A reform to the electricity transmission pricing system helping to stabilise prices to electricity consumers — and reducing charges to major industrial users in the South Island like the Bluff aluminium smelter — has been put forward by the Electricity Authority.
The reform has been kicked around since 2009, resisted by powerful vested interests, and yet is vital to get fairer prices across the country.
The new system is estimated to yield a net benefit of about $2.7bn over the next 30 years through lower transmission and generation costs. Even so, there are bound to be screams of outrage from Auckland and Northland, although the Electricity Authority puts a figure of $21 a year on an average residential bill in those regions.
The problem with the current pricing methodology under which the grid operator Transpower operates is that the current peak charge sends the wrong price signals. With a more targeted and accurate way to signal grid congestion, the Electricity Authority estimates peak prices would be on average 38% lower over 30 years than they are now.
The authority’s CEO, James Stevenson-Wallace, says the proposed changes would significantly benefit electricity consumers – and solve some big issues with the current transmission pricing methodology (TPM).
Current charges spread the costs of regional transmission investments across all NZ consumers. This means some are paying more, while others are paying less, than the benefit they get from the transmission grid.
The plan is to rebalance transmission charges so that those who benefit pay. It does not increase charges overall.
The authority is proposing two new charges –
- a benefit-based charge to recover the costs of new grid investments and the depreciated costs of seven major existing investments; and
- a residual charge to recover any remaining transmission costs.
Stevenson-Wallace says the proposal will also support NZ’s transition to a low-emission economy. With the current TPM, customers are investing in alternatives (such as batteries) to avoid paying the peak charge,wasting resources and shifting the cost of operating and maintaining the grid to others.
This avoidance is likely to increase if the TPM is not amended, as more grid investments are made to support the shift to a low emissions economy – and batteries and distributed generation become more affordable.
The proposal also solves another long-standing issue. Under the current TPM, only South Island generators pay for the high voltage direct current link (HVDC) between the North and South Islands. This is essentially a tax on South Island generation, and a disincentive to invest in an area full of potential renewable energy opportunities.
So how does the rebalancing of transmission charges impact on regions?
In most areas where charges would increase initially, such as Auckland and Northland, the initial impact for households and businesses is low – an average of $21 in that year on an average residential bill.
In 12 networks the transmission charges on the average electricity bill would fall by an average of $20. This includes a fall in charges for consumers served by distributors like Alpine Energy, Centralines, Eastland Network, Electricity Ashburton, Electricity Invercargill, Electricity Southland Marlborough Lines, Powerco, Scanpower, Unison Networks, Waipa Networks, and Wellington Electricity.
Importantly, charges for the Tiwai aluminium smelter would reduce as it would no longer pay for past North Island grid upgrades, but charges would rise for other industrial consumers like NZ Steel and Pan Pacific. Charges would rise for North Island generators, and fall for South Island generators.
The rebalancing of transmission charges would not increase the total amount that Transpower charges.
How is the estimated $2.7bn benefit to consumers over 30 years made up?
The estimated benefits include:
*$2.36bn from reducing the cost and increasing use of electricity at peak times, when consumers value it the most. This is after subtracting costs such as implementation costs and the cost of more grid investment.
*$200m from more efficient investment in new technologies such as grid-scale batteries where they would otherwise be used mainly to avoid paying transmission charges.
*$145m from more efficient investment in transmission and generation and consumer decisions about connection, electrification and location, as a result of allocating grid costs to those who benefit from them.
Point of Order reckons this is one of the most significant reforms in the electricity industry since it was corporatised. It is probably the most worthwhile to come out of the Electricity Authority, particularly because there has been consistent and long-term pressure for TPM reform since 2009.
The authority has consulted widely and considered a wide range of options. Now it is time to get it done.