Big power shake-up after a decade of deliberation and a lot of compromise

Tuesday, 9 June 2020

NZAS chief executive Stewart Hamilton makes the case for intervention to save the aluminium smelter in October.

A plan to radically change how New Zealanders pay for their power will be unveiled on Wednesday, after a decade of deliberation.

The Electricity Authority (EA) has been reviewing the way electricity transmission is charged, the Transmission Pricing Methodology (TPM). Transmission charges are a part of the cost of a monthly power bill (about 10 per cent) – but changes to the way they are priced could lead to big changes for households.

The money charged pays for the cost Transpower incurs getting electricity from where it is generated to where it’s used. It gets spent on maintaining lines and upgrading infrastructure where it’s needed.

The EA thinks the current system is inefficient. A document setting out proposals last year, describes it as a “postage stamp” approach: people pay more or less the same amount, regardless of whether you’re sending a letter down the street or to the other end of the country.

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This spreads the cost of big investments in grid infrastructure, despite the fact that those investments only really benefit the people who live by them. Regions pay for investments they don’t use.

Another problem is the Cook Strait cable that carries electricity between the South Island and the North. South Island generators pay for the cost of the cable, while North Island generators avoid having to pay, which the EA has called a “tax” on the South Island gentailers.

The EA has proposed using a “benefits-based” approach. That means people would pay for the grid investments they benefit from.

As renewable technology improves, the EA wants customers to face the real cost of getting electricity to their door. This is a price signal that will help them decide how best to make investments in their business.

An example used by the EA is a dairy plant owner who wants to upgrade its capacity. Currently, that plant owner doesn’t pay the true cost of transmission. If they’re looking to improve their capacity they might look to invest in solar or battery technology, or they might want to upgrade their connection to the national grid.

If transmission pricing were a more accurate reflection of the cost of electricity this plant owner would be able to make a more efficient decision. Currently, EA is concerned they might upgrade their connection to the national grid, which would effectively mean other electricity users would be subsidising that person’s power bill. They face a disincentive to make the most efficient decision.

But a change to a more market-driven approach has its drawbacks. Consumers advocates are concerned people in the rural North Island will be walloped with massive electricity bills to pay for the cost of maintaining their lines.

Aucklanders will also be forced to shoulder a bigger burden, as the city upgrades lines to deal with its ever-increasing demand.

The group has copped severe criticism so far. Winston Peters effectively torpedoed the last TPM proposal unveiled by the EA after he stirred outrage at the increased costs to consumers. Peters declined to comment for this story, a spokesperson said he wanted to see the changes first.

Despite the decade spent mulling changes, a group of businesspeople has called on the EA to delay the proposals further, citing Covid-19-related uncertainty as well as the question mark hanging over New Zealand’s biggest power-user, Tiwai Point aluminium smelter. Consuming roughly 13 per cent of New Zealand’s total electricity, closing the smelter would radically change the game for transmission pricing.

The owners of the smelter, NZAS, declined to comment for this story.

A group led by some energy companies, including Trustpower and Vector as well as the Employers and Manufacturers Association and Federated Farmers, said the proposals need to be put off while the EA consults further on why the dramatic changes in the forecast benefits of change.

They wrote to the EA in May requesting a 6-12 month delay.

Alan McDonald of the EMA, said the “timing was a bit wrong,” citing continued uncertainty over Tiwai point.

McDonald was also frustrated that the EA had persisted with the same model, despite multiple challenges.

'We’re really frustrated with the EA who seem wedded to one solution,”

“They keep circling back to the same answer,” he said.

He was concerned for households and businesses, particularly in the rural North Island who might not be prepared for a radical change to their energy costs. This could become particularly difficult for employers who would be faced with additional costs as they recovered from Covid-19.

The blow would be softened by an interim price cap to prevent massive cost spikes, but this would be eventually phased out for commercial users. Residential users will benefit from a permanent price cap.

Initially, the new TPM was meant to deliver $2.7b in benefits, although this has been revised downwards drastically to just $1.3b. McDonald and the authors of the letter are concerned by these massive swings in the cost benefits analysis done on the changes. They say there needs to be more certainty about the benefits of the new system before it’s implemented.