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Improved transmission pricing may save $2.7 bln - Electricity Authority

Tuesday 23rd July 2019

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Changes proposed to the way electricity transmission costs are shared could deliver about $2.7 billion in benefits to consumers during the next 30 years, the Electricity Authority says.

The plan, which aims to charge consumers based on the benefit they receive from transmission projects, will increase costs for many large industrial power users on the North Island, but will generally lower costs for South Island generators and lines companies in the lower South Island and lower North Island.

Homes and business in areas facing increases, such as Auckland and Northland would initially pay an extra $21 a year on average, with increases capped at no more than 3.5 percent. In 12 regions consumers’ costs would fall by about $20 a year.

Among generators, Meridian Energy remains the biggest potential beneficiary with a projected $29 million fall in its transmission costs in 2022, while Mercury NZ faces the biggest generator increase at $6.6 million.

Authority chief executive James Stevenson-Wallace says most of the estimated national benefit – more than $2.3 billion - comes from lowering the cost of electricity use at peak times by removing a peak charge Transpower applies under the current transmission pricing methodology, or TPM.

Better price signals are expected to deliver improved decisions on generation investment and see grid-scale batteries used efficiently – instead of just for avoiding transmission costs. Those benefits could be worth another $350 million.

“Under the current TPM, customers are investing in alternatives - such as batteries - to avoid paying the peak charge, which wastes resources and shifts the cost of operating and maintaining the grid to others,” Stevenson-Wallace said.


“This avoidance is likely to increase if the TPM is not amended, as more grid investments are made to support the shift to a low emissions economy – and batteries and distributed generation become more affordable.”

The industry has been debating improvements to transmission pricing for a decade. Some changes have already been made, freeing up generation in the South Island and removing transmission subsidies from small, regional power stations unless those plants actually provided a network benefit.

But the main issues – charging all of the $145 million annual cost of the high-voltage link across Cook Strait to South Island generators, and smearing the costs of major transmission projects across all consumers whether they benefited or not – remain unresolved.

The EA says the country needs more renewable generation, yet potential South Island generation projects are being disadvantaged by an effective ‘tax’ increasing their costs by about 10 percent.

Leaving firms and households in most of the South Island and parts of the North Island paying for – but getting little benefit from - more than $2 billion that was invested in the past decade upgrading the power link across Cook Strait, the lines around the Wairakei geothermal fields, the lines from Whakamaru into Auckland, is also adding further risk.

The authority noted that increased spending signaled by Transpower means it can’t leave those historic project costs being carried by consumers across the country.

“For example, with a benefit-based charge, Christchurch consumers could expect to pay most of the $283 million cost of the planned new switching station and new transmission line into Islington.

“If the seven major grid investments were to be grand-parented, the same consumers would also continue to pay nine percent of the cost of investments that benefited mainly North Island consumers, such as the $876 million North Island Grid Upgrade.”

The scheme proposed today is little changed from that proposed in 2016, when the authority had also proposed a cap on the annual impact the change could have on households.

But the benefits and costs are generally smaller, as falling interest costs mean transmission charges will be much lower – about $848 million in 2022 when the change could take effect – down from about $950 million today and less than had been projected in 2016.

The authority has also trimmed the post-2004 major projects that will be captured by the benefits-based charge from 10 to seven, and the value remaining after depreciation for those projects has also fallen further since then.

Where Auckland power distributor Vector, a vocal opponent of the change, had in 2016 faced a potential increase in its transmission costs of $59 million, today’s proposal would see those costs rise in 2022 by $7 million.

Similarly, Meridian Energy, which had been expected to benefit by $57 million, gets about a $29 million cut under the latest proposal. The Tiwai Point aluminium smelter, which was expecting a $20 million benefit, will likely be $11 million better off than would otherwise be the case in 2022.

Among lines companies, Wellington Electricity and New Plymouth-based Powerco may get the biggest savings at $7.6 million and $5.1 million respectively. Christchurch-based Orion and Dunedin-based Aurora Energy face the biggest increases at $7.7 million and $3.6 million respectively.

The authority is receiving submissions on its proposals until October 1. It is aiming to make a final decision early next year.


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