A coalition of businesses has asked the Electricity Authority to delay making a final decision on the belated transmission pricing methodology review, in light of the uncertain economic climate, Marc Daalder reports
Businesses are calling for a policy change 10 years in the making to be delayed yet again due to the uncertain economic climate caused by Covid-19.
The transmission pricing methodology (TPM), which determines who pays for upgrades to the national grid and the cost of transmitting electricity through it, has long been a source of controversy. As it stands, larger electricity users pay more in transmission pricing, even if they reap no benefits from the upgrades they’re paying for.
The Tiwai Point aluminium smelter, for example, receives its power on specially-constructed lines direct from the Lake Manapouri hydroelectric station, but pays hundreds of millions each year for upgrades to the grid in Auckland and Northland.
For years now, the Electricity Authority (EA), which regulates the Electricity Code and the TPM, has been trying to negotiate a solution between big users like Tiwai, who say they’re being unfairly charged, and smaller businesses and consumers in the North Island who would bear the brunt of a redistributed pricing scheme.
A 2017 proposal which would shift to a user-pays-style methodology in which those that benefit from upgrades shoulder the brunt of the cost hit a brick wall when then-opposition MP Winston Peters denounced the suggestion that Northlanders should pay more for power and pointed out flaws in the underlying cost-benefit analysis.
In July, the EA came out with a new proposal that continued the user-pays model but subsidised the hit to the North Island by reducing the benefits for Tiwai and Meridian Energy. For months, the regulator has insisted that the end of June will be its deadline for making a final decision on the TPM reform, with an expected implementation date, according to industry observers, of 2024.
Then everything went awry. First, Tiwai Point’s multinational owners, Rio Tinto, announced a strategic review of the smelter’s viability, originally due to be completed March 31. Then, Covid-19 struck. Now, it is unclear when a decision on Tiwai’s fate – which would have a major impact on the TPM calculus – will be coming after Rio missed the March deadline and as a global economic crisis looms.
Finally, in April, the EA substantially revised downwards its estimates of the benefits of the proposed TPM reform. The 2019 cost-benefit analysis predicted net benefits totalling $2.71 billion but that has been halved in the new analysis to $1.34 billion.
Now, the TPM Group – a coalition of business groups and big companies opposed to the user-pays model like the Employers and Manufacturers Association (EMA), Federated Farmers Northland, Vector, Northpower and Trustpower – is calling for a six or 12 month delay in any decision on the TPM.
“A change of over $1b in net benefits is a substantial change which warrants further formal consultation – not just a restrictive webinar to ‘explain’ the revised CBA [cost-benefit analysis],” the TPM Group wrote in a letter to the EA on Monday.
“We note that the uncertainty created by the Covid-19 pandemic presents additional and significant challenges to conducting a robust CBA. The pandemic is having severe and widespread effects on New Zealand’s economy, and on the electricity market specifically – including on electricity demand, network investment, and the cost of capital. All of these factors are key inputs into the various models that the EA has used to estimate the benefits from TPM reform.
“In addition, the outcome of Rio Tinto’s Strategic Review into the Tiwai Point Aluminium Smelter (which was due to be announced at the end of March) is not yet known. Given the significance of the outcome of this decision to New Zealand’s electricity market, we do not consider it reasonable for the EA to proceed with such a significant variable still pending. Given that the review has already been underway (in one form or another) for many years, a further delay of 6-12 months does not seem excessive.”
EMA head of advocacy Alan McDonald put it more starkly.
“This keeps happening. This is the second major CBA that’s had to be revised considerably downwards. They don’t consult the industry. When you try and engage with them, you get the impression that they’re just going to push ahead anyway,” he said.
“These aren’t small changes they’re making, they’re quite major. We just feel that instead of aiming for a second-quarter resolution to a problem that’s been going on for over a decade now, why don’t they just do the right thing, talk to the industry and get this stuff right.”
Rob Bernau, the general manager for market design at the EA, confirmed receipt of the letter to Newsroom.
“The Authority received a letter from the TPM Group earlier this week. We are currently considering the points raised and we will respond next week. We have no comment to make at this point in time,” he said in a statement.
A spokesperson for Tiwai Point declined to comment.