Consumers in the upper North Island would face the biggest increase in national electricity grid charges under the Electricity Authority's proposed changes to transmission pricing while the Rio Tinto-controlled aluminium smelter at Tiwai Point would get less than half the benefit it may have hoped for.

The authority released a consultation paper on transmission pricing that proposes replacing the current two main charges - $150 million a year for the HVDC link between the North and South islands and an interconnection charge of $639 million a year, with two new charges: an area-of-benefit (AoB) charge of $296 million and a residual charge for Transpower's costs of $500 million a year, spread across the country.

Because consumers in Auckland and the Far North have received the biggest benefits from upgrades of the national grid, ensuring the nation's biggest city has one of the most reliable power supplies, they would face the biggest increases under such a regime, the authority said.

A 'heat map' of increased charges for an average household show the upper West Coast and areas in Canterbury south of Christchurch would also face higher charges.


But the authority says the overall impact on electricity consumers would be "very modest", amounting to a 0.5 percent average increase, or $11 a year.

The current transmission pricing methodology (TPM) was flawed because it isn't service-based and doesn't reflect actual costs, authority chief executive Carl Hansen told a media briefing in Wellington. He likened the system to having a set airfare for a flight anywhere in New Zealand, no matter the distance, where even people who didn't fly were charged.

The authority is embarking on 10 weeks of consultation over the proposed changes, aiming to have final decisions by October. It would then develop a fully operational new methodology between 2017 and 2019, with the aim to have it in place for April 1, 2019.

See a brochure explaining the process here:

The issue has been running for years without resolution and centres on whether South Island power generators and consumers pay too much to access the grid, given $2 billion of upgrades over the past five years has bolstered security of supply for North Island customers.

A chart released with the briefing shows the biggest decrease in charges would be for South Island generators, who would no longer be required to carry all of the costs of the HVDC link. By contrast, the largest increase in charges would be for the upper North Island mass-market load, while charges for the lower North Island mass-market load would fall. The South Island mass-market load would face a modest increase.

The smelter would get an estimated benefit of $20.8 million - less than half the $50 million upside mooted in proposals the authority put out for discussion last year. The smelter could also benefit from a separate but interlinked proposal to expand the so-called prudent discount policy, which provides discounts to generators who are transmission customers but are looking to exit the grid in favour of a local distribution network.

The Tiwai Point smelter's operator has viewed the decision as an important factor in determining whether it can continue to run at full capacity, scale back production, or quit the New Zealand operation altogether.

Other major industrial users would face higher charges.

The Tiwai Point aluminium smelter will get $20.8m of benefit from the proposed new way of charging for the national power grid.
The Tiwai Point aluminium smelter will get $20.8m of benefit from the proposed new way of charging for the national power grid.

Electricity Authority chairman Brent Layton said he "doesn't expect much cheering" for the proposals. "We'll have a 100 percent success rate in not pleasing everybody. For every individual there's a perfect regime - everyone else pays."

The authority was at pains to show that the impact on consumers is much more modest than was proposed in its base option released last year. Analysis from Australian consulting firm Oakley Greenwood showed $213 million of net benefits to the economy over 20 years if the changes were introduced compared to the status quo.

A chart showing the impact of the proposals by customer group compared to the status quo shows KiwiRail would face the biggest increase - a jump to $57 per MWh. Prices also jump for NZ Refining, Vector, Northpower and Top Energy, who were the only grid customers whose indicative charges would be above the indicative volume-weighted average of $20/MWh.

The second paper, on distributed generation pricing principles (DGPPs), says current pricing rules for distributed generation are bad for consumers because distributed generators are getting avoided cost of transmission (ACOT) payments from distributors even when they don't demonstrably reduce transmission costs.

The authority estimates consumers pay $25 million to $35 million a year in unnecessarily high charges with no corresponding benefit. And the ACOT problem has become sharply worse in recent years. It proposes removing the DGPPs and having Transpower administer payments only to distributed generators that reduce transmission costs.