Efficient Pricing Road Map

Background

This document updates progress being made towards the introduction of more efficient distribution pricing. It is a departure from the previous timeline based road maps we have published, reflecting that we have moved further along in the process of establishing efficient 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.

The work of the Electricity Review Panel has touched on the potential for the introduction of more cost reflective pricing to bring with it the risk of price shocks as consumers move on to new price options. Minimising any price shocks to consumers will be a focus for us as we transition our price plans.

Below we detail the types of matters we are considering as we design a new price structure.

Westpower Consumer Profile

Westpower’s consumers currently fall into the following groups:

Table 1

Group

Number of Consumers

Description

Commentary

Domestic Category 1

10,912

Consumers with load less than 15kVA

Represents the largest number of consumers. 80% of these consumers use less than 8,000kWh of electricity a year and therefore qualify for the Low User Fixed Charge of 15c per day.

Non Domestic Category 1

1,788

Consumers with load less than 15kVA

Represents small non-domestic consumers

Non Domestic Category 2 Medium

887  

Consumers with load greater than 15kVA and less than 200kVA

Represents small to medium business consumers

Non Domestic Category 2 Large

17

Consumers with load greater than 100kVA and less than 200kVA

Represents medium businesses who typically have higher consumption than category 1 but not necessarily high demand

Non Domestic Category 3

24

Consumers with load greater than 200kVA

Bulk supply businesses with tariffs based on demand on the network and coincident demand at the source Grid Exit Point

Non Domestic Category 4

1

Large Bulk Supply

Large bulk supply businesses  with tariffs based on demand on the network and coincident demand at the source Grid Exit Point

 

Group

Number of Consumers

Description

Commentary

Non Domestic Category 5

1

Otira

An isolated GXP not interconnected to the rest of Westpower’s network.

 

Current Pricing Options

Westpower’s current pricing regime represent a mixture of options, some of which are cost reflective in nature, and some of which are not. As mentioned in the table above, 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.

The table above also shows that consumers in categories 3 and above are charged on capacity or demand basis, using a time of use approach which is cost reflective in nature. In addition to those charges, there are optional day/night tariff’s and off peak water heating charges which have an element of cost reflectivity.

Disruptive Technology

Commonly referred to in industry circles as disruptive technologies, the likes of smart meters, photovoltaic cells and electric vehicles are set to have an impact on EDB’s across the country. These technologies can also have unique impacts which may differ from region to region for various reasons. Each of these technologies are discussed briefly below:

Table 2

Technology

Use

Penetration

Commentary

Smart Meters

Potentially provide access to time of use pricing options if offered by retailers

Approx 30% of Network

We estimate that smart meters will not be a rolled out to all consumers for at least another two years, which creates an obstacle to both ToU (Time of Use) charging and to access to data which would allow greater analysis of pricing options

Photovoltaics (PV’s)

To provide distributed generation at generally small scale home use particularly when coupled with  battery storage

Approx 30 sites on the network with only slow growth being seen

PV’s do not reduce the fixed costs associated with the provision of services, but can create inequities in the allocation of the cost of the service to individual households where that allocation is based on consumption. Two houses in the same street may both have the same potential peak demand on the network so there is an argument that both should contribute the same to the cost of providing that service level.

 

Technology

Use

Penetration

Commentary

Electric Vehicles (EV’s)

Charged at home or on the street EV’s can create changes in demand profile that requires management

Approx 10 EV’s in the region

They key issue here for EDB’s is the timing of the recharging of EV’s. Controlling EV’s to be charged off peak (similar to hot water heating) will become critical in the future.  Ensuring that load is able to be managed will be critical as EV penetration increases.

 

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.

Westpower is currently in the process of developing a Cost of Supply Model (COSM) which will provide the ability to model various approaches to developing consumer groups (or costs drivers) and associated pricing options to allow a view of what might be the optimum way to allocate network costs on a benefits based and cost reflective basis.

This will also allow us to understand if any significant shifts in pricing are likely to occur which might create difficulties for consumers.

Once this work is complete we will be able to settle on a pricing alternative that can be shared with consumers and other stakeholders before being implemented.  

Future Pricing Options

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.

Based on consumer feedback, one of the key changes that is under consideration is a move to a higher fixed charge and a lower variable charge, which reflects the fixed cost nature of the network. This also goes some way in addressing the issue created by PV’s as set out in table 2.

Changing the ratio between fixed and variable charges is likely to have pricing impacts that will affect low users, so understanding this impact will be a key issue for us.

Also of note is that the LUFC will need to be either removed by Government or significantly altered to allow this approach.

Where disruptive technologies are in play (particularly PV’s), the move to higher fixed prices is likely to be a key consideration.

Next Steps

Westpower intends by September 2019 to be in a position to release to stakeholders a discussion document on future pricing options.

 

This information is produced in compliance with the Electricity Commission's Security of Supply Outage Plan (SOSOP). All reports have been published in PDF format.

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