How electricity prices work in NZ

Posted on Jan. 12, 2022, 6:16 p.m.

How electricity prices work in NZ

The power industry’s a complex beast. Throughout the years of market reform, regulatory structures have been put in place to manage the impact of extreme pricing events.

The Electricity Authority’s primary goal is to protect the interests of consumers, but in doing so, also need to maintain workable competition within the market - i.e., balance incentives on power companies to keep them investing in power generation capacity to ensure continued stability and security of electricity supply. Or, simply put, to make sure power companies are still getting paid so we can depend on them to keep running our lights, TVs and toasters.

The price you pay is determined by a competitive retail market with a growing (and maybe now shrinking) number of retailers. The retail tariff that you typically see at the consumer end, and pay for (as shown on your bill) is generally made up of:

The wholesale (or spot) price

This is the average cost that your power retailer pays to purchase power from the wholesale market. The wholesale price for power changes every half-hour. These half hourly prices can be seen in real-time here, in $/MWh terms.

For historical price changes, you can take a look here which shows the wholesale prices for each node (i.e., connection point) on our national grid. As you can see this fluctuates significantly which is why most retailers sign “hedge contracts” to manage this price risk on your behalf. These are contracts that commit the retailer to buy or sell an amount of power at an agreed price at some later date.

The (distribution) network charge

Your lines company (e.g., Vector, Counties Energy, WEL Networks, etc.) help to operate, manage and maintain the electricity lines outside your house. They’re the ones who are responsible for those creative pieces of artwork that you sometimes see while driving around Auckland.

They also take care of any downed lines such as when Auckland has a major storm, outage, or a typhoon creates significant damage to our electricity network. Safety is no joke, so I’m quite split on what to think about their artwork.

Part of your retail tariff charge will cover these costs, as well as for your network provider to make future investments to ensure their network has enough line capacity going forward to take care of population and power demand growth in their region.

The (transmission) network charge

Similar to the distribution charge, you also pay a portion of your bill to Transpower (the System Operator)  who’s responsible for operating, maintaining and investing in our national grid. These are the set of large wires that cover our entire country (i.e., a larger version of the mini-lines that you see on our local streets). These are responsible for transporting power from the great lakes of the South Island which generates most of our power, to the end-users, who are mostly in the North Island and Auckland.

The HVDC cable is the primary method of transporting power between the two islands, but can sometimes become constrained and congested when there’s not enough line capacity to meet required energy demand on the other side. This affects wholesale prices at different locations across NZ and can sometimes cause localised price spikes to occur.

The metering costs

Metering companies also get a piece of the pie for managing your metering configuration inside your premises. This includes site visits by authorised technicians to inspect any meter malfunctions, or if it’s a broadband-enabled communicating smart meter, this includes the daily collection of your energy data (on a half-hourly basis) in order for retailers to perform reconciliation and accurately charge you for your power consumption each month.

Finally, there’s also some regulatory charges that are passed through to the Electricity Authority, and GST paid to IRD, but these costs are mostly straightforward and very minor.

The retailer then gets what’s left over, which includes a (hopefully) healthy profit margin to keep the business afloat, and to compensate them for their efforts in providing customer service, and maintaining and storing all of your energy use data.