The electricity sector is changing pretty rapidly and for an industry that thinks building a dam in 15 yrs is ‘rapid’, its probably a bit scary. In my last blog we talked about the disruption in the retail electricity sector with the emergence of new players like Flick Electric, now I’d like to look at the massive changes about to hit the Electricity Distribution Businesses (called EDBs, network companies, or just distributors).
Most consumers have no idea who their electricity distributor is (can you name yours?), they assume that whoever they pay their monthly electricity bill to has the sole responsibility for making the electricity and getting it to their house. This of course is not true and throughout NZ there are 29 separate distribution companies (yes, 29 to service 2 million homes and businesses) that own and invest in poles, wires, transformers, and other big expensive stuff all called ‘assets’, and of course, people, that keep the electricity flowing. [Most of the generators (hydro dams, geothermal plants, wind farms, etc.) in New Zealand are connected to the national transmission grid run by the government-owned Transpower – that’s another story].
The job of the distribution companies is to ensure that the electricity flows from the national transmission grid to you – always; And we take totally for granted that when we flick that switch the lights will go on – always.
There is only one distribution company in your area and they own the one set of wires that go into your house. Clearly, no one can compete with them because it would be ridiculously expensive for a competitor to duplicate the infrastructure to every home. So your distribution company is a monopoly and so they are (mostly) regulated by the Commerce Commission to ensure that they are efficient and only charge a fair price for their services.
Your individual home or business distribution charges are calculated on an amount to cover the installation, upkeep, and replacement of all the assets with a small return on that investment. The charges are made up of a fixed charge as well as an amount based on the volume of electricity flowing through the wires to your house, a variable charge [the exception to this is The Lines Company in the central North Island]. This is why your holiday home, even when empty with the power off, still has a monthly electricity bill (the fixed charge). It is also why some homeowners, with solar panels, get confused about the cost of electricity they buy from their retailer (wholesale electricity price + distribution costs + some fees & levies) and the price offered to them if they sell solar-generated power back to the grid (electricity price only).
Distributors are in the middle of major disruption right now and the outcomes are going to affect all of us. The main problem is that fancy new (and disruptive) technologies like solar panels and home battery storage, not to mention electric vehicles, are on a very rapid increase. This changes everything for the distributor, power now flows two ways on a network designed for one-way flow. Some consumers can generate and store their own electricity and not need the network as much which reduces the amount of electricity flowing through the lines, which reduces the distributor’s income from its variable charge. If income is reduced the distributor must increase its overall charges to be able to maintain its network and guarantee a supply of electricity on cold, wet, snow blown winter nights when everybody has their heaters and electric clothes dryers on full, this, in turn, convinces more consumers to install new technologies like solar and batteries.
So the fix, as far as the industry is concerned, is to look at the way consumers pay for their electricity distribution and to see if there is a better way of doing it so it’s fair to consumers and the distributors. For example, should they have different prices throughout the day (every half hour like the wholesale market, based on demand), not just a night or weekend rate, to reflect the cost of providing electricity at peak times? Since the distributors costs are mainly driven by their need to be able to transport the volume of electricity required at the worst possible times (cold winter nights) or should they charge for the maximum volume you need which can be based on your historical peak demand? And there are a few other charging options to look at. If you think of the methods used to charge for your Internet connection you are getting close to some of the options being considered.
So all this navel-gazing has led distribution companies to realise they are no longer pure monopolies because they can be replaced, totally or partially, by new technologies and that they need to be able to raise money from a variety of services to enable them to continue to provide service at the level they are now (there are a number of regulatory issues here around other revenue streams because they are considered monopolies, which they aren’t totally).
So what does this all mean? Big changes are coming to the way distribution companies do business so they are going to come out of the shadows and become much bigger public players in the electricity markets. And the subject of my next blog. Electricity retailers, beware!