Details of retail power price review released
Hon Dr Megan Woods
Minister for Energy and Resources
27 March 2018
Details of retail power
price review released
Energy and Resources Minister Megan Woods has today released the terms of reference for review into the price of electricity in New Zealand.
“New Zealanders deserve to have access to electricity at a fair price and this review will look into whether the electricity market is delivering that.
“Residential electricity prices have risen by around 50 per cent since 2000 but the price for business remained flat. We want to find out why that is,” said Megan Woods.
The review will adopt a forward-looking approach and will consider the entire electricity market, from generation, through transmission and distribution, to retail.
“We need to consider how the market operates as whole because all of it contributes to what makes up our power bills.
“The review is also tasked with looking at how the electricity market and its regulatory framework is placed for the future especially in the light of the rise of emerging technologies such as solar power and electric vehicles.”
Megan Woods said the composition of the expert advisory group was in its final stages. The expert advisory group will provide peer and technical advice for the review which will be supported by a secretariat provided by the Ministry of Business, Innovation and Employment and external consultants.
“The review will be carried out in stages with the first phase looking at determining facts and building evidence and the scope of further stages will be shaped by those findings,” said Megan Woods
The final
report is expected to be delivered to the Minister early
next year.
Minister Woods has also released the
submissions from stakeholders on the draft terms of
reference and this can be found here:
http://www.mbie.govt.nz/info-services/sectors-industries/energy/current-reviews-consultations
Note for editors: Terms of Reference are
Below.
Terms of reference for the electricity
price
review
Context
Electricity
prices, especially for households, have increased faster
than inflation for many years, putting pressure on household
budgets. After adjusting for inflation, residential
customers have faced around a 50 per cent increase in real
electricity prices since 2000. In comparison, real prices
faced by commercial and industrial customers have remained
relatively flat.
International comparisons in the
International Energy Agency’s (IEA) 2017 In Depth Review
of New Zealand found that residential electricity prices
have grown from low levels much faster than in other IEA
countries. It also found that residential prices in New
Zealand were well above the IEA average in 2014, while
industrial prices were below the IEA average.
In
addition, rapidly changing technologies and business
innovations present opportunities and challenges to the
operation the electricity system. Emerging technologies can
contribute to the transition to a lower emissions economy
through renewable energy solutions, increasing the
efficiency of the grid and enabling greater energy
consumption control for the consumer. To benefit from
technology we need a regulatory framework that is
sufficiently enabling.
In this context, the Government
will undertake a review to investigate whether the
electricity market is delivering efficient, fair and
equitable prices to end-consumers. It will also assess
whether the electricity regulatory framework will continue
to be appropriate as we look to the
future.
Overarching
Objective
The objective of the review is to
ensure that the New Zealand electricity market delivers
efficient, fair and equitable prices as technology evolves
and we transition to a lower emissions future, taking into
consideration the requirements of environmental
sustainability and the need to maintain security and
reliability of supply – the energy
trilemma.
Links to wider
work
The review will take into account
crossovers and linkages with existing and planned work,
including the work of the Electricity Authority on
transmission pricing, work on how to reach 100% renewable
electricity by 2035 by the new Interim Climate Change
Committee and Climate Commission, and the work of the
Productivity Commission on its low emissions economy
inquiry.
Scope
1. The
review will examine whether the prices paid by end-consumers
for electricity are efficient, fair and equitable. Relevant
perspectives on fairness and equity include:
•
Whether suppliers of electricity services have the ability
to extract excessive profits over time[1].
•
Whether all consumers have access to affordable electricity
services, noting this depends on many factors other than
electricity prices (including housing quality and income
levels).
• Whether the costs of
providing electricity services are or should be socialised
or spread evenly across different classes of consumers (e.g.
households and businesses), or across regions, or urban and
rural communities.
2. The review will:
•
Consider the entire electricity supply chain: generation,
transmission, distribution, and retail.
•
Evaluate whether the regulatory framework governing both the
competitive aspects of the electricity market and the
monopoly aspects (i.e. transmission and distribution) are
delivering efficiency and fairness.
•
Consider the ability of the market and regulatory framework
to enable and benefit from emerging technologies and
innovation in business models.
3. In considering
whether prices are efficient, fair and equitable, the review
will take issues of security, reliability and environmental
sustainability into account.
Information
collection
4. The review will
collect information and report on:
•
The key components of retail electricity prices, how they
have changed over time and how they compare
internationally.
• Variations in
price across different customer groups.
•
The proportion of household income spent on electricity
bills and how this varies between different customer
groups.
• The financial performance
of suppliers across the supply
chain.
Competition
5.
The review will consider:
• The
existence of, or potential for, factors that may form
barriers to entry or limit competition across the supply
chain. This should include, but not be limited to, the
impact of vertical integration in parts of the supply
chain.
• The existence of, or potential
for, informational asymmetries, and the impact on
electricity customers with differing behavioural patterns
(and therefore different consumption profiles).
•
The existence of, or potential for, regulatory failure –
including the impact of the low fixed charge regulations,
and the impact on differing customer segments.
•
The role and effectiveness of the current regulatory
framework in promoting competition, including at the
boundaries between contestable and non-contestable
services.
• The respective roles and
functions of the separate regulatory agencies over the
electricity sector.
Equity
6.
The review will consider:
• The impact
of market conduct and regulation on a range of customer
segments. This should include, but not be limited by,
regional distributions, household income levels and broad
consumer group (i.e. residential, industrial, and
commercial).
• The nature of cost
allocations and level of any cross subsidisation between
consumer groups (including businesses and households, and
urban and rural communities), including the impact of the
low fixed charge regulations.
• The
regional distributional aspects of transmission pricing.
Future technologies
7.
The review will consider:
• The
potential impacts of emerging technology on services and
prices, and how this may affect different customer groups.
• The current regulatory framework and
its ability to promote the potential benefits from emerging
technologies.
Guidance on
scope
8. The review is expected to
make findings and recommendations at a level of detail
appropriate to a policy review. It is not required or
expected to make findings or recommendations about matters
of technical regulatory detail such as how regulated
weighted average cost of capital should be determined, or at
how many hubs financial transmission rights should be
traded.
9. In considering issues relating to the
economic regulation of natural monopoly networks applied
under Part 4 of the Commerce Act, the review should be
mindful that this regulatory framework is also applied to
the gas and international airport sectors, and any changes
could have significant impacts on these sectors that would
need to be carefully considered by the Government. The
review should also be mindful that the input methodologies
set independently by the Commerce Commission have been
subject to extensive consultation, expert analysis, and
review by the High Court. This previous scrutiny, the
technical complexity of the issues involved, impact on
investment and regulatory certainty, and their
cross-sectoral application means the Government is likely to
exercise considerable caution in considering changes to the
Commerce Commission’s input methodologies.
10. The
review is not expected or required to evaluate the
performance of regulatory bodies against their existing
statutory objectives, but may make findings and
recommendations about regulatory frameworks and
institutional arrangements.
Process and
timeframe
11. The review will determine
its own process, but is expected to involve wide engagement
on issues and draft findings.
12. The review may be
structured in stages, with initial stages focusing on
determining facts and building evidence. The scope of
further stages would be developed upon the findings emerging
from the first stage.
13. The final report should
include recommendations for any improvements to the
regulatory framework, structure and design of the
electricity market that are considered warranted.
14.
The final report will be delivered to the Minister of Energy
and Resources by April
2019.
________________________________________
[1] The
purpose of regulation under Part 4 of the Commerce Act
includes that ‘suppliers […] are limited in their
ability to extract excessive profits’, so the review may
draw on existing information about relevant regulated
services.
ends