Fair approaches to distribution pricing

Background

Every time you pay a power bill, part of what you pay goes towards the cost of the distribution network that delivers electricity from the national grid to homes and businesses. On average, distribution charges make up about 27% of an electricity bill. 

Increases in distribution changes, or changes to the way they’re charged, can have a significant effect on the overall cost to household and small business consumers. Cost increases can also make energy hardship worse. 

Changes to NZ’s distribution pricing are being considered at the moment. These changes include raising charges at “peak” times – for example, in the morning and evening when demand on the electricity network increases as power consumption rises. 

Higher charges at peak times can encourage consumers to switch their power use to times when there is less demand on the network. However, higher tariffs can also adversely affect consumer groups that have limited (or no) ability to change the times they use electricity. 

We commissioned BERL to investigate fair approaches to electricity distribution pricing that acknowledge: 

• electricity is an essential service
• many households can’t easily switch their power use to off-peak times
• raising tariffs will likely increase hardship for customers who can’t easily move the times they use electricity, who are in rental premises, or who lack the financial resources to invest in energy efficient and smart appliances
• small businesses that are unable to shift the times they use electricity may also face cost increases as distribution charges rise. 

Findings

BERL looked at distribution pricing in overseas markets in Australia, Europe, Great Britain, Northern Island and North America to identify possible approaches that New Zealand could adopt.

They suggested:

• New Zealand could strengthen its existing distribution pricing principles by following approaches in countries such as Australia, which requires distributors to consider the impact of tariff changes on retail customers, including the extent to which customers are able to mitigate the impact of changes through decisions about when they use power
• if New Zealand wanted to increase the Electricity Authority’s role in distribution pricing, it could consider models in Europe and Great Britain, which have greater direct involvement of the regulator in approving the methodology used and/or the prices charged to consumers 
• an alternative could be to adopt a common distribution pricing methodology similar to Great Britain’s, which would ensure the same methodology was applied across distribution networks. 

Next steps

BERL’s research findings will be used to help inform our future submissions on distribution pricing. We’ve already submitted on several consultations on this issue.

Financeability of electricity distribution services

Transpower’s individual price-quality path for the next regulatory control period

Default price-quality paths for electricity distribution businesses