Proposed TPM changes to benefit consumers and strengthen the electricity system
23 July 2019
The Electricity Authority today released a proposal to reform the transmission pricing methodology (TPM) that determines how Transpower sets charges to recover the costs of operating the national electricity transmission grid.
The Authority’s Chief Executive James Stevenson-Wallace says the proposed changes would significantly benefit electricity consumers – and solve some big issues with the current TPM.
“We estimate a net benefit of about $2.7 billion over the next 30 years from our proposal through lower transmission and generation costs.
“Current charges spread the costs of regional transmission investments across all NZ consumers. This means some are paying more, while others are paying less, than the benefit they get from the transmission grid.
“Our proposal rebalances transmission charges so that those who benefit pay. It does not increase charges overall.
The Authority is proposing two new charges - a benefit-based charge to recover the costs of new grid investments, and the depreciated costs of seven major existing investments; and a residual charge to recover any remaining transmission costs.
“Some recent investments have been included to make sure consumers do not end up paying both for new investments and for recent major investments in other regions they didn’t benefit from.
“Under the Authority’s proposal, wholesale market prices would work alongside the TPM to manage peaks, rather than the current peak charge.
“The current peak charge sends the wrong price signals. Some consumers end up paying a premium when power is most valuable to them - even when there is plenty of transmission capacity available.
“What we’re proposing is a more targeted and accurate way to signal grid congestion – with significant benefits for consumers. We estimate that peak prices would be on average 38% lower over 30 years than they are now.
Mr Stevenson-Wallace says the proposal will also support NZ’s transition to a low-emission economy.
“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.”
“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 proposal also solves another long-standing issue. Under the current TPM, only South Island generators pay for the high voltage direct current link (HVDC) between the North and South islands. This is essentially a tax on South Island generation, and a disincentive to invest in an area full of potential renewable energy opportunities.”
The Authority’s proposal includes a price cap for consumers and businesses connected directly to the grid to protect them from big price increases.
“Rebalancing charges means that some consumers will initially have to pay a bit more while others will pay a bit less. In the regions where transmission charges rise, the initial average increase is about $21 for the average annual electricity bill. This is less than fifty cents more each week - and consumers will be a lot better off in the future”, says Mr Stevenson-Wallace.
“TPM reform is urgently needed and it’s time to agree on a new approach. If we don’t do something now, consumers will get less benefit from the electricity system, and pay more for it, in the long-run.
“There has been consistent and long term pressure for TPM reform since 2009. We’ve worked with the industry over the past 10 years to review the TPM, consulted widely and considered a wide range of options.
“Transmission pricing is complex and there is no single option that will deliver a consensus, but we believe what we’re proposing will deliver significant benefits – and solve some significant issues - with the current TPM.
“We will be consulting widely on the proposal over the next 10 weeks. We’re open to ideas about how we could improve our proposal – and any new ideas will be thoroughly considered.
The proposal and draft guidelines are published on the Authority’s website and available for consultation until 1 October 2019."
How does the proposal benefit consumers?
The Authority’s TPM proposal:
- Encourages more efficient investment in transmission by allocating the cost of grid assets to those who benefit from them.
- Reduces the cost of electricity at peak times so customers are not over-charged for power at the times they most want to use it.
- Encourages more efficient investment in technologies such as distributed generation and batteries which would otherwise be used mainly to avoid paying transmission charges.
How is the estimated $2.7 billion benefit to consumers over 30 years made up?
The estimated benefits include:
- 2.36 billion from reducing the cost and increasing use of electricity at peak times, when consumers value it the most. This is after subtracting costs such as implementation costs and the cost of more grid investment.
- $200 million from more efficient investment in new technologies such as grid-scale batteries where they would otherwise be used mainly to avoid paying transmission charges
- $145 million from more efficient investment in transmission and generation and consumer decisions about connection, electrification and location, as a result of allocating grid costs to those who benefit from them.
How does the rebalancing of transmission charges impact on regions?
- In most areas where charges would increase initially, such as Auckland and Northland, the initial impact for households and businesses is low – an average of $21 in that year on an average residential bill.
- In 12 networks the transmission charges on the average electricity bill would fall by an average of $20. This includes a fall in charges for consumers served by distributors like Alpine Energy, Centralines, Eastland Network, Electricity Ashburton, Electricity Invercargill, Electricity Southland Marlborough Lines, Powerco, Scanpower, Unison Networks, Waipa Networks, and Wellington Electricity.
- Charges for the Tiwai aluminium smelter would reduce as it would no longer pay for past North Island grid upgrades, but charges would rise for other industrial consumers like NZ Steel and Pan Pacific. Charges would rise for North Island generators, and fall for South Island generators.
- The rebalancing of transmission charges would not increase the total amount that Transpower charges.
For more information:
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