Lines companies want to change the way you pay for power. This could have a major impact on your bill, so we want to hear your thoughts.

In 2015, Kiwi households forked out an average of $2101 on electricity, but where does all that money end up?

The largest slice goes to generation: the hydro dams, wind turbines and thermal power stations that produce your electricity, which receive about 30 cents of every dollar paid for power.

But close behind is the cost of building and maintaining the distribution network connecting your home to the national grid, about a quarter of every bill. The national grid is the high voltage transmission network that moves power from generators to load centres (heavy industry and local substations), while the distribution network consists of the overhead lines and underground wires that deliver power to your home.

Part of the remainder of your bill goes to Transpower (9.9%), which operates and maintains the national grid. The rest goes to your electricity retailer (16.2%), GST (13%), metering costs (3.4%), and a market governance/services levy (0.8%).

Credit: MBIE
Credit: MBIE

New Zealand’s distribution networks are operated by 29 lines companies owned by a mixture of trusts (the majority), public listings, shareholder co-operatives, and local bodies. They’re each responsible for the network in certain areas of the country. As they’re a natural monopoly – there’s no local competition – 17 of them are regulated by the Commerce Commission (the other 12 are exempt from regulation as they’re consumer-owned, which generally means they’re operated by a trust where returns are given back to consumers through an annual payment discount).

Recently, the Electricity Authority has been thinking about how to encourage lines companies to efficiently recover their costs. In a market where electricity prices have risen by more than 46% in real terms since 2000, you’d be forgiven for thinking “cry me a river”. But they have a point: without change, there’s a risk many of us will end up paying more than our fair share of lines charges.

The problem

Currently, most consumers pay their lines company fees via a fixed daily charge and a component of their per unit charge. Those fees cover the national grid and local lines charges. If you used more electricity during the year, the lines company would get more revenue. The trouble is the cost of operating the lines running to your home has nothing to do with the amount of energy you use.

Consider a local lines company supplying power to two households: a family where both parents work and the kids are at school during the day, and a retired couple on a fixed income who rent their home.

The retired couple are likely to have a steady power consumption throughout the day. Their instantaneous demand is unlikely to rise above 4kW: the cost of running a heat pump, TV, cooktop and a few lights simultaneously.

In contrast, the working family are likely to use little or no power during the day, but once they come home they’re cooking, showering, blasting heaters and watching telly all at once. They could use up to 8kW for an hour or two during winter evenings.

Despite very different consumption patterns, it’s conceivable both households could use similar amounts of power each year. So they’d pay the same amount to the lines company.

However, the cost of building and maintaining the network supplying both properties depends on the maximum power demand expected on the network at any one time. The wires required to supply the working family on a cold winter evening need to be much thicker than those for the retired couple, while the transformer on their power pole will also need to be twice as big.

With the current lines charging scheme, the working family aren’t paying their full share – they are being subsidised by the retirees.

If the family invest in solar panels and an electric vehicle, it gets worse for the retirees. The solar panels will reduce the family’s consumption during the day, but on cold winter evenings, when their power use peaks, their solar panels won’t be generating. They’ll be paying less towards their lines, but they’ll still need the same network capacity.

Plugging in their electric vehicle as soon as they arrive home at night would increase their peak consumption even further, meaning the lines company may need to upgrade the network. The cost of this upgrade will be shared between the retired couple and the family through increased power prices, even though the retirees are placing no extra demand on the network.

On a macro scale, if large numbers of homes invest in solar PV systems and current lines charging arrangements remain in place, then they’ll pay lower lines charges while requiring the network to be maintained at the same level. The lines company will then need to hike charges for everyone, in effect everyone else would subsidise the lines charges of solar homes.

However, we are concerned the move to new lines charging arrangements could adversely affect some consumers, especially those on low incomes who spend a large proportion of their income on electricity and rely on inefficient plug-in electric heaters. On cold winter evenings (when network demand is highest) their lines charges could increase significantly under new pricing structures, causing serious bill shocks – see our submission on the EA’s earlier distribution pricing review for more information.

The solution?

The Electricity Networks Association (ENA, the lines company lobby group) has put forward five new pricing options:

  • Time-of-use (TOU): lines charges vary based on the time of day, with higher lines charges during peak times for the networks. Smart meters enable TOU lines charges to vary every half hour based on network congestion.

  • Customer peak demand or anytime maximum demand (AMD): adjusts lines charges based on a consumer’s maximum all-at-once power consumption at any period during the day. So even if your maximum all-at-once consumption occurs off-peak this is what your lines charge will be based on.

  • Network peak demand: similar to customer peak demand, this measures your maximum power consumption at any one time, but only during times when there’s high demand on the network. This means you’ll pay more if you run several devices simultaneously, for example a heat pump, washing machine and oven, at peak times.

  • Installed capacity: charges are based on the maximum installed capacity at your property, literally the size of the main fuse on your home’s incoming power supply. You can’t use more power at any one time than the capacity you’ve prepaid for without tripping the fuse.

  • Booked capacity: also called nominated capacity, this is analogous to the way most of us pay for telecommunications services, with a maximum upload/download speed and caps on the amount of data or minutes we’re allowed each month. For electricity you’ll agree a maximum instantaneous power consumption with your lines company, which is likely to change from period to period as your demand varies with the seasons.

Note: the changes being made to the distribution charges are, with one exception, those to the retailers, rather than to customers. Retailers are responsible for determining how the costs of distribution services are passed on to their customers, as lines charges are only one component of the total electricity bill. Retailers will develop pricing, packages and services off the back of these new distribution charges. Some will offer direct “pass-through” of the charges, and others will bundle and package to provide a different service. In one instance (The Lines Company, which services the King Country region), consumers are currently billed directly for their lines charges.

The technology and systems required for these new pricing structures will require further development. As a result, there will be a transition phase as new distribution prices are rolled-out across the country. Some networks may also choose not to change their pricing structures depending on their network needs.

What do you think?

We’d like to hear your thoughts on which, if any, of the above pricing options you’d prefer (we’ve also included the current status quo option as “Fixed daily and per unit charges”).

Note: the ENA’s full technical discussion paper is available here. Members of the public can make submissions on the consultation questions due by 20th December 2016.