Electricity pricing review

News | 10 November, 2017
With the new government announcing its intention to mount a full-scale review into retail electricity pricing, industry commentators have been quick to start pointing fingers as to where they see the blame lying.

This of course is presupposing that there is ‘blame’ to be apportioned.


Philip Barry, an electricity consultant, made the point in the NZ Herald on 9 November that despite the rise in residential prices over recent years, New Zealand still has the 11th lowest residential electricity prices among the 32-country OECD, and the seventh lowest industrial prices.


There are four main components contributing to the final retail electricity bill – generation, transmission (over the national grid), local distribution, and retailing (including marketing, metering and billing).


When questioned in recent research commissioned by the Electricity Networks Association, most participants felt that at the cost of around $4.00 to $6.00 a day in many cases – “not much more than the price of a cup of coffee” – electricity represented pretty good value for money in terms of the benefits offered to our daily lives.


The Electricity Networks Association (ENA) represents the 29 local lines (or distribution) networks around the country. Most of these networks are still community owned.


Because lines companies are natural monopolies, they are heavily regulated in terms of how much they can earn – and as many are owned by either local bodies or community trusts, they return their regulated profits back to the community by way of dividends or annual discounts.


The distribution network component makes up approximately a quarter of the final retail bill.


In real terms, of all the price components, the distribution charge showed the lowest price increase over the last 12 years, with an average increase of only 1.5 percent per year.


Charges have risen faster for other components that make up the final retail bill over this period, but there can be good reasons for this – for instance, the need to upgrade or invest more in infrastructure to ensure safety and resilience to earthquakes.


A review will have the benefit of bringing these contributing factors out into the open. Any finger pointing should probably best wait until the true facts are known.


While each of the various players in the electricity market have their own drivers and their own commercial requirements, each is dependent upon the other and they all have to work together.


While some commentators have been keen to jump the gun and suggest that the lines companies should be a focus of any review, they are often doing so with their own interests in mind.


The proposed review shouldn’t be trivialised into a partisan stoush between retailers and distributors – or any other of the parties in the market. In reality, all the participants in the sector cooperate and collaborate well.


In the case of lines companies and retailers, New Zealand’s 30 plus electricity retailers are the lines companies’ primary customers (in most cases, it is the retailer that has the direct relationship with the residential consumer). The lines companies and the ENA work closely with retailers to ensure consumers have access to sustainably and efficiently delivered, reliable electricity.


As Barry mentioned, the International Energy Agency in its 2017 review described New Zealand as being "a world leading example of a well-functioning electricity market, which continues to work effectively".


This favourable assessment is of course open to debate – and no doubt the current market model will be challenged as part of the government review. Whatever the view of market efficiency, however, it could be acknowledged that there is an affordability issue for some consumers – particularly for large families and/or those living in uninsulated homes.


The government, to its credit, has already signalled its intention to address electricity affordability directly via a winter fuel payment for households in need.


The ENA and its members support the intentions behind the review of retail electricity prices and look forward to the complexities that contribute to the final price that consumers pay getting a good public airing.


Graeme Peters, Chief Executive, ENA