Regulator spurns industry advice on new transmission pricing regime

The Electricity Authority cuts through nearly two decades of argument on how best to charge for the cost of the national grid.

BUSINESSDESK: The Electricity Authority has cut through nearly two decades of argument on how best to charge for the cost of the national grid, setting out a new approach that will make generators and consumers pay amounts that reflect the benefit the grid gives them.

The change is most significant in the way it treats the cost of the Cook Strait cables, known as the high voltage direct current (HVDC) link, that carries power between the two main islands.

At present, only South Island generators pay for the link, a situation that has long irked Meridian Energy, whose hydro-generation assets are all in the South Island.

However, the industry regulator gave short shrift to Meridian's argument that it gains no benefit from the cable link in a decision that seeks to share the costs of national electricity transmission at a lower overall price than under the current regime.

Meridian has led the charge unsuccessfully in the past to overturn the existing regime, which has been a vexed issue in the industry and provoked numerous reviews since 1994.

Heavy investment in the grid by state-owned monopoly owner Transpower means the transmission component of electricity bills is forecast to rise by 79% over the next decade. Transmission now comprises around 7% of the average household power bill, but will rise to around 10% over the next 10 years.

"The overall effect on households' electricity bills will be a minor reduction in electricity costs relative to what they would otherwise have been," the authority says.

It calculates the net present value of its proposals over the next 30 years at $173.2 million, against $49.3 million from the proposals favoured by a slender majority by the Transmission Pricing Advisory Group, whose key recommendations the authority decided to ignore.

"The TPAG was split, with a large minority view that wanted to stay with the current approach and a majority view that wanted to lump the HVDC charge on consumers," the authority says.

The changes will see some of those charges borne by consumers who directly benefit from them.

The authority presented comparisons of private and generator benefits based on the three largest grid upgrade projects: the North Island Grid Upgrade (NIGUP), the introduction a third HVDC link known as Pole 3, and the Wairakei Ring upgrade in the central North Island.

These calculations show Wairakei Ring changes particularly benefit the Hawke's Bay and East Cape regions, which have long been subject to transmission bottlenecks at peak times.

The NIGUP project provides 25.8% of its benefits to Auckland consumers and another 15.5% to the isthmus running from Auckland to North Cape, while the Waikato reaps a 10.5% benefit.

Auckland also gains most from the Pole 3 and Wairakei Ring projects, at 16% and 14%, respectively, of total benefits.

Geothermal generators Contact Energy and MightyRiverPower gain most from the Wairakei Ring, which was prompted by the growth in generation from the steamfields in the area, at 12.3% and 11%, respectively.

Among generators, the NIGUP project benefits MRP most, at 6.5% of the total benefits.

Meridian is the generator to benefit most from the Pole 3 project, at 9.4% of total benefits, followed by Contact, which has lower South Island hydro assets, at 6.2%.

Among major users, the benefits of Pole 3 and the Wairakei Ring are largest for Rio Tinto's Bluff aluminium smelter, which is forced to pay high spot prices or reduce production for a portion of its total load, which accounts for around 15% of total electricity production in New Zealand.

Despite its location within the region benefitting from the Wairakei Ring, forest products processor and major electricity user Pan Pac gains only 0.5% of the total benefits from that project.

The Electricity Authority proposals are out for consultation until November 30, with cross-submissions sought by December 21. Its ultimate decisions are capable of being judicially reviewed.