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Electricity regulator spurns industry advice for new pricing regime

Wednesday 10th October 2012

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The Electricity Authority has cut through nearly two decades of argument on how best to charge for the cost of the national grid, setting out a new approach that will make generators and consumers pay amounts that reflect the benefit the grid gives them.

The change is most significant in the way it treats the cost of the Cook Strait cables, known as the high voltage direct current (HVDC) link, that carries power between the two main islands of New Zealand.

At present, only South Island generators pay for the link - a situation that has long irked Meridian Energy, whose hydro-generation assets are all in the South Island. However, the industry regulator gave short shrift to Meridian's argument that it gains no benefit from the cable link in a decision that seeks to share out the costs of national electricity transmission at a lower overall cost than under the current regime.

Meridian has led the charge unsuccessfully in the past to overturn the existing regime, which has been a vexed issue in the industry and provoked numerous reviews since 1994.

Heavy investment in the grid by its state-owned monopoly owner Transpower means the transmission component of electricity bills is forecast to rise by 79 percent over the next decade. Transmission currently makes up around 7 percent of the average household power bill, but will rise to around 10 percent over the next 10 years.

"The overall effect on households' electricity bills will be a minor reduction in electricity costs relative to what they would otherwise have been," the authority said.

It calculates the net present value of its proposals over the next 30 years at $173.2 million, against $49.3 million from the proposals favoured by a slender majority by the Transmission Pricing Advisory Group, whose key recommendations the authority decided to ignore.

"The TPAG was split, with a large minority view that wanted to stay with the current approach and a majority view that wanted to lump the HVDC charge on consumers," the authority said.

The changes will see some of those charges borne by consumers who directly benefit from the changes.

The authority presented comparisons of private and generator benefits based on the three largest grid upgrade projects: the North Island Grid Upgrade (NIGUP), the introduction a third HVDC link known as Pole 3, and the Wairakei Ring upgrade in the central North Island.

These calculations show Wairakei Ring changes particularly benefit the Hawke's Bay and East Cape regions, which have long been subject to transmission bottlenecks at peak times.

The NIGUP project provides 25.8 percent of its benefits to Auckland consumers and another 15.5 percent to the isthmus running from Auckland to North Cape, while the Waikato reaps a 10.5 percent benefit.

Auckland also gains most from the Pole 3 and Wairakei Ring projects, at 16 percent and 14 percent respectively of total benefits.

Geothermal generators Contact Energy and MightyRiverPower gain most from the Wairakei Ring, which was prompted by the growth in generation from the steamfields in the area, at 12.3 percent and 11 percent respectively. Among generators, the NIGUP project benefits MRP most, at 6.5 percent of the total benefits.

Meridian is the generator to benefit most from the Pole 3 project, at 9.4 percent of total benefits, followed by Contact, which has lower South Island hydro assets, at 6.2 percent.

Among major users, the benefits of Pole 3 and the Wairakei Ring are largest for Rio Tinto's Bluff aluminium smelter, which is forced to pay high spot prices or reduce production for a portion of its total load, which accounts for around 15 percent of total electricity production in New Zealand.

Despite its location within the region benefitting from the Wairakei Ring, forest products processor and major electricity user Pan Pac gains only 0.5 percent of the total benefits from that project.

The Electricity Authority proposals are out for consultation until Nov. 30, with cross-submissions sought by Dec. 21. Its ultimate decisions are capable of being judicially reviewed.

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