Energy bills need to change, to make the most of new technology.

The way electricity lines companies charge for their services is all wrong and needs to change if we are to take advantage of emerging technologies, the Electricity Authority says.

In particular, the status quo could encourage premature investment in solar panels, have perverse effects on when electric vehicles are recharged and undermine incentives to invest in battery storage.

About 26c in the dollar of the average residential consumer's power bill goes to a lines company like Vector, whose network connects those consumers to the national grid.

The service we expect in return is that all the power we need will reach us whenever we want it.


The costs networks face in meeting that expectation are driven by peak demand. But current pricing structures for the lines charge component of our power bills do not reflect this.

Typically there is a fixed component, but the lion's share - 78 per cent, on average - of the lines charge is variable and is based on consumption over a year. The more power you pull down the distributor's lines over a year, the more you pay for the connection.

The result is a misalignment of the costs a consumer imposes on the network - which is largely about how much they contribute to demand at peak times - and how much they pay - which is largely driven by how much they consume over a year.

Time-of-use meters have allowed more accurate and varied pricing models to be made available to commercial and industrial consumers.

Until recently, smart meters which (among other things) allow a consumer's maximum demand to be measured, were too expensive for the mass market.

But no longer. About 60 per cent of electricity meters are now smart meters and the proportion is rising.

The authority argues that current consumption-based pricing raises the risk of over-investment in solar panels, potentially to the tune of hundreds of millions of dollars a year.

It is not talking about people who go off-grid altogether, but about those who are content to meet a portion of their demand from photovoltaic panels on the roof, secure in the knowledge that at dinner time on a cold winter's night, the national system will still provide all the power they need.

Under current consumption-based line charges they will pay significantly less for that service than their neighbours who have not gone solar, even though their share of the network's common costs is similar.

Although its cost has come down a lot, solar power is still relatively expensive. At around $200 a megawatt hour, its long-run marginal cost is 2.5 times that of new generation added to the national system, which these days is almost entirely renewable.

So there is no climate-based case for a cross-subsidy at the expense of what are likely to be less affluent households - as the authority points out in a "just saying" sort of way.

It is not opposed to solar power but seems to regard it as technology whose time has not yet come, citing International Energy Agency projections that the price of photovoltaic panels will fall by around 75 per cent over the next 20 years. The authority's chief executive, Carl Hansen, compared investing in panels now to buying a plasma TV when they were new to the market and cost $10,000.

Another area where consumption-based pricing sends entirely the wrong signal relates to electric vehicles.

If all the cars in New Zealand were electric, it would increase total electricity demand by a less-than-scary 11 per cent, or 4500 gigawatt hours a year, the Electricity Authority estimates.

If all the cars in New Zealand were electric, it would increase total electricity demand by a less-than-scary 11 per cent.


But what matters for the lines networks is not annual demand but peak demand.

The Ministry of Business, Innovation and Employment forecasts there will be up to 150,000 electric vehicles on New Zealand roads in 10 years time. Although that would be less than 6 per cent of all light vehicles, it is enough to increase peak demand by around 5 per cent if they were all plugged into the mains as soon as people got home from work.

The potential cost of meeting that extra load on the network strengthens the case for pricing which reflects time of use, not annual consumption.

Mighty River Power's retail arm, Mercury Energy, already offers a discount of 30 per cent for people recharging electric car batteries off-peak.

But generator/retailers such as Mighty River only control about half of the residential consumer's power bill.

The lines companies, which at this stage are virtually immune from competitive pressure to price efficiently, also need to come to the party.

They are incentivised to do so by the desire to avoid costly investment to upgrade the capacity of their networks.

One way of shifting load away from peak times would be to invest in battery storage.

The economics of this are discouraging, however, at least at the consumer level.

Based on proposed pricing for the Tesla Powerwall battery, the authority estimates a battery capable of storing 7kWh would cost about $6500 installed. Currently available price differentials between day and night tariffs would save consumers only $150 to $300 a year - not an attractive return - but the key word there is "currently".

The lines companies are already debating these issues among themselves.

And the Electricity Authority at this early stage in its consultation process is offering no recommendations about what alternative "service-based" pricing structures might look like, beyond the general observation that giving consumers options to choose among is good.

There will be no one-size-fits-all prescription. What makes sense in a fast-growing area like Auckland is unlikely to be suitable for a thinly populated regional network where electricity demand might even be falling.

It is clearly right to stress the need for lines companies to consult their communities widely on the issue.

The Lines Company, which serves the King Country, moved to a peak demand pricing methodology in 2007, which triggered a petition to Parliament last year, seeking an inquiry into its pricing model.

The commerce select committee found no fault with the legality of the change, nor its economic rationale, but was critical of its being rolled out without the necessary smart technology to take advantage of it, acknowledged that people on low or fixed incomes had fewer options to alter their behaviour as power consumers and was critical of The Lines Company's "deficient communications strategy."

See the latest Electricity Authority consultation paper here: