$300 million benefit to consumers touted from embedded generation subsidy removal

The Electricity Authority says consumers will save around $300 million a year following its decision to end power station subsidies.

The Electricity Authority is ending subsidies to power stations that are embedded in local electricity networks rather than connected to the national grid in a move the regulator says will save consumers around $25 million to $35m a year, or $279m on a net present value basis.

The decision, announced this morning, follows last Friday's rejection by the High Court of a bid by Infratil-controlled Trustpower, to force a judicial review of the EA's approach to the pricing of so-called distributed generation (DG).

At the same time, the authority announced it was delaying the release of the supplementary consultation paper on its hotly contested transmission pricing methodology proposals until next Tuesday, after discovering late yesterday that a key component required further work. The delay is accompanied by a two-week extension of the deadline for submissions on the paper to February 24.

The impact of today's DG decision falls mainly on four of the main power companies - Trustpower, Meridian, Contact, and Genesis Energy - which own around two-thirds of the 1500 megawatts of installed distributed generation capacity available in New Zealand. Their plant is mostly a combination of small diesel-fired, wind and hydro stations, along with some geothermal operations, such as Top Energy's Ngawha plant in the far north.

Until today, DG operators have been able to claim 'avoided cost of transmission' (ACOT) revenues under a regime that was intended to reward the installation of plant that took pressure off the national grid.

However, the regime had produced "perverse incentives" and had contributed to a 79 per cent increase in ACOT revenues flowing back to DG owners in the last eight years, the authority's chief executive, Carl Hansen, told a media briefing today.

In some cases, such as the lower South Island, DG was actually adding to the pressure to spend money on upgrading the grid because the new plant was being installed in areas where there was excess electricity generation capacity already, which had to be exported out of the area,

In other cases, investment in grid upgrades raised the value of ACOT payments to DG generators, creating an unintended incentive to install DG.

However, the authority has not gone as far as its original proposals, reducing the cost of the proposals to DG owners by some 55-to-75 per cent, said Hansen.

The concerns of small DG operators had been heard and there was still potential to earn ACOT revenues where Transpower judged DG plant genuinely relieved pressure on the national grid. In future, Transpower would be able to contract for that capacity. It would undertake a four-stage review of DG plant, starting in the lower South Island next April and moving through the rest of the country over the following two years.

The authority also did not proceed with a proposal to remove the regulated price ceiling for what local electricity distributors could charge generators to connect to their networks, another concern expressed by DG plant owners.

The decisions have no impact on solar rooftop generation at a household or small business level.