Vector says regulation needs to change in wake of Cyclone Gabrielle

Vector says Cyclone Gabrielle means the regulations governing power distributors will need to change. Photo / Brett Phibbs

Vector says the destruction wrought by Cyclone Gabrielle has highlighted the need for regulations to change if energy distributors are to face the climate challenge.

As a natural monopoly, the electricity and gas distributor is heavily regulated by the Commerce Commission in terms of what it can charge consumers.

The company, in releasing its first half result, said distributors needed better-aligned cashflows and for their regulated asset bases to not be linked to inflation.

Vector said it had delivered a solid first half result within a challenging environment - its net profit fell by $15.2m, or 13.2 per cent, to $100.3m.

Group chief executive Simon Mackenzie said regulators needed to understand the challenges that lay ahead.

“With climate change, emissions reductions goals, and now the rising cost of living, it’s even more critical that the sector, and our regulators, understand the criticality of our energy infrastructure and the challenges ahead of us to manage both the growth of energy and the rapid electrification of transport and industry, in an affordable way,” he said.

“In addition, the extreme weather we’ve seen already this year with the latest devastating Cyclone Gabrielle makes it clear that funding for climate resilience needs urgent attention in the upcoming resetting of regulatory expenditures.

“Expenditure settings must support more climate resilience, and the critical transition of the whole industry, of which distribution businesses are essential.”

Mackenzie said current regulation does not facilitate the type of innovation or level of investment required to boost resilience and achieve affordable decarbonisation.

It’s been estimated that New Zealand will need to spend $22 billion on distribution infrastructure alone to manage both the impacts of climate change and the growth in demand for electricity, including the rapid electrification of transport and industry.

“Given that scale of investment, distribution businesses must have sufficient cashflows to support that level of investment, and appropriate commercial returns for investors,” he said.

Mackenzie pointed out that the need to fund more investment had been recognised by the Commerce Commission in changing Transpower’s regulatory settings to better align cashflows with high levels of investment.

Electricity Networks Association chief executive Graeme Peters said lines companies were still coming to grips with the scale of the damage with the main priority restoring power, BusinessDesk reported.

However, there were some early lessons.

One was whether lines companies’ budgets were sufficient to deal with the increasing likelihood of more severe weather events. An early estimate of the costs of Gabrielle was $100m, which far exceeds the annual budget for service restoration for all lines companies across the entire country.

This will have to be funded from somewhere. Lines companies’ bosses estimate that half of the cyclone damage could have been prevented if they were able to remove or cut back trees that put lines at risk.

Peters hopes ministers will turn their minds to changing these regulations because being able to clear trees has been a long-standing request from the sector.

An argument could also be made that the regulator could allow more spending on building resilience in the networks.

This could mean building more redundancy into the system, with alternate lines into areas.

Also, the response to Gabrielle showed the importance of having spare parts and replacement equipment on hand.

NZX-listed Vector is 75 per cent owned by Entrust, a community trust.