and for now the Government is sticking by that advice.

ANALYSIS: Households should find out in the next month or two whether they will be paying hundreds of dollars more or less for electricity in the years ahead.

The Government is close to deciding whether to gradually phase out the requirement for power firms to offer ‘low-user’ electricity tariffs to consumers that cap daily fixed charges at 30 cents plus GST.

Households on higher-usage plans typically pay a fixed daily charge of about $2 plus GST for power.

If the Government does approve a phase-out, it now looks likely there will be alternative concessions for people who have invested in solar systems, and people on low incomes who also use little power.

* Electricity reforms will 'take pressure off monthly power bill', Government promises

* Low-user electricity tariff has 'never really worked that well'

The Government is expected to shield some households from higher bills if it implements a recommendation to phase out low-user power plans – or perhaps call the whole thing off.

But it would be brave person who bet on the Government’s decision.

Electricity Retailers’ Association chief executive Cameron Burrows says power companies would like a decision in time for them to introduce new pricing from next April if a change is approved.

“Before this happens there are significant processes that need to be undertaken – developing the new prices, consulting with customers and other industry participants, and implementing new pricing systems,” he says.

“To allow this to happen a decision on the removal of the regulations needs to happen in mid-2021, but there’s no ‘one date’ deadline for when the decision needs to be taken.”

Power firms compensate for the lower fixed charge by requiring people on low-user plans to pay a higher per-kilowatt-hour price for the electricity they use than customers on “standard” plans.

But electricity companies say that because fixed daily charges don’t cover all their fixed costs, the effect of removing the plans would that be that daily charges would average out at a higher rate, and the per-kilowatt price of electricity would average out at a lower rate, across all their customers.

Low-user plans benefit people who use less than 8000 kilowatt-hours of electricity a year, which is the slight majority of households, sometimes by hundreds of dollars a year.

They typically include households that use woodburners, gas or solar systems to heat their homes or their water, and people living in flats or small or well-insulated homes.

The Electricity Price Review recommended scrapping the requirement to offer the tariffs, arguing the people who benefitted from them were in effect being subsidised by customers who used more power, including large families living in poverty in poorly insulted homes.

Philosophically, Energy Minister Megan Woods appears on the same page.

“If you think about myself, I represent a multicultural electorate with a large stock of state houses, many built in the 1940s and 1960s with six or seven people living in them,” she said in April.

“But I live in a less than 10-year-old townhouse that is double-glazed with all the insulation that goes along with that. I pay a lower rate for my electricity than those constituents.”

Power companies want Energy Minister Megan Woods to make a call, so they can start adjusting prices from April next year.

But that is only a couple of stereotypes of Kiwi households, and there are reasons to think the Government might be thinking twice about implementing the review team’s recommendation.

One is environmental.

Electricity tariffs with a low daily charge and higher per-kilowatt charge for electricity will tend to encourage power conservation.

That is why the Green Party successfully argued for the introduction of low-user tariffs in the first place in 2004.

That consideration may be higher in Woods’ mind now, with electricity generation in short supply, coal burning at Huntly, and wholesale electricity prices continuing to sit at several times their historical levels.

Conserving electricity can be either good or bad, depending on the circumstances.

It might involve someone chucking on a jumper instead of turning up the heater a notch, sticking a bit more insulation in their loft, or turning the lights off when they leave a room.

But it can also mean families shivering rather than risking turning on the fire.

It could also mean some households choosing not to replace their petrol car with an electric one.

In general though, incentives to conserve power might on balance appear a good thing, especially now.

People who have invested in solar systems would be among the losers if low-user electricity tariffs were phased out without alternative relief.

The second consideration is more political.

In theory, the winners and losers from abolishing low-user tariffs should roughly cancel out, but that doesn’t mean people’s perceptions of the impact will have similar balance.

At least according to Stuff’s (non-scientific) reader poll, the mood appears strongly against a phase-out, with about 87 per cent of readers opposed in April.

One reason may be a concern power companies would pocket some of the higher daily fees they could charge low-user customers, rather than passing them all on by cutting the average per-kilowatt price for power.

It’s hard for consumers to see the prices charged by the major electricity companies from their websites, so it would perhaps not be surprising if trust in them was weak.

In November, Consumer NZ accused power firms of making it unnecessarily complicated for people to compare prices.

The fact that power companies themselves seem so strongly in favour of the policy change is only likely to heighten suspicions that the net effect might be an increase in the average price of electricity.

Unfortunately, there seems no easy way that the Government could monitor and enforce pass-through.

The Government might see a middle ground in gradually phasing out the tariffs while shielding some groups from the impact, as appeared to be Woods’ thinking in April.

In descending order of likelihood, it could provide alternative relief for people with solar systems, people on low incomes with low power usage, such as superannuitants, people with woodburners, and gas users.

But the further it went down that list, the less the benefit there might be on the other side of the ledger for those large families in hard-to-heat homes, and the more fiddly its interventions would get.

It would be a bitter pill for power companies if the Government got cold feet about abolishing the low-user tariff requirement.

But are the stars in alignment to push through a policy such as this? It looks like a tough call.