30 September 2019SubmissionsElectricity AuthorityPO Box 10041WELLINGTON 6143via e-mail: [email protected] Pricing Methodology Review: 2019 Issues PaperGreat South, Invercargill City Council, Southland District Council, Gore District Council and EnvironmentSouthland appreciates the opportunity to provide a submission to the Electricity Authority on itsconsultation paper, Transmission Pricing Methodology: Issues Paper 23 July 2019.Summary Changes to the TPM are long overdue and should be implemented without delay.The Residual Charge masks the true cost of transmission and should be reduced to reflect theareas of benefit.The Price Cap should be removed as its existence means that consumers continue to pay fortransmission assets that they do not receive any benefit from.This submission is made by Great South on behalf of the Mayors of Southland and Chairman ofEnvironment Southland representing the views of the combined Councils as well as Southland businessesand consumers.Great South is the Southland Regional Development Agency and acts independently to achieve itsshareholders’ aspirations contained within their annual letter of expectation. Great South works closelywith regional businesses as part of its role in delivering the Regional Business Partners Network. GreatSouth, formerly Venture Southland, has been actively involved in energy related matters since it publishedSouthland’s first Energy Strategy in 2003 and has since developed, in conjunction with industry andcommunity, two further Energy Strategies. It has also made multiple submissions on Transmission PricingMethodology (TPM), particularly in the last five years, each involving wide consultation. Accordingly, webelieve Great South is qualified to reflect the views of the parties affected by the current TransmissionPricing Methodology.The submitters acknowledge the Electricity Authorities role to promote competition in, reliable supply by,and the efficient operation of, the electricity industry in New Zealand for the long-term benefit ofconsumers and acknowledge the Authority’s duty to ensure that the correct regulatory frameworks are inplace to achieve a fair and equitable Transmission Pricing Methodology.143 Spey Street, PO Box 1306, Invercargill, Southland, New ZealandPhone 64 3 211 1400 Email [email protected]

Transmission Pricing Methodology Review: 2019 Issues PaperSouthland1.Southland has a population of 97,500 and consistently punches above its economic weightproducing or processing 15% of all of New Zealand’s tradeable exports. The region is highlyexposed to international commodity prices. Primary sector businesses, processors, exporters,dairy and aluminium production are particularly impacted. Business seek efficiencies in all aspectsof their activities.2. Currently South Island consumers have limited energy options and are specifically unable to accesscost-effective, alternative energy such as reticulated natural gas and consumers rely heavily onelectricity for space heating and cooking.3. In terms of electricity infrastructure, Southland sits at the bottom of a long and thin electricitytransmission grid, close to significant sources of renewable electricity generation; in fact around22% of all electricity generated in New Zealand is generated south of Cromwell.4. Despite the proximity to generation, under the current allocation of costs Southland must pay forthe cost of transmitting electricity 1,600 kilometres to the upper North Island to supply by far thiscountry’s largest population centre and one that is experiencing rapid and significant growth. Wenote that nearly 40% of all New Zealanders live in Auckland, or Northland, distant from significantgeneration necessitating extensive transmission infrastructure.Unfair investment subsidisation5. Since 2004, 1.3 billion has been spent making sure Auckland and Northland have the transmissioninfrastructure required to keep their lights on. There is enough transmission capacity remaining inthese investments to ensure that Auckland can keep growing and industry in Northland candevelop and expand.6. The financial effect of this investment, however, has added 220m to Transpower’s revenueexpectations, yet only 39% of this cost is paid by the upper North Island consumers, leaving thelower North Island and South Island consumers paying 61% for the grid investment in the Aucklandarea. The effect of this approach is that grid investment cost is socialised across consumers thatdo not receive any benefit from the investment.7. Currently transmission costs show a strong bias against the South Island. Based on their bookvalues, 80% of the transmission assets are located in the North Island and 20% in the South Island.However, South Island consumers pay 34% of the costs. This is an inequitable situation that needsto be remedied.Renewable energy8. The current practice of charging South Island generators for meeting the costs of the Cook Straitcable is supressing investment in new South Island renewable electricity generation, locking NewZealand into a future of meeting reserve generation with North Island fossil-fuelled generation.This method of transmission pricing seems to be out of step with New Zealand’s widercommitment to meeting climate-change emission reduction targets. We acknowledge thatemissions reduction is currently beyond the Electricity Authority’s mandate, but an efficientelectricity network and transmission system will be a significant enabler of decarbonising oureconomy

