The government is digging deep into the price of electricity in New Zealand, with a review of the entire energy sector. What will the review look at, why should there even be one, and does it mean you might pay less for power? Vector’s Bridget McDonald has the answers.
A lot has happened since we first published this guide to the Electricity Pricing Review in May 2018. The first discussion document for the review was released in September. In the Energy Minister Megan Wood’s own words, the document “delivered… much food for thought”, and is a “clear demonstration that the market is not working for everyone.” Some key points from that discussion document include that:
- Households are paying almost 80 percent more for power today than in 1990, after adjusting for inflation.
- A two-tier market is forming, where those who actively seek out better deals from electricity retailers benefit from that competition, while those who don’t shop around end up paying higher prices.
- Prompt payment discounts (or what some call late payment penalties) weigh heavily on lower-income New Zealanders who aren’t able to meet the payment deadlines, and so miss out on discounts that can make up to a quarter of their bill.
- Innovative technologies, like electric cars, solar panels, and others, have major disruptive potential to the sector, and if those changes aren’t managed then “the costs will fall on those least able to afford them.”
It’s also not just consumers who’re affected by wholesale energy prices. Since that discussion document was released Flick Energy, Pulse Energy, Electric Kiwi, Vector, and Switch Utilities (Vocus) jointly filed an Undesirable Trading Situation (UTS) with the Electricity Authority (EA). The UTS claimed ‘coordinated exercise of market power’ by generators, resulting in high consumer prices.
It’s not common to have companies from different segments of the energy sector come together, but an example of why they found it necessary can be found in Flick Energy: the company lost nearly 3,500 customers in two months following wholesale power price spikes in October.
Meanwhile, a company which is both an energy generator and an energy retailer, Genesis, announced price increases of up to 4.5 percent for some regions in New Zealand.
There’s also been an interesting development across the ditch. In Australia, legislation has been passed which introduces penalties and remedies of up to $10 million for energy market misconduct, including market manipulation by generators. The law’s a mouthful – The Treasury Laws Amendment (Prohibiting Energy Market Misconduct) Bill 2018 – and it followed a review there, similar to the Electricity Pricing Review currently underway here.
Finally, the discussion document released by the review panel heavily hints at the need for energy distributors to be focused on investment in new technology and innovation for the future. Big investment in innovation is needed to support New Zealand’s transition to a zero carbon economy – and the discussion document also points to Electric Vehicles (EV) playing a key role in a zero carbon future (Vector recently released guidelines for the installation of EV charging stations earlier this month). Advances in solar panels and batteries will turn the current one-way flow of electricity between suppliers and consumers, into a two-way flow, requiring significant changes in distribution business practices.
Where did the idea for an electricity pricing review come from?
The price of electricity has long been a contentious and political subject, but some of the bigger chunks of your bill haven’t been looked at for close to a decade – and a lot has happened in the energy space since then.
The writing has been on the wall for a review since before the election last year. Labour, the Greens and NZ First all had various ideas for reviewing New Zealand’s energy sector during the election campaign. Concern over price rises, complaints from the regions and lower-income New Zealanders, and New Zealand’s ambitious carbon reduction targets have prompted interest in having a look-see. The United Kingdom and Australia have also recently conducted reviews of the electricity sector in their countries and have found concerns.
So when Winston Peters and Jacinda Ardern sat down to nut out the details of how they’d work together, one of the things they agreed on was an electricity price review – so in it went to their coalition agreement.
Yeah, but why?
According to the government, the amount you’re paying to heat your home and turn on your lights has increased faster than inflation for a number of years. They want to understand why that has happened.
Before this review was announced, the government had announced a “winter energy payment” to help out beneficiaries and pensioners, because some lower-income New Zealanders couldn’t afford to heat their homes in winter. The government acknowledged the payment was “treating a symptom, not a cause.”
OK, so what exactly are they looking at?
Profits, electricity costs for different groups of consumers, barriers to competition, regulators, and new technology.
