Power prices below cost, says report

The report comes after Labour and the Greens' plans to scrap the wholesale electricity market, which draw on claims that consumers have been overcharged for over 30 years. Photo / Thinkstock

Consumers not charged enough to cover outlay since 1974, says Electricity Authority

Setting electricity prices based on historical costs could increase costs for consumers rather than reduce them, says the Electricity Authority.

It put out research yesterday which concluded that since 1974, electricity charges have consistently been below the cost of supply for consumers as a whole and, until the introduction of the electricity market in the late 1990s, well below.

It is a thinly veiled response to plans by Labour and the Greens to scrap the wholesale electricity market, which draw on claims that electricity consumers have been overcharged for more than 30 years and have already paid off past investment in generating capacity.

The authority's chief executive Carl Hansen said: "The results reflect the fact that, prior to the 1990s, New Zealand governments treated water as a free resource and did not fully account for the cost of capital, so they built very costly hydro generation plants. It is a myth that the old hydro plants were low cost for New Zealand as they often had very high capital costs that more than offset their low running costs."

The report calculates the total cost to build all of New Zealand's electricity generation plants since 1907 as well as the other costs incurred in delivering electricity to consumers.

The analysis assumes a weighted average cost of capital of 10 per cent, after inflation but before tax, a rate recommended by the NZ Institute of Economic Research which has peer reviewed the commission's work.

But the commission has made its model available so that other assumptions can be tested.

Even with a cost of capital of 6 per cent (before tax), consumers were paying well below the cost of supply until 10 years ago. Hansen said even at such a low return on capital there would be little scope to reduce electricity charges for consumers.

The report acknowledges that residential consumers' charges have more than doubled in real (inflation-adjusted) terms over the past 40 years. But it found that back in 1974, residential consumers were meeting less than half the cost of the power they consumed while commercial ones were paying close to full whack.

It was not until 1990 that households were covering the cost of generating the power they used and were still getting it delivered to them over the national grid and local lines networks for free.

Residential power bills have since been pushed up by the unwinding of prior cross-subsidies, increased natural gas costs, the rise in GST in 2010 and most recently the need to recover the cost of major capital expenditure on the national grid.

"The modelling suggests that residential consumers are currently paying close to the total cost to serve them based on historical cost while other consumers are paying less than total cost," the report concludes, substantially so in the case of heavy consumers, a category dominated by the Tiwai Point aluminium smelter.

Hansen said the analysis could not be used to justify current prices. "That would have to look at efficient costs rather than historic costs."

By efficient costs he means the cost of new entry generation: "If we consume more, how much additional cost does that impose on the economy?" Those are likely to be lower than historic generation costs, the commission believes.