Distribution pricing reform will make disturbing price shock

Sunday, 10 March 2019, 2:43 pm
Article: NZ Energy and Environment Business Week

Distribution pricing reform will bring disturbing price shocks

Originally published in Energy and Environment on February 28

The Electricity Authority has been warned sudden implementation of more efficient electricity distribution pricing will bring “disturbing” price shocks for many customers.

The EA is currently considering submissions on its proposals to speed up distribution pricing reform and the Electricity Networks Association says there will be material downsides for large groups of consumers and “careful transitioning is essential if the reform is to be successful”.

Even those who are pushing hard for change, such as the Electricity Retailers Association, also warn the EA the process could be difficult, and some caution is needed.

The ENA urges the EA to take part in its working groups (which includes retailers) focussing on formulating an implementation roadmap with a preliminary report due April 2019.

Their analysis identified material practical issues to be dealt with across the industry to successfully implement reform at an operational level. “The more ‘efficient’ pricing options (demand and capacity-based options) would take years to implement for some industry participants” and there was too much at stake to risk poor implementation.

“The analysis provided disturbing results, showing that negative bill shocks will be felt by those who can least afford them, and that the number of consumers negatively impacted is material enough to be worrying.”

The ENA considers that the dis-benefits from not urgently reforming distribution pricing cited by the Authority are over-stated with growth in solar steady rather than accelerating.

Time of use pricing in some form was already available on many networks and the research showed in the short-term the customers that will benefit in the long-term from reform (those who are unable to access new technologies) are very likely to face increased bills.

Sudden change risked alienating stakeholders including retailers, unduly upsetting consumers, and created risks of political backlash.

The Electricity Retailers Association said it has been advocating tariff reform for several years as pricing did not reflect costs and encouraged inefficient behaviour. ERANZ agreed the uptake of new technology such as solar would exacerbate this issue. “ERANZ believes therefore that reform needs to proceed with more vigour. We are supportive of the EA’s proposals to increase scrutiny on the speed of change being undertaken by distributors. However, we would also caution that pricing reform carries significant risk if it is poorly executed.”

Fundamental changes would take time for retailers to implement and for customers to understand what the changes will mean for them. It was supportive of ENA’s pan-industry working group to develop and agree an industry wide roadmap for cost reflective distribution tariff reform.

The ENA agreed with the EA retailers should not have to pass on network prices to customers, “But we see little merit in designing price structures that customers would find unpalatable, such that all retailers substantially depart from the network pricing structure, but at the cost of increased risk premiums to cover the risk of revenue-cost mismatches.”

ERANZ strongly agreed with the EA that it should be optional for retailers to pass on distribution pricing changes to customers, saying some are willing to pay to be shielded from price fluctuations and retailers should be able to do that.

The ENA suggested a time frame with decisions about pricing reform in April 2020 with phasing in of new options from there. “It will still take some time for all distributors to reform their prices depending on the extent of rate shocks and the need to conduct trials to determine the most effective approaches in each network area amongst other things. It will take longer again for these prices to filter through to consumers depending on how long it talks retailers to pass the price signals through.”

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