Transmission Pricing Methodology Review: 2019 Issues Paper9. The dairy, meat and food processing industries, which predominate in Southland, are consideringthe introduction of high temperature heat pumps and contemplating low emissions processing, allof which will require greater investment in renewable electricity generation.10. Regulatory certainty and the consistency of treatment of the South Island’s HVDC and HVAC asproposed in the July 2019 TPM Issues Paper would go a long way towards stimulating renewablegeneration investment in the South Island by removing what is effectively a 10% tax on SouthIsland generators. This approach is supported by the submitters.11. There is a greater need for value-added processing as exporters move from commodity trade tohigher value exports, which are less exposed to the vagaries of commodity price fluctuations. Highvalue exports are less impacted by transport prices are expected to increase as the internationalshipping fleet transitions from heavy fuel oils to diesel from 2020 onwards, which will increase thefuel and carbon cost to transport. The investment required to support such initiatives and newprocessing opportunities requires regulator certainty and the availability of increasing amounts ofelectricity.Tiwai Point Aluminium Smelter12. The Tiwai Point aluminium smelter produces one of the world’s lowest carbon emissions,aluminium. This lightweight metal is required by the emerging EV and alternative fuel transportfleets. The aluminium produced is an infinitely recyclable metal which meets the objective ofproduct stewardship of a true circular economy. The Tiwai smelting process is also with one of theworld’s lowest carbon emitting processes at 1.9 tons of carbon per ton of metal produced asopposed to the industry standard at around 15 tons of carbon per ton of metal produced.13. Historically, much has been made of energy consumed by large users such as Tiwai aluminiumsmelter. However, the smelter pays almost the total book value of the Manapouri to Tiwai Pointtransmission line annually. Indeed, the Tiwai Point aluminium smelter has used largely the samegrid infrastructure since its operation began in 1971, but has faced huge increases in transmissioncosts since the implementation of the current TPM.14. In the case of the Tiwai Point aluminium smelter, it has faced nearly 200 million in increasedtransmission costs since 2008. Much of this is to provide revenue to Transpower for assets in thenorth of the North Island. Overpayments will never be recouped by the smelter, and make it lesscommercially sustainable.15. In 2014 Transpower’s book value for the transmission lines connecting Manapouri power stationwith the Tiwai Point smelter was 72 million – this means that transmission charges have beenrecovering almost the entire book value of the main piece of infrastructure the smelter uses yearon year. NZAS has estimated that the payback time for them to overbuild their own privatetransmission line from West Arm, Manapouri to the smelter is under two years.16. The smelter provides the base load necessary to enable grid stability, a factor that is important asmore intermittent renewable generation comes on stream. The smelter also assists with electricitydemand management.

Transmission Pricing Methodology Review: 2019 Issues PaperBenefits based charging17. Southland strongly supports reform of the transmission pricing methodology (TPM) and agreesthat reform is necessary and urgent. It believes that consumers should pay for the transmissionassets they benefit from and not pay for those they do not use.18. Consumers in the lower North Island and the South Island have for the most part been overchargedover the past eleven years while the upper North Islanders in particular have been undercharged.This situation has been driven by rapid growth and the need for substantial investments in theupper North Island grid, particularly since 2008.19. We agree with the introduction of a benefits based charge to recover the cost of new gridinvestments, but believe that future charges should include recently constructed assets.20. We believe the benefits based charge should be applied as widely as possible to all existing assets,as until it is, some consumers will continue to pay large amounts for transmission assets they don’tbenefit from.21. We acknowledge that for consumers who are enjoying subsidised rates for the assets will notwelcome increased costs; however, consumers now paying for assets that do not benefit them arecurrently unhappy with carrying an unfair burden.Residual charge and price cap22. Our concern is that the benefit of transmission efficiency gains achieved by consuming energyclose to the point of generation will be lost unless the ‘residual charge’ reflects the true cost oftransmission. Should this situation be left unaddressed then there is likely to be perverseconsequences that in effect incentivises investment which is inefficient in areas distant fromgeneration and potentially within areas that already have overloaded or weak transmissioninfrastructure. As it stands, any new electricity-intensive industry contemplating starting up inNew Zealand would find its electricity costs to be lowest if it were to establish itself near Auckland,in spite of incurring the highest energy loss in transmission, rather than in Southland adjacent toa renewable power station incurring almost no transmission losses.23. We believe the residual charge is too large and does not deliver relief for the consumers who havebeen overcharged for a decade and who, under this proposal, will continue to be overcharged formany years after it is implemented, which is estimated to be 2024 at the earliest. Accordingly,Transpower should be required to implement systems that give effect to a revised TPM well within5 years and it is suggested that a reasonable implementation time be 2½ to 3 years, following afinal decision on the TPM.24. The introduction of a price cap to soften the effect of price increases to consumers who have beennot been paying for the assets they benefit from and in some instances avoiding interconnectioncharges altogether, will need to be effectively subsidised by other customers. This would beunacceptable to consumers who have faced large and unchecked increases over the past decade.25. Tiwai Point aluminium smelter, who would contribute over 1 million per annum to pay for thecap to other customers’ prices, did not enjoy the comfort of a price cap to soften their annualincreases since 2008 of between 3 and 30 million dollars per annum. As a trade-exposed

