Posted on Feb. 4, 2023, 12:03 p.m.
Electricity pricing is typically approached on a cost plus margin or return basis. This means that rates are set in a way that recovers the costs to the retailer, plus a margin or return to provide a return on investment.
This is not only the case for electricity retailers, but also for other market participants along the value chain, e.g., transmission and distribution line owners/operators. Alternative ways to price electricity include “value pricing”, which is pricing the commodity based on its perceived value to customers.
As we enter into the next financial year, you’re likely to see many retailers look to review and revise their pricing to set the way forward for the next 12 months.
We believe price increases are a natural part of business, given that costs of goods/services increase year on year, as with all industry sectors. However, as electricity is an essential service required by society, there’s generally a lot of controversy, complaints and strong feedback voiced on any changes to electricity pricing every year.
Also, because multiple participants are involved along the energy value chain, all of whom on-charge their costs (and required return) onto the end-consumer, it can also be difficult to dissect what is actually the underlying driver of any cost increases each year, and by how much.
This is further complicated by the fact that, in recent years, retailers have started offering more creative / innovative pricing plans that are disrupting the market. The most notable (and potentially controversial) is the spot pricing plan that was introduced to the market a few years ago by NZ and Australian electricity retailers.
Below, we provide a summary of the different energy pricing structures/options available in NZ and abroad.
|Fixed price variable volume (FPVV)
|This is the most common option traditionally offered into the market. A two-part tariff, which includes a fixed price or daily rate, plus a variable volume component to charge for any consumption used.
|Presents low risk to the consumer, but can sometimes be higher compared to other plans, depending on consumption levels, and the price charged.
|Customers who don’t want to spend too much time managing their energy costs and billing.
|Similar to above, a FPVV can also be structured with different volumetric charges for different times of the day. The most typical example seen in the market is off-peak / peak pricing.
|For off-peak/peak pricing, retailers will typically charge higher rates for the peak period, and lower rates for the off-peak periods.
|Customers who have a different load profile to the general user - i.e., consume more energy during off-peak periods, and less energy during peak periods.
|Spot price (plus margin)
|Customers pay the hourly wholesale electricity price, plus a margin paid to the retailer for use of their platform.
|Relatively higher risk than a fixed price plan as you’re fully exposed to spot price volatility. Only really makes sense if you have the resources (e.g., time, experience) to constantly monitor and manage your spot price exposure.
|Customers who want to be more proactive in the management of their energy use and costs.
|Block-meter rate tariff
|The per unit tariff (i.e., volume consumption) of the individual block is fixed in tranches, where the rate you pay reduces as you consume more energy.
|Can start at a much higher rate compared to other plans if only using a low level of energy, but significant cost savings are possible if energy consumption is high.
|High energy users
|Single flat rate structure (subscription-based)
|A single rate charged for electricity, no matter what time of day, with no fixed charge. This is similar to a subscription-based regime.
|Simple to understand, with some cost savings possible, but can sometimes be difficult to compare against other tariff structures.
|Low to standard energy users
|Charged for electricity supplied to a specific standalone appliance e.g., electric hot water system, at a different rate to your other electricity usage
|Customers receive a lower rate for any controllable load on their property. Usually combined with a standard two-part tariff plan for uncontrolled load. Controlled load allows the network operator to control your appliances (e.g., hot water cylinder) when it requires it, such as to manage network congestion.
Customers who don’t depend heavily on the appliance with the load control applied.
|Charges based on the load you place on the electricity network. Typically measured over 30 minute intervals during your demand time period, with the highest kW/MW measure for the billing month used to calculate your demand charge for the entire month. This may also change by season (e.g., summer, winter).
|Usually only separately applied to large commercial customers, to reflect their part of the costs required for maintaining infrastructure required to deliver electricity to the property.
|Medium to large commercial users of electricity
|Bundled packages with energy supply. Typical services that are bundled include broadband, mobile, energy and gas. Other examples include solar and battery storage costs, although less common.
|Useful if you want simple billing through one company for all of your utility services.
|Customers with multiple bills to pay who are looking to streamline their bills into a single invoice. Some cost savings are possible if multiple service discounts apply, but can also be cheaper going with multiple service providers if you have the time to hunt around for the best deal.
|Payment to the customer for any excess electricity generated by your site, e.g., solar. Some electricity retailers in NZ offer solar buy-back rates, which are similar, but are much lower than the usual wholesale cost of electricity.
|In NZ, there is no Government administered FiT, but some retailers offer solar buy-back schemes at much lower rates than what you would pay on the wholesale market.
|Households or properties with solar installed.
As seen in the table above, there are multiple options available when thinking about the best plan for you and your property. Much of this really comes down to what your preferences are, and how you use (or plan to use) energy at your property.
As we start to see retailers increase their rates in the coming months, it’s important to consider whether you’re still on the best plan for your power supply.
At Tensor, we provide households and businesses with flexible options that can be specifically catered to what they’re looking for. By identifying your needs first, we’ll be able to help you find the best pricing structure and plan for your property.
If you’re considering switching power suppliers to help manage your utility bills and/or would like to discuss your options for power supply, contact us using our website chat, our general email address email@example.com, or using our contact form here to talk through your options.