Summary

Oakley Greenwood (OGW), the Authority's economic advisor has revised the cost benefit analysis (CBA) of the Authority’s Transmission Pricing Methodology (TPM) proposal.

The revised CBA estimates total expected net benefits for the proposal of $241.9m, in present value terms, from a previous value of $203.3m. 

Background

In May 2016, we published the Transmission Pricing Methodology– Second Issues Paper (second issues paper) which proposed to amend the TPM guidelines to provide for a more efficient TPM. OGW prepared a CBA of the proposal which calculated expected net benefits of $213.3m, in present value terms.

After considering submissions on the second issues paper, in December 2016 we proposed refinements to the proposal in the paper TPM: Second Issues Paper: Supplementary Consultation (supplementary consultation paper). Following its consideration of the refinements, OGW revised its estimate of net benefits for the proposal down to $203.3m, in present value terms.

In February 2017, an error was discovered in the calculation of one of the benefits OGW had estimated in its CBA. This related to the expected benefit from removing the South Island Mean Injection (SIMI) charge that recovers the cost of the High Voltage Direct Current (HVDC) inter-island link. The SIMI removal benefit was initially calculated at $13.7m (of total expected net benefits of $203.3m). The error mainly related to incorrect generator locations. There were also some incorrect formulas in the model.

OGW has revised its calculation of the benefit from removing the SIMI charge. OGW has included a terminal value adjustment to the model for calculating the benefits of removing the SIMI charge, which reflects submissions on the supplementary consultation paper. OGW’s revised calculation for removing the SIMI charge estimates net benefits of $52.3m, in present value terms.

OGW also provided an additional sensitivity analysis in relation to its estimate of benefits from ‘more efficient co-investment in generation and transmission services’ – which was another category of benefit that OGW assessed. The sensitivity calculates the impact of including a terminal value adjustment in the model. The sensitivity provides for net benefits of $164.6m, in present value terms, which is an increase of $71.9m from the previous estimate of $92.7m, the calculated net benefit for this category in the second issues paper and supplementary consultation paper.

As stated above, the revised CBA estimates total expected net benefits for the proposal to be $241.9m, in present value terms, compared with a previous value of $203.3m. If the ‘more efficient generation benefit’ were replaced with the sensitivity calculation, estimated total expected net benefits are $313.8m, in present value terms.

Revised calculations