09 February 2014

ASEC Report finds Benefits from Distributed Generation and ACOT Payments

A new report by Andrew Shelley Economic Consulting Ltd (ASEC) finds that distributed generation (DG) provides significant benefits, and that Avoided Cost of Transmission (ACOT) payments made to distributed generation embedded within distribution networks also provide benefits. ACOT payments are made to generators embedded within a distribution network and which generate at peak periods, thereby avoiding transmission charges based on peak.

In November 2013 the Electricity Authority issued a "working paper" which, in essence, claims that there are little or no benefits obtained from distributed generation that is embedded within distribution networks, and indicating that such payments should be eliminated. Andrew Shelley Economic Consulting Ltd (ASEC) was retained by the Independent Electricity Generators Association (IEGA) to examine the Authority's analysis and, where relevant, to provide estimates of benefits derived from distributed and embedded generation and from ACOT payments themselves.

ASEC finds that:
  • A focus on the "Long Term Benefit of Consumers", which is the Authority's statutory purpose, requires a focus on dynamic efficiency and long term investment incentives rather than the Authority's apparent concern with short-run concepts of productive efficiency;
  • Retail electricity markets are regional, and distributed generation has an important role to play in enhancing the competitiveness of those markets;
  • Transmission investment does take account of distributed generation, and distributed generation does have the effect of reducing or deferring transmission investment. If the Authority has concerns about the transmission investment process then the appropriate forum would be to engage with the Commerce Commission in the review of the Transpower Capital Expenditure Input Methodology;
  • Previous studies have shown that embedded generation does have positive net benefits in the distribution network, but the Authority's analysis completely ignores this work;
  • A model of transmission investment suggests that there can be significant positive benefits from distributed and embedded generation avoiding transmission investment.
Given a simple model, low levels of DG penetration may result in net benefits from avoided transmission investment of between $3.94 and $7.58 per Installation Control Point (ICP), whereas high levels of DG penetration may result in net benefits of between $15.50/ICP and $29.82/ICP. To the extent that ACOT prevents market failure by enabling DG to internalise the benefits of reduced future transmission investment and reducing the relative risk of DG cash flows, at high levels of DG penetration the benefits induced by ACOT exceed the $10.29 per household cost calculated by the Authority. This suggests that if the Authority’s focus is on long term benefits to consumers, it should be seeking to reduce the barriers to increased DG penetration rather than reducing or removing ACOT payments.

To read more of the ASEC report, download the report here. The IEGA's covering submission is available here.