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Cap proposed for transmission pricing changes

The Electricity Authority plans to set a cap on any increases in customer costs resulting from proposed changes to the way almost $1 billion of annual transmission costs are shared around the country.

The regulator says its work on the industry’s transmission pricing methodology remains “extremely important” and today signalled the core of its May 2016 proposal remains intact. It is aiming to wrap the project up by June and has pledged a “major consultation exercise” on its final proposal.

“We continue to see TPM reform as extremely important. The long-running debate over the current TPM does not help provide certainty for any larger investor who wants to use or generate electricity,” the authority said in a project update.

“We recognise that companies generally don’t want changes that could lead to them having to pay more. But we think there are some serious problems with the existing transmission pricing methodology and these problems will only get more pronounced over time.”

The authority and its predecessor, the Electricity Commission, have spent more than a decade looking for a fairer way to allocate the cost of the national transmission grid.

Under the current regime, South Island consumers pay for North Island upgrades they get no benefit from, some generators pay little for the lines that deliver their power, and only South Island generators pay for the high-voltage direct current link across Crook Strait, despite power flowing in both directions.

The authority’s 2016 proposal, which would scrap the HVDC charge and the use of peak demand for setting charges, was widely opposed by Auckland and Northland manufacturers and politicians, given the increases consumers in those regions would face.

Vector, Top Energy, Northpower, New Zealand Steel and Norske Skog Tasman faced some of the biggest increases. Contact Energy and Meridian Energy – the biggest South Island generators – Christchurch-based network Orion and the Tiwai Point smelter had the most to gain.

At the time, the authority had included the option of a price cap to smooth the impact on customers in the worst-affected regions, like Northland, but also on the West Coast. Transmission there was upgraded for projects like Pike River Coal but is now under-utilised.

Critics had also questioned the practicality of calculating the proposed “area of benefit” charges and applying them to the already sunk costs of historic transmission projects – including Pole 2 of the HVDC link commissioned in 1991 and other upgrades since 2004.

The regulator put its TPM work on hold in June last year to fix flaws in a cost-benefit analysis it had commissioned, and to enable four new board members to come up to speed.

Today the authority said it has spent the past year looking at the workability of a benefits-based charging system, which it still favours.

It also believes those charges should be applied to the HVDC link and at least some recent major transmission investments. Where that line will be drawn will be guided by the cost-benefit analysis.

The authority says the move away from peak-demand based charges is necessary as some customers reduce their usage at peak time, or use local generation or batteries to do so, even when there is plenty of grid capacity. That just pushes transmission costs onto other users.

“In many ways local generation and batteries are a good thing. And in some cases they might help Transpower avoid having to make investments, which would be a cost saving.

“We want to get the pricing methodology right so that batteries and local generation can help reduce transmission costs where they can, without pushing other grid costs onto others.”

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