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Government eyes electricity price imbalance

Corporates may have to pay more for electricity if residential prices are to decrease, according to the Electricity Price Review, Thomas Coughlan reports.

The first report of the Electricity Price Review has been released, and reveals households pay 79 percent more now than in 1990. But the report excuses electricity companies from the allegation they are “making excessive profits”. 

A two-tier system 

The price imbalance is partly the result of the evolution of what Energy Minister Megan Woods is calling a “two-tier” system. While household costs increased, electricity costs to business fell. Commercial businesses now pay 24 percent less than they did in 1990, while industrial users pay 18 percent less. 

Over 100,000 households spend more than 10 percent of their income on power, putting them in “energy hardship”.

Woods said the divergence between household and commercial energy prices found by the report was consistent with international findings from the International Energy Agency and she was looking forward to receiving submissions on that issue in the second stage of the review, which is due back in May 2019.

“There is some discussion in the report about why that is [the disparity between household and business prices] because you can skip out the distribution and you can go straight to the transmitter in terms of accessing that electricity,” Woods said. 

“I think that will be a really important point of discussion that a number of people will want to submit on — both consumers and businesses,” she said. 

The review panel’s chair, Miriam Dean QC, said some networks had shifted costs from businesses to consumers.

“It is plain that with some networks - but it is only some networks - they’ve shifted some of the common costs onto residential consumers as opposed to businesses,” she said. 

The report identified two trends that contributed to increased costs for residential consumers. The most significant factor was the shifting of the distribution charges from commercial customers to residential customers.

Before 1990, commercial customers paid the lion’s share of distribution costs, but this has since shifted. Distribution charges for households have risen 548 percent since 1990, while charges for commercial and some industrial businesses fell 58 percent. 

Genesis Energy CEO Marc England told Newsroom he supported this finding and said it was solvable through better competition regulation.

“I don’t know why that happened, I don’t know what caused it, but it feels eminently solvable because ultimately the commerce commission regulates the distributors and I presume could easily mandate that a higher portion of the costs are allocated back to businesses,” England said.

The second trend identified in the report was a lack of investment from Transpower in the national grid between 1990 and 2004. 

Transpower erroneously believed that technological advances would allow more electricity generation closer to the point at which it was consumed, for example solar panels on the roofs of households or wind turbines near urban centres. 

Not only did technology not move at the pace anticipated, but urban centres, particularly Auckland, grew at such a pace that a rapid investment in the national grid was needed to cope with rising demand. 

This flowed through into prices. Between 2004 and 2018, transmission costs increased 67 percent, although because transmission is only a small component of electricity prices, the ultimate flow-on to electricity bills was small, just 1.2 cents extra per kilowatt hour.

A figure from the Electricity Price Review showing the changing composition of residential energy prices. Source: supplied.

Change to come

Dean implied the next stage of the report would look into possible remedies for the shifting of cost burdens onto the consumer. 

“That’s something we want to look at in the next stage ... maybe fairness may dictate that some of the sharing of costs may be reallocated,” she said.

Opposition energy spokesperson Jonathan Young said the more salient issue was New Zealanders’ low incomes, rather than cost shifting from businesses to consumers 

“I think the issue is not around cross-subsidisation the issue is about an effective competitive market, where consumers are paying their share of the costs of electricity generation” Young said.

“Part of that fair price is having a good wage and that is what we want in New Zealand.”

England noted that another concern rarely addressed is the low energy efficiency of New Zealand homes, largely due to poor insulation, which results in households using more electricity on average here than they do overseas. 

The report showed that residential electricity prices in New Zealand are in the lower half of the OECD. 

“Electricity prices are not the cause, the cause is consumption, the fact that we heat our homes with electricity and our homes are very inefficient. The real challenge we have as a country is addressing energy efficiency,” he said. 

A figure from the Review's report showing New Zealand's residential pricing was competitive on a megawatt hour basis. Photo: supplied.

This article was first published on Newsroom Pro on Tuesday, September 11 at 3:35 pm. Subscribe to Newsroom Pro here.