The proposal looks at the network charges paid by distributed generators and the payments to them for reducing distribution costs. It also looks at payments to distributed generators to avoid transmission costs, which are called ‘avoided cost of transmission’ (ACOT) payments.

The consultation paper proposes that distributors should set network charges for distributed generation using the same principles as they should use to set charges for other customers.

The Authority also proposes that ACOT payments to distributed generators only be made when that provides benefits to consumers by reducing transmission costs.

Carl Hansen, Chief Executive of the Electricity Authority says, “Under the current approach, consumers can be paying for something without getting any benefit. That’s because distributed generators are paid to operate to avoid transmission charges rather than to defer or reduce transmission investments and costs. This just leads to higher transmission charges on other distributors and their consumers, which is a ‘pass the parcel’ outcome that’s of no benefit to consumers overall.”

“The Authority believes that consumers are paying distributed generators between $25 and $35 million each year for which they are not receiving any benefit in terms of reduced transmission costs. This means consumers are paying higher electricity prices than would otherwise occur. The Authority’s proposal would mean over the next 15 years consumers would pay up to $325 million less in electricity charges than would otherwise occur.”

Mr Hansen says, “Our statutory objective is to promote an electricity market that creates long-term benefit for consumers. We do not believe the current pricing rules for distributed generation do that.”

“While distributed generators can provide valuable support services to distributors, they need to pay an efficient share of network costs. Our proposal would make the ‘playing field’ more level for all generators and ultimately encourage more efficient investment decisions.”

The Authority’s proposal would remove the distributed generation pricing principles (DGPPs) from the market rules, called the Electricity Industry Participation Code. This would enable Transpower to reach individual agreements with distributed generators when that will benefit consumers.

Through their trial demand response regime, Transpower is making individual agreements with consumers to reduce demand or start up their own generation when called upon. The Authority’s proposal would put distributed generation on the same footing. The Commerce Commission’s regulatory arrangements can provide incentives and mechanisms for Transpower to make payments to distributed generation that reduces network costs.

If adopted, the change would be phased in beginning 1 April 2017 to allow for Transpower and the owners of distributed generation to reach agreements on operation and payment terms. Mr Hansen says, “We recognise that our proposal would significantly alter the payments made to distributed generators. However, we are committed to making sure consumers see the benefits of the proposal as soon as possible.”

The Authority’s proposal is not expected to materially affect greenhouse gas emissions because 95% of consents for new electricity generation are for renewable sources of generation. Recently, about 80% of New Zealand’s electricity supply has been from renewable sources, and the same proportion has occurred for distributed generation.

The Authority is confident that its proposed changes will not adversely affect the reliability of the electricity system. Also, although distributed generation plants tend to be located in the regions, so is grid-connected generation. The Authority believes its proposal is neutral in regard to regional impacts.

The Authority’s proposal is open for consultation until Tuesday, 26 July 2016. More information is available at: http://www.ea.govt.nz/development/work-programme/transmission-distribution/review-part-6-dg-pricing-principles/consultations/#c15998

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For more information:

Nicky Chilton
Communications Manager
021 321 831

Leah Chamberlin
Communications Adviser
021 073 7777

Note for editors:

There is about 1,000 MW of distributed generation capacity in New Zealand, accounting for approximately 11% of total generation capacity in New Zealand.