New at Castalia

Castalia Evaluates Proposed Electricity Transmission Pricing Methodology in New Zealand

The Electricity Authority released a consultation paper in October 2012 that proposes substantial changes to the way that the costs of electricity transmission are allocated.  Genesis Energy engaged Castalia to review the proposed transmission pricing methodology (TPM), and to specifically consider whether the proposed TPM is likely to provide benefits that outweigh its costs. Download Castalia's report here.

To complete this review, Castalia developed a "bottom up" framework for assessing the likely benefits and costs of any change. Castalia then:

  • Assessed each of the components of the proposed TPM, at all levels of the hierarchy in the Authority's economic decision-making framework;
  • Identified and assessed the discrete impacts that we expect the TPM proposal to have on efficiency, competition, and reliability (including the risks of unintended and perverse outcomes); and
  • Quantified each of these discrete impacts in turn.

Applying this analytical framework, Castalia found that the proposed TPM does not evaluate favourably in a cost benefit analysis.

The proposed TPM is based around the insight that wholesale market outcomes can be used to identify the beneficiaries of transmission, and how much they benefit. While this may provide small improvements in investment decisions, the proposed beneficiary pays charge (known as the SPD charge) would introduce distortions in the wholesale and retail electricity markets that would eliminate any gains from targeting costs towards the beneficiaries of transmission. In particular, the volatility introduced by the proposed TPM will create new risks and costs for retailers - risks they are not well placed to pass through or manage. This will result in a decline in the interest of parties wanting to enter or compete in the retail market, particularly among small players that will not have the cash reserves to manage the risk, reducing retail competition in the market.

News Archive