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May 27, 2024

Fair approaches to electricity distribution pricing

What are alternative approaches to electricity distribution pricing?

Electricity distribution pricing in New Zealand is being reviewed to support the large energy transition required for a net-zero carbon future. Changes could include raising charges at “peak” times – for example, in the morning and evening when demand on the electricity network increases as power consumption rises. 

The Consumer Advocacy Council, the independent advocate for residential and small business electricity consumers in Aotearoa New Zealand, commissioned BERL to investigate approaches to distribution pricing that could be used to help ensure pricing is fair for small electricity consumers.

Every time a power bill is paid, part of it goes towards the cost of the local distribution network. This network is made up of the power lines that deliver electricity from the national grid to homes and businesses. On average, these distribution charges make up about 27 percent of an electricity bill. 

Many households are already burdened by the rising cost of living. Changes in energy distribution, or the way it is charged, can significantly increase the overall cost. This is especially hard for families who are already struggling to pay for energy. 

Higher charges at peak times can encourage consumers to switch their power use to times when there is less demand on the network. However, higher tariffs can also adversely affect consumer groups that have limited (or no) ability to change the times they use electricity. 

On behalf of the Consumer Advocacy Council, we set out to investigate fair approaches to electricity distribution pricing that acknowledge: 

  • Electricity is an essential service
  • Many households cannot easily switch their power use to off-peak times
  • Raising tariffs will likely increase hardship for customers who cannot easily move the times they use electricity, who are in rental premises, or who lack the financial resources to invest in energy-efficient and smart appliances
  • Small businesses that are unable to shift the times they use electricity may also face cost increases as distribution charges rise. 

Our investigation looked at distribution pricing in the Australian, European, Great British, Northern Irish, and North American markets to identify possible approaches that New Zealand could adopt.

These markets do not explicitly consider the impact on different consumer groups, specifically those potentially in energy hardship, vulnerable households, or small businesses. The majority of markets operate on the premise that a key desired outcome is efficient and “fair” prices that allow electricity distributors to make a “fair return” on investment.

Our research identified three broadly common approaches. On the east coast of Australia, in Northern Ireland, and in the European Union, electricity distribution businesses are required to submit pricing proposals that are either approved or agreed upon with the regulator. In Great Britain, distributors use a common pricing methodology agreed between industry participants and the regulator. In the selected North American markets, prices are set by the regulator, which usually involves judges and public hearings.

New Zealand could strengthen its existing distribution pricing principles by requiring distributors to consider the impact of tariff changes on retail customers, including the extent to which customers are able to mitigate the impact of these changes through decisions about when they use power.

If New Zealand wanted to increase the Electricity Authority’s role in distribution pricing, it could consider models in Europe and Great Britain. These have greater direct involvement from the regulator in approving the methodology used and/or the prices charged to consumers. 

Technology can reduce distribution costs
New Zealand is also looking to use electricity to further reduce carbon emissions. This means that distribution pricing and the integration of distributed energy resources (DER), such as electric vehicles, solar panels, batteries, and smart appliances, will become even more crucial.

The ability of consumers to generate and consume their own electricity, shift and reduce consumption, and inject electricity back into the grid, enables them to lower their electricity bills. This will also allow consumers to decrease their overall reliance on the electricity network, facilitate the hosting of greater amounts of intermittent renewable generation, and improve environmental outcomes.

Distribution costs are expected to increase. This will have an adverse impact on vulnerable consumers, specifically those who are unable to change consumption behaviours in response, or afford the capital cost of DER and flexible response-enabled appliances. At the same time, although DER can be costly, unreliable, and unable to be fully leveraged by all consumer groups, it is what will place downward pressure on network and generation costs.

This research will inform the Council’s future submissions on distribution pricing. Access the full report.