EA sticks to its guns on transmission pricing

The Electricity Authority's final decision on reforming the Transmission Pricing Methodology has few differences from its July 2019 proposal, Marc Daalder reports

The cost of maintaining and upgrading the national electric grid will now be paid by those who benefit most, as opposed to being evenly spread across the country.

The decision from the Electricity Authority (EA) to reform the Transmission Pricing Methodology (TPM) - which determines who pays what for the national grid - to a user-pays-style distribution has been forecast for years.

Transpower, which maintains the grid, is expected to come up with a TPM in line with the EA's new guidelines by June 30, 2021. The regulator expects the new system will be in place by April 2023 - one year earlier than observers had forecast.

In recent weeks, groups opposed to the user-pays system had asked the regulator to delay making a decision, in light of the uncertainty around the Covid-19-prompted economic downturn.

New plan similar to 2019 proposal

The new plan is largely unchanged from a July 2019 proposal. It will apply to all investments begun after June 2019, as well as the remaining costs of seven large grid projects started before that date. Other historical improvements still in progress will continue to be charged based on the old system.

"The current TPM spreads the cost of transmission across all customers, regardless of whether they benefit or not. This is a significant problem because it may cause customers in a region to favour a grid upgrade over more efficient local solutions, such as a demand management technology. This is because the rest of the country will pay for most of the grid upgrade," the regulator wrote in the text of its decision.

The Regional Coincident Peak Demand (RCPD) charge, which allocated cost of transmission according to how much consumers used at peaks in the previous year, will now be replaced by a benefits-based charge. In other words, consumers will pay for maintaining and improving those aspects of the grid that they actually benefit from.

The EA wrote that the desire to avoid paying peak charges had led to perverse market incentives. 

"We have observed and been told this includes running diesel generators to avoid using the grid at potential RCPD times. These generators are expensive to run and unnecessarily increase carbon emissions," the regulator wrote.

"These investments and actions add costs to producing electricity and just shift transmission charges on to other consumers as overall transmission costs still need to be paid for. This ultimately increases the overall cost of consuming electricity in New Zealand."

Likewise, the charges for the HVDC cable connecting the North and South Islands will now be scrapped. Previously, South Island electricity generators paid all costs of the link, despite the fact that the North Island consumers were receiving enormous benefit from it.

"In effect, the HVDC charge acts like a tax on South Island generation. It inefficiently discourages investment in South Island generation," the regulator wrote.

More than a billion in benefits

A 2016 plan built on flawed modelling by an Australian consultancy firm was lambasted by then-Opposition MP Winston Peters for proposing a $176 rise in household power bills in Auckland, prompting the regulator to retreat and rework the maths.

The new version of the TPM reform includes a temporary 3.5 percent cap on how much household prices can rise due to transmission charges. For those regions that will see a price increase, the average bump is expected to be around $19 a year, the regulator said.

Overall, the reforms will have a net benefit for consumers of between $300 million and $2.2 billion over the next 30 years, the EA said. The figure would likely land around $1.3 billion. The regulator assured stakeholders that it had taken into account the possible withdrawal of the Tiwai Point aluminium smelter from the market in calculating its cost-benefit analysis.

By far the biggest winner in the new TPM is South Island generator Meridian Energy, which is expected to pay $26.7 million less in transmission charges during the first year of the new methodology. Tiwai Point comes in second, with savings of $10 million a year.

Auckland distributor Vector will have to pay out another $8 million a year in charges and Christchurch-based lines company Orion will face an extra $5 million. Almost half of Vector's increased charges go towards funding the cap on price jumps for consumers. Wellington Electricity fares the best of the distributors, reducing costs by $6.8 million a year.

Mercury, the country's third largest generator, will have to pay an extra $6.2 million a year under the new scheme. Among industrial power users, NZ Steel faces the largest hike with its transmission charges more than doubling to $5.7 million, even after the cap strips away $5.6 million in charges.

Household electricity users in many parts of the country may see decreased transmission charges, with savings averaging $19 a year - the same as the average rise in household bills for those who will see an increase. Customers of the Network Waitaki lines company will see the largest increase, at $41 a year.

Chart: Electricity Authority

Electricity Southland customers, meanwhile, will see almost $80 in savings a year. Customers of Centralines, Electricity Wellington and Electricity Invercargill will also see above-average savings on their power bills.

Prudent discount win for Tiwai

Tiwai Point also received a bonus to the TPM reforms in a change to the prudent discount mechanism. Newsroom reported previously that the regulatory mechanism, if appropriately reformed, could allow Tiwai to dramatically lower its transmission costs.

The smelter consumes about 12 percent of the country's electricity and therefore pays around 7 percent of the transmission charges, despite only using 2 percent of the country's electricity grid. Chief executive Stewart Hamilton has previously said that the charges for infrastructure the smelter doesn't use amount to almost $200 million over the past decade. In 2017, the smelter estimated it would pay $72 million in transmission pricing for the year. By 2019, that figure had fallen slightly to $64.5 million.

According to the Electricity Code, the policy is intended "to help ensure that the transmission pricing methodology does not provide incentives for the uneconomic bypass of existing grid assets. The prudent discount policy aims to deter investment in alternative projects which would allow a customer to reduce its own transmission charges while increasing the total economic costs to the nation as a whole."

In other words, if a user finds themselves paying too much for transmission pricing - as Tiwai says it is - they might choose to build their own power lines or pull out of the country. In such an event, the transmission costs they were paying would be redistributed to the rest of the country, leading to economic inefficiency.

While the old rules required the smelter to provide a business case for building new power lines, that requirement has been waived under the new rules, so long as it can prove that the project would actually cost less.

Tiwai has long maintained that while it would cost less to transmit the power, it can't make a business case because the consents for duplicate power lines across Southland wouldn't be approved by the relevant councils.

Stakeholders call for Government intervention

The benefits-based system had been opposed by a coalition of electricity companies like Vector and North Island business interest groups like the Employers and Manufacturers Association (EMA) Northern and Federated Farmers Auckland and Northland branches. Big electricity users like the Tiwai Point aluminium smelter and South Island generators like Meridian had favoured the changes.

In response to the final decision on the TPM - something the EMA had attempted to delay by 12 months - the TPM Group coalition has called on the Government to intervene.

"The Government must act now to rein in the Authority in the interests of all New Zealanders," the coalition said in a statement.

"We are facing a once in a generation economic crisis. It beggars belief the Authority would choose now to make these changes, when so many households and businesses are facing such uncertainty."

Energy Minister Megan Woods said in a statement that she was seeking advice on issuing a Government Policy Statement, but it is unclear whether the statement would address the TPM Group's concerns.

"There is no perfect solution to transmission pricing that satisfies everyone and it is not unexpected that there are those who are unhappy with the rules released today, just as there are those who are unhappy with the current rules. As Minister I am interested in the overall fairness and workability of the electricity system and whether there are good outcomes for the nation as a whole," Woods said.

In its own statement on the subject, Vector said the decision "leaves electricity consumers worse off at a time when many Kiwi households are already feeling the sting of an economic recession".

EA chief executive James Stevenson-Wallace defended the changes.

"You’ve got customers investing in alternative generation, including diesel generators, just to avoid using the grid at peak times despite there being plenty of supply. This behaviour just shifts costs to others and in some cases increases carbon emissions," he said.

Stevenson-Wallace said large industrial power users have managed to completely dodge paying transmission charges.

"With emerging technologies and increasing distributed energy resources this problem will only get worse. It’s crucial we get transmission pricing right to unlock New Zealand’s renewable potential and encourage the right investments, in the right place, at the right time."

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