Falling interest rates and regulatory pragmatism have helped dull the pain of the new electricity transmission pricing rules announced today.
The current regime – which disadvantages renewable generation options on the South Island and risks encouraging further cost avoidance by industry – had to change.
You can quibble aboutthe claimed $1.3 billion 30-year benefit - any cost-benefit analysis with a $400 million to $2.4b range can fairly be described as fudgy - but no-one can say the Electricity Authority's final decision today is arbitrary or unprincipled.
Two chief executives and almost two different authority boards have now come to the same view in a 10-year process that has already delivered other beneficial changes to Transpower pricing practices.
But there will be pain. And in a long stringy country with only a couple of dozen major power users that pain will fall harshly on some – even allowing for the $13m the Electricity Authority has earmarked to limit the first-year impact on big industrial power users like Pan Pacific Forest Products, New Zealand Steel and Norske Skog.
Zero-sum game
It is a zero-sum game. For Meridian Energy, the Tiwai Point smelter, Wellington Electricity and Powerco to share in about $48m of annual savings, somebody else has to pick up that cost.
Thirteen lines companies face increases of $1m a year or more. The charges of Greymouth-based Westpower and Whakatane-based Horizon Energy roughly double, but 12 others should see reductions.
If the past 15 years has taught us anything it is that delay only makes change harder.
And arguing - as the northern Employers and Manufacturers Association has again today - that the process should be stalled to protect vulnerable customers in the upper North Island makes no sense.
Where is the fairness in leaving consumers in other parts of the country paying more than their share year after year after year?
With the infinite benefit of hindsight, it would have been better if more time had been spent 15 years ago – before we embarked on almost $3b of mostly North Island transmission work – considering whether a pricing regime that smeared that cost across the entire country was equitable.
But even today's decision leaves much of Transpower's existing costs shared across the country. And those costs are not small.
Rising regulated revenue
Falling interest rates have trimmed about $150m from Transpower's regulated revenues in recent years. But it will still collect about $800m in the coming financial year and that is projected to climb to about $1b a year within the next decade.
Only about a fifth of Transpower's $800mn-odd bill will be recovered from the authority's new benefits-based charge to pay for seven recent specific investment projects. Connection charges remain largely unchanged with the balance – about $460m – classed as a residual which all consumers contribute to.
Norske Skog paper mill in Kawerau. Photo / Supplied
And the lion's share of that $174m benefit-based charge relates to just two projects - the $894m North Island Grid Upgrade into Auckland commissioned in 2012 and the $672m upgrade of the Cook Strait link completed in 2013.
Two further Auckland projects, the North Auckland and Northland upgrade and a new switchyard at Otahuhu, were among three projects the EA dropped from the benefits-based regime last year as it wasn't convinced consumers were yet getting a net benefit from them.
The two Auckland projects accounted for about $580m of the combined $634m we power consumers collectively spent on the three of them.
As the authority noted last July, "the lack of net benefits at this point raises questions around the efficiency of the timing of construction at the very least."
Important shift
That's why moving to benefits-based charging for future investments is so important, given the drive to increase electrification of industry and transport.
Doing the latter at least cost will depend on us building the right assets in the right parts of the country at the right time.
It was a point authority chief executive James Stevenson-Wallace reiterated today.
Basing Transpower's charges on peak period demand simply incentivises firms to invest in batteries and diesel generation to avoid them, in-turn pushing those costs onto other users.
And the current regime also spreads the cost of transmission across all customers, regardless of whether they benefit or not, potentially reducing scrutiny of their value.
"This is a significant problem because it may cause customers in a region to favour a grid upgrade over more efficient local solutions, such as a demand management technology. This is because the rest of the country will pay for most of the grid upgrade. These inefficient investment choices also increase costs for consumers."
Today's changes will impose painful adaptation on many; not changing risks locking us into higher costs long-term.
