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Electricity charges below costs for many decades

28 January 2014

Electricity charges below costs for many decades

A new report from the Electricity Authority shows that electricity charges in New Zealand were far below the cost of supply for many decades, and that current charges are almost in line with the costs that have been incurred to supply electricity.

This finding is contrary to claims that consumers have been over-charged for electricity for more than 30 years and they have already paid off past investments.

The report has compiled the total cost incurred to build all of New Zealand’s electricity generation plant since 1907, as well as the other costs required to deliver electricity to consumers.

Carl Hansen, Chief Executive of the Electricity Authority, says “The results reflect the fact that, prior to the 1990s, New Zealand governments treated water as a free resource and didn’t fully account for the costs of capital, so they built very costly hydro generation plants. It is a myth that the old hydro plants were low cost for New Zealand, as they often had very high capital costs that more than offset their very low running costs. The total cost to New Zealand was often very high but consumers were not charged the full cost of supplying electricity to them.”

The analysis suggests that setting current electricity charges based on historical cost could increase prices for consumers, rather than reduce them. It would mean prices would have to rise to achieve a 10% return on historical generation investments (before taxes and after adjusting for inflation). Even at a low return on capital, such as a 6% rate, there would be little scope to reduce electricity charges for consumers.

The research also shows that historically, commercial consumers have paid a high proportion of the costs to supply them, while households paid a very low proportion until the 1990s.

Mr Hansen says historically charges to households failed to cover the cost of generation and often made no contribution to covering other costs such as distribution, transmission, retailing, metering and GST. Rises in household electricity prices since 1985 reflect efforts to gradually lift prices to the levels needed to cover the full cost of supplying electricity.

Although average costs reduced in the 1990s, they increased quite sharply from the early 2000s, mainly as a result of increasing fuel costs. More recently there have also been cost increases due to the increase to GST in 2010 and increases in transmission and distribution charges.

“Obviously, we’d all like to pay less for our electricity. The best way to sharpen up these prices is to increase the competitive pressure in the market. Everyone who purchases electricity can help encourage competition by actively seeking the best deals,” says Mr Hansen.

The historical cost report has been independently reviewed by the NZ Institute of Economic Research and is available at www.ea.govt.nz. The Electricity Authority is an independent Crown entity responsible for promoting competition, reliability and efficiency in the New Zealand electricity industry.

ENDS

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