Electricity Authority releases proposed changes

Electricity Authority releases proposed changes to transmission pricing guidelines
17 May 2016

The Electricity Authority has released a consultation paper outlining its proposed changes to the guidelines that set the transmission pricing methodology (TPM).

The Authority’s proposal seeks to alter the way transmission charges are shared among transmission customers so that charges are linked to the transmission services delivered and the costs involved.

The current TPM is complex and sends the wrong price signals to transmission users, resulting in wasteful investment. The Authority is proposing that two of the key charges in the current TPM be replaced with two new charges which are designed to provide far better price signals. The Authority is also proposing a wider range of circumstances for which Transpower could discount its transmission charges to particular customers.

Chief Executive Carl Hansen says, “The current TPM encourages wasteful use of the transmission grid, and investment in transmission and generation assets that is not in the best interests of electricity consumers and the New Zealand economy. The economic cost to New Zealand exceeds $200 million.”

“If no change is made, in the future consumers could pay hundreds of millions of dollars more for electricity than necessary.”

In 2015, the Authority consulted on a range of options for a future TPM. The proposal released today has been informed by extensive consultation on the options and is substantially refined and simplified.

A key component of the Authority’s proposal is an ‘area-of-benefit’ charge. This approach allocates the cost of a transmission investment to generators, distributors and industrial consumers located in areas of the country that benefit from the investment.

A ‘residual’ charge would cover Transpower’s overhead costs and the cost of any grid assets not recovered by the area-of-benefit or other transmission charges. The residual charge would apply to distributors and industrial consumers only. The cost of any replacement or refurbishment of existing grid assets would be subject to the area-of-benefit charge, reducing over time the number of grid assets recovered through the residual charge.

Mr Hansen says, “Over time the proposal will reduce costs in the electricity industry and reduce prices for consumers from what they would otherwise be. The immediate overall impact of the proposal on the average residential electricity bill is fairly modest. In 15 regions, electricity consumers’ bills will decrease. In the remaining 14 regions, the average bill increase is less than $50 per year.”

“The regions where consumers will see an increase in their bills are those that have benefited from substantial recent grid upgrades to improve service levels, or where transmission prices have been lower than average. In every region, the benefit from these recent investments greatly exceeds the area-of-benefit charges proposed to pay for them.

“Under the current TPM consumers that have had little or no benefit from these investments have faced higher costs of electricity to pay for them. Not surprisingly, this has made the current TPM contentious. The Authority believes that after an initial settling-in period, the new approach will improve the acceptability and durability of the TPM.”

The Authority believes it is a good time to be making these changes because evolving technologies, such as electric vehicles, solar panels, batteries and consumer apps, are likely to drive big changes in where electricity comes from, and when and how it is delivered. Adopting better transmission pricing signals will help New Zealand consumers make wise technology choices and make the most of the new technology.

The Authority’s consultation closes on Tuesday, 26 July 2016. Any change to the TPM would not come into effect before April 2019.

More information is available at: http://www.ea.govt.nz/development/work-programme/transmission-distribution/transmission-pricing-review/consultations/#c15999

ENDS

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