Regulator softens power price hit for Aucklanders

The Electricity Authority’s latest take on transmission prices has softened the expected hike in power prices for Aucklanders from $176 per year to $21 a year. A new price cap for consumers and a drop in benefits for Meridian and Tiwai Point helped reduce the pain, Marc Daalder reports.

Four years after New Zealand First leader Winston Peters and consumer advocates attacked the Electricity Authority over its proposed new transmission pricing system, the industry regulator has reconfigured the scheme to reduce the forecast increase in power costs for Aucklanders and other consumers who live a long way from big dams in the South Island.

But the changes have also reduced the expected benefits for South Island dam owner Meridian and the owner of the Bluff Aluminium smelter near Invercargill, who currently pay more than than their 'share' of the cost of transmitting electricity all the way from the southern lakes to Auckland. Their benefits are forecast to be a combined $37 million a year less than the previous methodology originally proposed in 2015. 

That scheme was based on a flawed analysis by an Australian modeller. It ignited a political firestorm when Peters criticised it in the run-up to the last election, accusing the Authority of regulatory over-reach that sold out regional New Zealand. Northland, the West Coast and many parts of regional North Island would have been hardest hit by the changes.

Since its formation in 2010, the regulator has strived to reform the transmission pricing methodology (TPM), which determines how electricity users are charged for the price of transmitting electricity through – and further developing – the national grid.

Under the current system, the price of transmission and new investments in the grid are evenly spread across all customers. The EA wants to change to a user-pays style benefit-based pricing system, which would see customers only paying for the investment that benefits them.

Such a system would cause prices to rise in Auckland and Northland while prices across the South Island and in parts of the North Island would drop as customers no longer paid for transmission assets they didn’t benefit from.

As an example, the EA noted that parts of Auckland have been advocating for underground urban transmission lines. These cables are several times the price of the existing overhead lines. If Auckland Council were to order that new lines must be underground, the costs of this change would be passed on to consumers around the country. Under the regulator’s proposed system, only the Auckland consumers who benefitted from the undergrounding would pay for it, through increased transmission costs.

Also included in this change is a redistribution of costs for the high-voltage direct current cord spanning Cook Strait. Currently, South Island generators bear the full cost of this line, which amounts to a 10 percent tax despite the fact that it provides benefits to customers on both islands, says the EA.

The effects of these changes on the average household bill are predicted to be minor. Transmission only makes up about 10 percent of any given power bill and an interim price cap would be introduced to prevent massive cost shifts. For industry, this cap would be slowly phased out, but the cap will remain in place permanently for residential users.

“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.”

Authority chief executive James Stevenson-Wallace estimates that the average household bill in Auckland or Northland would only go up around $21 annually, amounting “to less than 50 cents per week.” This number doesn’t account for potential future increases in price to cover new investment. The $21 estimate is down from the Authority's original estimate of $176 for Aucklanders.

'$2.7b of consumer benefits'

Overall, the new benefit-based pricing system would decrease transmission and generation costs over time, the EA argues.

“We estimate a net benefit of about $2.7 billion over the next 30 years,” Stevenson-Wallace said. That estimate of consumer benefits is a conservative number plucked out of a wide range by EA analysts – it could in actuality be anywhere from $200 million to $6.4 billion in savings.

Industry at large is expected to pay higher prices, but there are some beneficiaries. The Rio Tinto-owned Tiwai aluminium smelter would see reduced charges of $11 million per year, but other industrial electricity users like NZ Steel and Pan Pacific would pay more. The cost reduction for Tiwai was originally estimated in May 2015 at $21 million. North Island electricity generators would pay more, while South Island generators would pay less.

The transmission costs for the South Island-focused Meridian Energy are proposed to fall by $30 million a year, while the 2015 proposal would have seen its costs fall by $57 million. 

The regulator also wants to cut peak price charges that make electricity more expensive at peak times even when there is no congestion in the grid.

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

The new system will use nodal pricing, which the EA believes “can do a better, more targeted job of signalling the actual cost of grid congestion at specific locations than the [current] charge.” This will lower peak prices.

Over 30 years, the peak prices will be on average 38 percent lower than they currently are.

Wholesale electricity prices in New Zealand.

Pressure from Peters

Last time the Electricity Authority took a new TPM proposal to the people, it was routed by industry pressure and public outrage at the prospect of increased costs, stirred up in part by Winston Peters. TrustPower, the Tauranga-based generator-retailer, found several numerical irregularities in the regulator’s cost-benefit analysis, which then fell apart under further investigation.

The EA then took the Australian consultancy firm which had produced the analysis, Oakley Greenwood, to court to recover the $350,000 or so it had spent.

Meanwhile, Peters previously said Aucklanders would be paying an extra $176 yearly. In a 2016 statement, he said, “An average connection cost increase of $176 per annum hides the reality that larger power users, like the ones who employ people and create jobs, face massive power price increases. These hikes are about making consumers pay for what Transpower has already built, then making them underwrite generator dividends and subsidising Australia’s Rio Tinto.”

In the end, the EA backed down, promising to look again at its plan. The new iteration retains the controversial users-pays style benefit-based system, but the implementation of a price cap may blunt political criticism. It also comes as the Government considers a 41-point report on electricity pricing, the outcome of New Zealand First’s coalition demands. The final report of the Electricity Pricing Review is due in early to mid August.

Stevenson-Wallace said the regulator would not be taking political concerns into account and was "pursuing the proposal in our own right". 

But the firestorm around TPM reform has already forced the EA to back off once. Whether this new proposal is watered-down enough to make it through remains to be seen.

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