John Crook: Subsidies don't benefit users

Unison Group Chief Executive Ken Sutherland.

While I fully agree with Unison's desire to see users paying charges that reflect the costs their use imposes on the electricity network, I strongly feel that they are going about it the wrong way.

The recent debate in the HBT about solar hot water heating vs solar electricity demonstrates the unfairness of the system Unison has introduced.

To demonstrate this unfairness, consider two users, A and B, who both have the same hot water usage and electricity demand profiles. A decides to install a solar water heating system to save on power costs. B decides to put in a solar PV panel system to generate electricity that will heat his water. The result is that both A and B will still have identical electricity demand profiles. Both will use less power during the day, which Unison does not like because allegedly these users are contributing less to the subsidy of peak power costs than other users.

Unison's new system of pricing will "tax" the solar PV owner (B) and not the solar water-heating owner (A). But surely fairness requires that users pay charges that reflect the costs their own use imposes on Unison's network? This means that both A and B should pay the same prices/amount for their electricity. So what should Unison do? Should they impose a "tax" on solar water heater owners for power not being consumed during the day, in the same way as they are doing with the solar PV owners? They could argue that this would be non-discriminatory as it would discourage investment in solar water heaters in the same way as they are now doing to solar PV owners! Fortunately Unison doesn't have the powers to tax other non-users of daytime power.

The elephant in the room that causes these problems, and which nobody is really talking about, is the system of subsidies built into Unison's pricing. Why should Unison use a uniform charge per kilowatt-hour as its main pricing system, when their costs are not directly related to the total number of kilowatt-hours that they deliver? Instead, Unison's and TransPower's costs (the latter being passed onto us by Unison) are almost entirely controlled by the level of peak power consumption that their lines have to carry. During off-peak periods their costs for the transport of energy are effectively zero.

The current system of uniform pricing (per kWh) for conveying power in TransPower and Unison's networks means that power usage during off-peak periods is substantially subsidising usage during the peak periods. Unison is now trying to argue that people who don't use power, or use less of it, during the off-peak periods should make a separate payment towards this subsidy. The amount of Unison's new charge is independent of how much power the affected users do or do not use during peak demand periods. It is based purely on presumption. That too is quite unfair.

This begs the obvious question, why do we have this system of subsidies at all? Who is supposed to be benefiting from this subsidy arrangement? In earlier times there was little choice about charging methodology because the technology of electricity metering was not very sophisticated. However, today's smart meters can separately report on the amount of energy consumed in each of 48 half-hour periods during the day.

Any economist will tell you that subsidies are economically inefficient. They promote over-consumption, because consumers will use more of the subsidised commodity than they would if they knew had to pay the full price. This over-consumption leads to peak power demands much greater than they would be in an efficient market where the service was properly priced. Historically, this excessive consumption of electricity during peak periods has led to unnecessarily large investments in electricity generation, transmission (TransPower) and the systems of electricity distribution companies.

Obviously we can't directly recoup the unnecessary investments that have already been made, but let's pull the plug now and abandon this damaging system of subsidies, so that further over-investment is curtailed, and then electricity prices could at least stabilise, if not go down, in the future. If Unison's charges per kWh during the peak periods of 7am-11am and 5pm-9pm were trebled then they could be set to zero for the off-peak periods and this would generate approximately the same revenues for them as at present, but with the major difference that peak period usage, which alone determines network costs, would be fully paying for the costs of Unison and TransPower's networks.

Unison's charges represent about half of the total amount per kWh that we pay for power. Most of the balance goes to the generating companies and the retailers. Applying the subsidy-free Unison charges described above, we would have an overall power price about double the present price during the peak periods, and about half the present level during off-peak periods. These changes may sound very dramatic, but there is really nothing to fear and much to be gained for most users. For those users whose daily demand profile matches the national average and continues to do so, their power bills will be the same as before. The big benefit to be reaped from removing the subsidy is that we users of electricity will know that we can save money and help avoid future price increases if we change our behaviours by shifting some of our usage to the off-peak periods.

- John Crook, who lives in Hawke's Bay, is an electrical engineer with nearly 50 years' experience in the telecommunications industry.

- Views expressed here are the writer's opinion and not the newspaper's. Email: editor@hbtoday.co.nz