Transmission Pricing Methodology Review: 2019 Issues Papercommodities business, the Tiwai Point smelter cannot pass those costs on to its customers andhas no option but to absorb them. This makes achieving commercial sustainability very difficult.Transition period26. Southland industry and consumers have been overpaying for transmission assets for over adecade. The currently proposed reform does not deliver the deserved relief from these overpayments and, with expected implementation, not until 2024. This situation is further exacerbatedbecause a large amount of assets will still be deemed to fit within the residual charge: South Islandbusiness will continue to pay for grid assets they do not derive benefit from and will continue tomake these overpayments for many years to come.27. We do not believe a transitioning of the TPM is consistent with the Authority’s statutory objectiveas it would allow inefficient prices to persist. Southland is already paying for infrastructure, fromwhich it gets no benefit, and has been doing so for the past eleven years. While we understandthat some economically disadvantaged customers might find it hard to face higher prices, thereare already disadvantaged customers paying prices that are inefficiently high, and any transitionwould mean they have to keep on paying them until a new TPM is fully implemented. Energypoverty is often raised as a reason for not effecting changes. Fortunately it is not within the veryspecific mandate set for the Authority to prioritise one party’s private wealth impacts overanother’s; accordingly, the TPM Review is not the appropriate place to address social policy issuesof energy poverty. However, the establishment of an efficient TPM will stimulate much neededchange providing the confidence to invest in a greater range of renewable energy and value addeddecarbonising investment. Therefore the submitters request that the proposed TPM reforms beimplemented without delay.Other matters28. There are a number of historic transmission investments made by Transpower that have failed tomeet the returns anticipated in their respective investment business cases. These investmentsshould be written off and Southland urges the Electricity Authority to recommend this action toensure that these poor investments do not continue to be funded by consumers.29. We also urge the Electricity Authority to look closely at transmission losses caused by over -heatinghigh voltage transmission lines, power factor and harmonics, as these losses contribute toinefficient transmission and distribution and should be progressively identified and mitigated.Such an approach may reduce the level of new generation required and ensure that more of theelectricity entering the grid is available to consumers30. The cost of the national grid is beyond the control of businesses and residential consumers.Whatever price is set by the Commerce Commission for Transpower to collect must be met byconsumers; it is therefore imperative that the method of allocating costs is economically efficient,service-based and, accordingly, cost-reflective.31. There have been calls for the EA to consider the need for a wider review of the transmission systemand wider grid capability in the light of increased electricity demand. While this may be needed, itis important that additional stream of work such as this, should not delay the TPM decision-makingprocess.

Transmission Pricing Methodology Review: 2019 Issues PaperIt is unfortunate that the current TPM is neither fair, nor cost reflective and adversely impacts on businesscompetitiveness in the South by imposing unreasonable and unjustified costs on southern industry andconsumers. It is expected that a fairer TPM will go some significant way towards addressing these issuesand we urge that this should be implemented with some urgency.Finally we would like to thank the Authority for its comprehensive consultation on the Issues Paper.Should any further information be required, please do not hesitate to contact Mr Stephen Canny on(03) 211 1400 or by emailing [email protected] LockhartChief ExecutiveMayor Tim ShadboltMayor Tray HicksMayor Gary TongChair Nichol Horrell

5. Since 2004, 1.3 billion has been spent making sure Auckland and Northland have the transmission infrastructure required to keep their lights on. There is enough transmission capacity remaining in these investments to ensure that Auckland can keep growing and industry