Most of New Zealand’s electricity is generated a long way from where it is used. That means we need infrastructure in the form of a national transmission grid to transport electricity around the country. Transmission costs pay for the national grid and make up approximately 10 per cent of the average consumer’s total power bill.
That national grid is owned and managed by Transpower which is a regulated monopoly. Because there is no competition, the maximum cost Transpower can recover is set by the Commerce Commission and the way it allocates its charges is determined by the transmission pricing methodology (TPM). Transpower develops a TPM that is consistent with guidelines determined by the Authority.
The national grid is the backbone of our electricity system. Who pays for the grid is an almost $1 billion-per-year question. While small scale generation close to consumers, such as solar panels, is likely to become more important, the grid is still likely to play a very significant role, and possibly a considerably expanded one.
For nearly 20 years much of the annual bill has been notionally spread across the entire country, although features of the way charges have been set have allowed some parties to effectively reduce their share and shift it to others.
During this time some generators and consumers in some regions have benefited from large and costly grid upgrades and now receive a more reliable service and cheaper wholesale electricity prices, which is money in their pocket. Meanwhile, consumers in other regions do not receive either of those benefits but they still pay for the grid upgrades.
In addition, generators in the South Island have been bearing the costs of the link between the North and South Islands (the HVDC) – yet consumers in the North Island benefit from lower prices and those in both islands benefit from increased reliability in dry years.
As a result many stakeholders say the current way costs are allocated is untenable and unfair. The Authority and its predecessors, and also Transpower itself, have been lobbied for years to have these problems addressed. There has also been several rounds of litigation. These on-going activities reflect the underlying position that, in our view, the current cost allocation method is not durable.
We are also concerned with the poor outcomes for consumers arising from the current allocation method. Right now, the way grid costs are allocated encourages people and businesses to spend money on investments that may not be needed, or are in the wrong place, or may cost more than alternative investments.
The current TPM also encourages some parties to make business decisions purely to avoid or reduce transmission charges for themselves or their client, rather than to reduce transmission costs. This simply shifts charges to other customers. Over time this will lead to consumers paying more than they need to for electricity. This will only get worse as new technology gets cheaper and more people are able to use it to shift charges to others. For example, batteries are getting cheaper which is great. But as the cost continues to fall, the current TPM could encourage businesses to buy too many, purely for the purpose of shifting their transmission charges to other customers which will make electricity more expensive for others.
The Authority is responsible for promoting long-term benefits for consumers from a competitive, reliable and efficiently operated electricity system. This includes removing barriers to investment decisions that would result in lower costs for consumers.
We believe transmission prices should more closely reflect the actual cost of delivering electricity to consumers in different parts of the grid. A benefit-based approach to pricing will help provide better information and incentives to encourage decision makers to deliver lower cost options. It will also ensure the country as a whole benefits from investment in renewables and new technology.
Since we put our previous proposal on hold in May 2017, new members were appointed to the Authority Board. Over the past year, the Authority’s Board members have thoroughly reviewed the considerable history of the project, including TPM charging options that the Authority and its predecessors had previously considered and stakeholders’ feedback on them. In June 2018 we confirmed the next steps for this review and since then we have started another cost benefit analysis.
The principle that costs should fall on those who benefit was a key theme of our 2016 proposal. We noted that during the 2016-17 consultations some stakeholders questioned whether allocating costs based on who benefits from transmission investment would be practical.
To help answer these questions, during the last year we further investigated the workability of a benefit-based approach. We examined how similar approaches are applied in other electricity markets. For example, in New York and some other North American systems, the costs of many new transmission investments are allocated to those who benefit. With colleagues from the Commerce Commission and Transpower, Authority representatives met with staff from several US electricity system operators, and the New York regulator, as well as a world-renowned electricity market expert, Professor William Hogan from Harvard University. We sought to understand how the benefit-based approach had been applied and how it is working in the US. Authority Board members also spoke directly with Professor Hogan to test his views on the scope of a benefit-based approach and how it should be applied.
We have also reviewed alternative potential methods for the valuation of transmission assets over time under a benefit-based approach.
The major features of our proposal will be similar to the proposal made in 2016, but with some changes taking into consideration submissions from earlier consultations and the additional analysis we have been doing this year, particularly thinking about the practicality question.
We are definitely interested in applying a benefit-based charge to future transmission investments and at least some recent major transmission investments.
The cost benefit analysis (CBA) and modelling of the effects on customers are well underway.
We will need to take sufficient time to complete these core elements of our proposal to a robust standard so the timing will depend on how long these take. The time required is uncertain as the amount of work and time needed to finalise the policy, undertake the cost-benefit analysis and modelling still needs to be finalised. However, we recognise that a considerable amount of work has already been undertaken on these matters and this will materially assist us develop our formal proposal.
While we want to be pragmatic where possible, it’s important we deliver a high quality proposal for consultation. This means taking the time we need to get key parts of the proposal such as the CBA and impact modelling right. We have built time into our planning to allow for additional checking and quality controls to support this process. And we have taken on learnings from previous consultation rounds and refreshed our project management approach for this review.
We aim to publish our proposal for consultation in mid-2019, currently targeting release in June 2019. This is a priority piece of work for the Authority and we want a new transmission pricing regime to be put in place as soon as possible.
We are definitely interested in proposing that a benefit-based charge be applied to future transmission investments and to at least some recent major investments and the HVDC. The precise details will be in our proposal as where we draw the line will be guided by the cost-benefit analysis.
We don’t know yet, as we haven’t finalised the proposal details. The Authority’s preliminary view is that the introduction of a benefit-based charge as part of the TPM should be able to be achieved without imposing a shock on consumers’ power bills compared with what they pay now. Over time a benefit-based approach will lead to lower electricity prices for the country overall.
We are also aware that some parties will oppose our direction for TPM reform, for a couple of reasons. One group will oppose because they’re benefiting from recent grid upgrades without paying the full cost of those upgrades; in effect, others are subsidising them. Another group have distributed generation and many of them will oppose the direction we have set because the change will reduce payments they are receiving for supposedly reducing transmission costs when in fact their investments are merely shifting costs to other parties.
We invited a representative from Transpower and a representative from the Commerce Commission to be part of our investigation of United States electricity market operators who are already using a benefit-based approach so that they could learn more alongside us.
We will continue to work with both agencies.
Changing the TPM is not done until the new methodology is in place—resetting of the guidelines is only the first step. It is becoming increasingly clear that a new transmission pricing regime should be in place soon as possible and, to that end, we will look at changes that are practical and pragmatic.
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