TPM Options Review

On 16 June 2015 the Electricity Authority (EA) released that latest in its series of working papers: the Transmission Pricing Methodology Review: TPM options working paper (the “TPM Options Paper”). It is understood that the EA intends the TPM Options paper to be the last of the working papers, with the results of the current consultation enabling it to move to selecting a specific TPM option to assess against the current TPM. In a somewhat unusual situation, ASEC prepared three responses to the TPM Options Paper:

• A report for the Independent Electricity Generators Association (IEGA);
• A report for Electra (a distributor) and King Country Energy (a small generator and retailer and member of the IEGA); and
• A letter from ASEC on the treatment of the Loss and Constraints Excess (LCE).

The EA’s proposals created sufficient alignment of interest between the parties that the three responses could be prepared without risk of arguing at cross purposes.

Traditional analyses of embedded generation are typically focussed on short-run effects, concerned to ensure that pricing does not provide incentives to avoid or reduce use of the current transmission system. A long-term view, on the other hand, suggests that this approach may not be correct and may result in being locked in to existing technologies and existing network structures.

The report for the IEGA develops a theoretical framework for embedded generation within the construct of a planner seeking to optimise the mix of local generation, local transmission, and remote generation for a distribution network. The same framework readily allows energy efficiency and other demand management initiatives.

Both the IEGA and Electra/KCE reports address a wide range of issues that arise with the various proposed TPM Options. Perhaps the greatest concern is that the allocation of the proposed Residual charge results in an under-allocation of approximately $52m to the directly-connected industrial customers, which will instead be paid by the consumers connected to distribution networks. The same allocations provide an incentive for larger industrial consumers to disconnect from distribution networks and connect to the transmission network.

The letter on the treatment of the Loss and Constraints Excess reinforces the submission made in March 2014. The EA proposes to credit the LCE that arises on Connection and Deeper Connection assets to the parties that pay for those assets, but credit the remainder of the LCE in bulk against Transpower’s revenue requirement. The treatment of LCE on Connection and Deeper Connection assets is appropriate, but the treatment of the remainder is not. The proposed TPM Options also include an “Area of Benefit” charge to recover the cost of specific transmission investments. The parties that pay for those new assets should also receive the LCE generated on those assets.

For more detail on these issues and more, see the relevant submissions:

• report for the Independent Electricity Generators Association;
• report for Electra and King Country Energy; and
• ASEC submission on the Loss and Constraints Excess.