The price of power: monopoly management of the national grid benefits the few

22 October 2019

Our national grid pricing needs solutions. And after 10 years of pondering its navel, the Electricity Authority (EA), the Government agency charged with ensuring an efficient and effective electricity industry, plans to release a paper that may or may not gain industry consensus and may or may not actually be the right answer. 

A decade in, the EA claims it is past the point where it is seeking an industry consensus, and advises that “you’ll have to show a factual error in our assumptions to change our views.”   

This paper attempts to address the question, who pays how much for the right to access the electricity transmission backbone that is the national grid.

Just how we derive economic efficiency by perpetuating monopolies, stifling innovation and transferring the costs of transmission to regional small businesses and consumers, is beyond me.  

This backbone is owned and operated by a Government-owned monopoly called Transpower, and connects our generation assets to the whole country.

The trouble with essential monopolies like the national grid is that they exert enormous political influence. Combine this influence with that of other essential monopolies such as the electricity generators who own our hydro dams, and massive energy consumers like the Bluff aluminium smelter, and the EA’s findings are wholly predictable.   

This draft report, citing “economic value created”, suggests transmission costs be moved away from certain major users – notably the Bluff aluminium smelter – and should instead fall most heavily on domestic consumers and small businesses farthest from the point of generation. Meanwhile the hydro dam owners (the generators) will continue to utilise the transmission network without paying anything like the true cost of doing so.    

When justifying their recommendations, the gurus at the Electricity Authority have estimated net economic benefits to all parties involved in the electricity market, of between $200 million and $6.4 billion by 2049.  There are clear signs of an agency that has lost track of the most basic financial disciplines, when they can seriously suggest that a business case benefit that has an estimated range of $6.2 billion over 30 long years is somehow rational rather than looking suspiciously like a complete guess.  

Virtually all these barely-credible benefits are assumed to come via increases in market efficiency. Just how we derive economic efficiency by perpetuating monopolies, stifling innovation and transferring the costs of transmission to regional small businesses and consumers, is beyond me.  

Disincentives to use the national grid

The EA’s proposed pricing mechanism builds in disincentives for those seeking to find alternative methods of transmitting, storing and using electricity. The EA will do this in the following two ways:

  1. By offering special discounts to people considering using innovations such as battery and solar to avoid using the grid. These discounts will be funded by transferring these costs to other consumers (in other words, not by reducing Transpower’s profits); and
  2. By reducing peak load pricing. This is the mechanism whereby we pay more for electricity transmission at times when the grid is most heavily used: think winter cold snaps and dinner time. Peak load pricing offers a price incentive to those who want to store and use their own electricity at a time when it is most expensive on the national grid. No peak load pricing, no incentive to innovate.   

The national grid was bought and paid for over decades by all the taxpayers of New Zealand. This asset was designed to reliably transport one of our most essential services, electricity, and to share the costs evenly to the benefit of all. 

Perhaps the Electricity Authority should be paying more attention to mechanisms and policies that have seen electricity prices soar over the past two decades, instead of continuing this futile, decade-long attempt to fix a transmission pricing problem that didn’t exist in the first place.