Untangling the debate on who pays for the HVDC lin

Untangling the debate on who pays for the HVDC link

“Following on from complaints by South Island generators about the Electricity Commission final decision that they should pay for the existing and any new HVDC link assets, over the last few days several business and community leaders in Canterbury have also expressed dismay,” said Ralph Matthes, Executive Director of the Major Electricity Users’ Group (MEUG).

“The alarm by the latter commentators is unfounded. The cries from the South Island generators are understandable because this is a potential wealth grab for them rather than anything to do with improving national economic welfare. The business and community commentators should take a more critical look at the motives and arguments of the South Island generators.

“The status quo is for South Island generators to pay Transpower for the HVDC assets. For the existing assets this is about $70 million per year. The EC final decision is for the status quo to continue including new HVDC assets.

“The South Island generators argue they shouldn’t pay and instead all consumers in both islands should.

“Relative to the status quo if consumers were to pay for the HVDC then:

1) There will be no change in spot electricity prices but there will be a significant increase in delivered power costs equal to $70 million per year due to that fixed cost of the HVDC link being transferred from South Island generators to consumers through line charges. There would not be a reduction in the cost of power to South Island consumers; instead there would be an increase.

This seems to be a point of confusion for some commentators so it’s worth considering further. Currently a South Island generator competing to be dispatched ahead of other generators will maximise its profits if it offers a spot price close to its own additional costs if it generated an extra unit of electricity. This “marginal cost” will not reflect the HVDC charge because this is a fixed cost and does not vary with changes in output. If you take away the HVDC fixed charge from South Island generators (or for that matter any other fixed charge) nothing changes in terms of the incentive to compete at the margin, ie spot prices throughout NZ will remain unchanged.

2) What the South Island generators’ proposed to the Electricity Commission was that the $70 million should be rolled into other transmission charges and so end up in the bills of all consumers through their line charges. This would result in a significant wealth transfer to the owners of South Island generators, ie this is the $70 million per year wind fall Meridian Energy, Contact Energy and Trustpower would receive.

“Suggestions by some commentators in Canterbury that South Islanders had been ‘booted in the guts’ have probably been borne from misinformation from South Island generators who are simply focussed on avoiding the current $70 million per year HVDC changes and thereby increasing their own wealth.

“I’m sure manufacturers in Canterbury competing to sell their wares in Auckland would welcome a law requiring buyers of their products to pay for shipping costs to bring them at par with Auckland based manufacturers with no shipping costs. But as everybody knows that’s not how markets work. If such an intervention into any other market were proposed there would be significant opposition from other manufacturers and consumers. Yet this is the very structure South Island generators and some misinformed business and community leaders are advocating for the HVDC.

“For all other goods and services Canterbury manufacturers must cover transport charges and exploit competitive advantages that Auckland manufacturers do not have. In the South Island the competitive advantage for generators has been an abundance of hydro resource relative to the North Island. That competitive advantage is diminishing as untapped water becomes more valuable to a range of competing uses. But the South Island has new competitive advantages with more remote windy sites for large scale wind farms and large coal reserves for new thermal generation.

“The facts are clear. If consumers were required to pay the $70 million per year HVDC charges their delivered energy prices would increase by that amount, there would be absolutely no change in spot electricity prices and South Island generators would make a substantial wind fall gain,” concluded Mr Matthes.

ENDS

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