Ambition, urgency needed in network pricing reform

Friday 21st December 2018

Electricity lines companies have been told to act with “ambition and urgency” when changing their pricing to cater for new technologies like solar panels, electric vehicles and batteries.

The Electricity Authority wants “substantial” progress on the new pricing by 2020, the start of the next regulatory period for network pricing.

Without change, the charging structures of many lines companies risk increasing peak period demand to the cost of all consumers, while potentially also raising charges to households without solar panels and/or batteries.

The authority says the government’s focus on transitioning to a low-carbon economy will likely accelerate that change, increasing the need for prompt action.

“The commercial implications for boards − from being lumbered with inefficient investments and costs increasingly concentrating on a smaller group of consumers − are closing in much faster than recent trends might suggest,” the authority says in an industry consultation paper.

Network charges account for more than a quarter of average residential power bills. That rises to about 37 percent when the costs of national grid operator Transpower are included.

But because most are based on flat per-kilowatt-hour charges they provide no price signal to consumers as to when they should use more or less electricity. That will become key to encouraging night-time charging of electric vehicles.

Existing charging structures also risk allowing households installing solar panels to avoid their fair share of network charges, in turn putting more of that cost on families without solar.

Distributors are already working to change the way they charge; many already offer time-of-use charges or charge based on network peak demand.

But the regulator is frustrated with the pace of progress and last month wrote directly to the boards of all networks and urged them to get on with it.

It has now published a consultation paper on a series of changes it plans for the industry’s pricing principles to ensure distribution charges are cost-reflective and benefit-based.

Where costs can be attributed to users, it believes there can be: a fixed, one-off cost for getting connected; a charge for the ability to draw from, or inject power to, the local network; charges that discourage greater demand at peak times; and overheads that all consumers would share.

It assumes a roughly 80-20 split of fixed and variable charges as a benchmark when assessing networks’ pricing proposals.

The authority stopped short of trying to formally standardise charges across the 29 lines companies – something retailers have requested in order to simplify billing and reduce costs industry-wide.

“While this is not a question that the authority seeks to address specifically at this point, we do want to understand it,” the regulator noted.

The authority says pricing reform should lower average costs for consumers, but there will be winners and losers. The lower cost of capital the Commerce Commission will likely apply in the next pricing reset should put downward pressure on prices and may provide an opportunity to reduce ‘bill shock’ if networks can make the changes by 2020, it noted.

Networks can also manage the impact on customers over time, and should talk to retailers about that. The authority noted that it proposed a 3.5 percent cap on the initial bill increases from the changes it plans to transmission pricing.

It says there is likely to be opposition from consumers and it is important that networks make their communities understand the cost of not acting – that their bills could be higher long-term through increasing cross-subsidisation and unnecessary network investment.

“It is important that everyone recognises the cost of doing nothing. The immediate change in electricity bills caused by price reform may be most visible. But that ignores the benefits.”

(BusinessDesk)

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