29 Sep 2022
Transpower is calling for feedback on the level of investment the national electricity grid requires if it is to continue to provide a reliable and safe service while playing a critical role in enabling electrification of Aotearoa New Zealand’s economy and empowering a net zero carbon future.
Transpower will have regard to the feedback in its final proposal to the Commerce Commission on its expenditure and service performance measures for the five-year regulatory period starting on 1 April 2025. The proposal needs to be presented to the Commission by December next year.
Transpower General Manager Grid Development John Clarke said Transpower is confident of the level of work it needs to do in the next regulatory period and over the next 15 years, and how to deliver it in the most efficient way.
“We’re sharing the key elements of this plan now because feedback from customers and stakeholders will help us fine-tune our final proposal and help the Commission determine our expenditure and performance requirements for the next regulatory period,” he said.
A key consideration in the proposal is the investment required for the national electricity grid to be able to deliver on its critical role enabling electrification and the decarbonisation of the New Zealand economy.
“Our focus in the next regulatory is on the ongoing refurbishment of a grid largely built 50-70 years ago and the delivery of the service levels and investment to support the electrification of Aotearoa New Zealand’s economy,” Mr Clarke said.
“To deliver the service levels expected by our customers our assets must be at the right standard and in the right condition as we transition away from fossil fuel use. We must ensure our customers can continue to depend on the national grid as New Zealanders rely on it more and more.”
Transpower has been focused in recent years on developing its understanding of the investment required to support electrification, which has seen it defer replacement and refurbishment of some assets.
“This has meant we have been able to pass on significant savings to customers and electricity consumers,” Mr Clarke said. “The time is now right to invest in our assets and critical systems to ensure we continue to provide a reliable and safe service while enabling electrification.”
The proposal comes at a time where inflation and rising interest rates are having a significant impact on Transpower’s operating and financing costs, with interest rates set to increase to a similar level to when the 2015-2020 regulatory period was finalised. Combined with the increased emphasis on critical investment to support electrification we are forecasting a 31% increase in nominal revenue requirements.
The forecast increase in base capital and operating expenditure only drives around one-third of the revenue increase. The remainder is largely attributable to the increase in financing costs, inflation and a larger asset base. Adjusting for inflation means revenue for the fourth regulatory period will be similar to revenue over the 2015-2020 regulatory period in real terms.
The increased focus on investment combined with the rising inflation and borrowing costs is expected to increase the average household electricity bill by $5 per month from 2025. Transmission costs account for around 10% of the average electricity bill.
Mr Clarke said the investment proposal provides the most cost-effective outcome for consumers over the long term.
“Deferring investment may reduce consumers’ monthly bills by a few dollars now, but it would come at an increased cost and risk over the long term,” he said
The volume of electricity carried through the national grid will also increase as the economy electrifies, meaning the cost per unit of electricity will remain relatively static for consumers even as the overall cost rises. This will mean the increased investment will pay for itself over time.
Mr Clarke added that Transpower has been conscious of cost pressures on its customers and electricity consumers and has carefully worked through each proposed capital project and its future operating costs.
The investment proposal is on our website.
The regulatory regime
Under Part 4 of the Commerce Act, Transpower is required to provide a five-year expenditure and quality of service proposal for the Commission to review. The Commission uses this information and its own analysis to determine Transpower’s expenditure allowances and service levels, which in turn determine the revenue Transpower will need to raise from the industry.
Transpower is currently operating under its third Regulatory Control Period (RCP3) which finishes on 31 March 2025.
Consultation process
The process for the next period (RCP4), covering 1 April 2025 to 31 March 2030 is:
- Transpower consultation with customers and stakeholders on current plan from late September 2022
- Plan submitted to an independent verifier for review in March 2023
- Plan submitted to the Commission by 1 December 2023
- Commission consults on draft plan before releasing final decision in late 2024.