EA to prepare cost-benefit analysis as part of TPM review

Media release:

Electricity Authority to prepare new cost-benefit analysis as part of TPM review

26 April 2017

The Electricity Authority has decided to prepare a new cost-benefit analysis as part of its review of Transmission Pricing Methodology (TPM) guidelines, which will push the timetable for a final decision into 2018.

Chief Executive Carl Hansen says the TPM review is part of the Authority’s statutory role to get the best outcomes for electricity consumers through the right regulatory settings.

The Authority has been consulting with the electricity sector on proposed new guidelines for setting transmission prices, which included an evaluation of the costs and benefits of the proposed changes, prepared by Oakley Greenwood – an economics consultancy in Australia.

“Our decision to prepare a new cost-benefit analysis follows our discovery of further errors in the calculations in Oakley Greenwood’s model,” Mr Hansen says.

The Authority identified errors in the model in February 2017 and instructed Oakley Greenwood to correct them and explain the situation to those involved in the TPM review.

Upon further review, the Authority found more calculation errors in the model and concluded it was no longer reasonable to rely on the cost-benefit analysis in the Authority's decision-making.

Mr Hansen says a new cost-benefit analysis, together with the views of those involved in the TPM review, will help the Authority to make the right decisions for consumers.

He says the Authority had taken submitters’ views into account in the interrogation of Oakley Greenwood’s model. However, it was the errors the Authority discovered recently that led the Authority to decide that a new assessment of costs and benefits was needed to make robust decisions.

“We found errors in cell formulas, there were also incorrect assumptions about generation costs, retirement of certain generators, transmission charges and the location of new generation plant. It wasn’t clear that the results of this cost-benefit analysis were an over estimate, an under estimate or about right.”

Mr Hansen says the Authority is committed to the TPM review because the current guidelines are not durable, particularly in the face of recent developments in technology such as rapidly declining prices for large-scale batteries.

“The current methodology encourages transmission customers to make wasteful investments merely to shift costs onto others. This activity results in higher prices for consumers who are unable to adjust their electricity demand, and technology developments are likely to magnify these problems in the near future.”

Mr Hansen says the Authority is still considering its options relating to the abandoned cost-benefit model, including recovery of costs, which are a very small part of the Authority’s total expenditure.

The Authority expects the new cost-benefit model will be ready for consultation in late 2017 or early 2018 with the intention of making a final decision on the review in the first half of 2018, and implementing any new guidelines by April 2020.

More information is available www.ea.govt.nz/development/work-programme/pricing-cost-allocation/transmission-pricing-review/

© Scoop Media