The energy sector is a hellishly complicated beast, and the price you pay when you get your energy bill (the review’s primary concern) is made up of many costs – not just the amount of energy you used, but what it cost to generate that energy; what it cost to send that energy to your home; the cost of building and maintaining essential infrastructure; funding the regulators; and more. To understand where the costs in your energy bill come from, you’ve got to understand how our energy sector works.
First, you’ve got the generation of energy, which in New Zealand is predominantly hydropower (energy from water), geothermal power (energy from heat from the earth), and wind power (energy from… well, wind). While New Zealand is fortunate in having over 80% renewable energy, we still (somewhat controversially) rely on some power from burning fossil fuels (coal) to help plug any gaps between supply and demand that might occur in, say, a dry year (climate change anyone?)
Then you have to move that energy from where it is generated, to all the different places around New Zealand where it’s going to be used: that’s transmission. Across the country that’s looked after by Transpower. Then you’ve got to spread that energy throughout each region via power lines and networks – aka distribution. At that point, a retail company takes that power and sells it to you, and you use that energy to power your homes and businesses (consumption). Then there are the administrative parts of the sector, which includes metering businesses and the regulators.
At every single point in energy’s journey from A to B, there is a cost (both in terms of dollars and in terms of carbon) – and since 2000, the government reckons what you pay for electricity has risen by about 50%. So, the review is going to consider what the causes of that are; whether the business rules and regulations in place for electricity businesses are right; and what could be changed now to better set up the sector to manage and use new technologies like electric vehicles (EVs) and solar panels.
Haven’t there been reviews and reforms already?
Yes, several times actually. The energy sector has been tinkered with for decades. In fact, this document by the Ministry of Business, Innovation and Employment detailing the chronology of electricity reform since the mid ’80s is 40 pages long.
So then what’s the point of this one?
Energy minister Megan Woods has stressed this review will be “forward-thinking”, which means a lot of what will happen in the energy sector (as well as what has happened) will be considered.
New energy technologies such as solar panels, EVs, and energy storage batteries will be considered, as well as asking whether our energy sector will be able to handle them and the changes they bring. When EVs become cheaper and more people use them, will the fancy suburbs with garages full of them be charged for the privilege of plugging them in at night? Depending on charging technology, connecting one electric vehicle is equivalent to an additional one to 20 new homes on the electricity network. Or will everyone have to subsidise that cost, whether they have an EV or not? These are some of the big questions this review will hopefully help answer.
Will the review impact what I pay for my power?
The point of this review is that the government wants to better understand if you are paying too much for your electricity, and they want to get greater transparency over all the bits that make up your bill, in order to ensure that consumers get a better deal. But this will be balanced by the government’s desire to have a resilient energy sector – especially with climate change creating concerns over more frequent storms and weather events. Big investment in energy infrastructure does tend to cost a bit of money, and that is usually paid for by users in some shape or form. The sector has to get the balance right between delivering a reliable and secure power supply, and avoiding wasteful spending on infrastructure that might not be needed in the long-term as the sector inevitably gets transformed by emerging technology and as more and more New Zealanders use distributed generation sources such as solar.
So, what else will I get out of this review?
Good question. For starters, you should expect to have greater transparency on your energy bill over what exact costs you’re paying for every month. But also, when it comes to the dollars you part with for electricity, you should expect to get more bang for your buck.
As has happened in other sectors in New Zealand that have been disrupted by technology, there’s no reason why – given the expected drop in prices for things like solar, battery and EVs, and the rapid advancements we are seeing in areas such as artificial intelligence, internet of things and more – you shouldn’t expect significantly better competition and consumer benefits in the future.
The final word
Nobody can predict all the possibilities to be unlocked for consumers in the electricity sector. Who knows what is coming in the next decade – maybe the energy version of Netflix, Amazon or Uber? At the very least, it’s worth asking now whether the system we have is delivering good value every time you use electricity, and if it’s going to ensure New Zealanders will benefit from the energy industry revolution that is sure to come.
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