Efficient Pricing Roadmap March 2020
This document updates progress being made towards the introduction of more efficient distribution pricing.
Over recent years the Electricity Authority has encouraged Electricity Distribution Businesses (EDB’s) to move to pricing which is more cost reflective and benefits based, and which is therefore more efficient in terms of signalling the cost of supply and providing consumers better information on which to base their energy decisions.
The distribution industry is also changing. Consumers are gaining better access to new technology which has the potential to significantly change generally accepted demand and use patterns.
Current Pricing Options
Westpower’s current pricing regime represents a mixture of options, some of which are cost reflective in nature, and some of which are not. Due to the that fact that we already provide capacity/peak demand pricing options to large consumers, our current work is focused on our “mass market” pricing, and also on pricing options that better reflect the impact of disruptive technology.
A significant number of consumers qualify for the Low User Fixed Charge (LUFC), which provides that a charge of 15cents per day is the maximum fixed charge payable by low use consumers, with the balance of their charges based on a variable kilowatt hour charge.
When the LUFC was originally introduced by Government, Westpower took the view that given the number of qualifying consumers, and in order manage revenue risk, all domestic consumers should be charged the 15c per day rather than have this as an option.
Due to the that fact that we already provide capacity/peak demand pricing options to large consumers, our current work is focused on our “mass market” pricing, and also on pricing options that better reflect the impact of disruptive technology.
Survey of Consumers
Our November 2018 survey provided some valuable insights into consumer preferences that we will be taking into consideration as we develop our approach to more cost reflective pricing.
Key messages were:
- Most respondents (92%) felt that they were happy to continue to pay about the same or a bit less to have the power go off about the same number of times across the year.
- The majority of consumers didn’t realise that their line charge varied depending on how much electricity they used. The vast majority felt that they would prefer to pay a fixed amount for their line charge, or for it to vary only a little. They said that this would make it easier for them to budget.
- Most people surveyed told us that they would either definitely not or probably not purchase an electric vehicle, but if they did they would be happy for Westpower to control when the vehicle could be charged in return for a cheaper rate.
- With regard to our question about the reasons why consumers were not installing solar panels on homes, the main reasons cited were cost, followed by a lack of understanding of the benefits and a view that they did not pay back enough of the investment.
Cost Allocation between Consumer Groups
The allocation of the cost of the network between consumer groups and/or locations is a key element, and in fact the starting point for any pricing review.
In recent months we have undertaken a review of the allocation of the costs of owning and operating the network on the basis that they could be allocated to the various lines (which we refer to as feeders) that carry energy from Grid Exit Points. The modelling of our current cost allocation against this feeder based approach has revealed what at first glance appears to be a cross subsidy from urban to rural consumers.
This is not totally unexpected as what is revealed is that the further residential and small business owners reside from major urban centres, the greater the infrastructure required to service them.
The approach of allocating costs to feeders is generally designed to provide a signal of the cost of supply so that alternative approaches can be considered by consumers. There are a number of reasons why we believe this approach is not justified, particularly in areas such as South Westland which are at the end of long sub transmission lines. Examples are:
- The further the consumers are from the urban area’s the longer fault restoration times can be. This means that the costs do not necessarily reflect the quality of service consumers may receive.
- In some areas signalling the cost of supply may result in consumers adopting inefficient alternative investments. For example, large business demands are unlikely to be able to be met by solar panel, wind or diesel generation as cost effectively as a line that already exists in the area.
- We are of the view that signalling the cost of supply for new loads on the network may have some benefit, however Westpower’s lines in general have excess capacity available for new loads, and the cost of those lines is already sunk.
- Changing current cost allocation to a feeder based approach would result in price shocks to some consumers while producing only small benefits to others. The socio-economic impacts of price changes must be taken into account when considering changes. What is important in any future pricing decisions is to not increase the level of any actual or perceived cross subsidy further.
In addition to the matters outlined above it is important to note the results of our consumer survey on pricing which was undertaken in early 2019. The results of the survey showed a clear preference from the majority of mass market consumers to pay the same amount as they do now for the same quality of supply, but through a fixed annual charge rather than a charge based on consumption.
The fact that 80% of Westpower consumers qualify for the Low User Fixed Charge means that under current regulation we are not able to provide a pricing option that meets that expectation. We are also of the view that there is sufficient anecdotal evidence to suggest that regulation will be extended to cap increases in distribution charges in the future.
On this basis we are not proposing any changes to our current pricing methodology in the immediate future, but as always will keep a watching brief on this area of the regulatory environment.
This information is produced in compliance with the Electricity Commission's Security of Supply Outage Plan (SOSOP).