8. Transmission
Background
88. The way in which transmission services are provided and priced impacts both directly and indirectly on all parts of the electricity industry, the economy and the environment. Transmission has strong natural monopoly characteristics, which make it important that the Government sets out its policy expectations as to how transmission services should be provided and priced and how Transpower should operate. Poorly designed policies may, for example, encourage inefficient investment in generation or transmission, which would waste scarce capital resources and cause unnecessary environmental effects.
Objectives for the Provision of Transmission Services
89. The Government's objectives for the provision of transmission services are that:
- the services are provided in a manner consistent with the Government's policy objectives for electricity, and in particular, that grid reliability should be maintained at a level required by residential, commercial and industrial users and by the Government's economic development objectives
- the transmission grid should be adequately resilient against the effects of low probability but high impact events having regard to the load which could be disrupted and the duration of any disruption
- where practicable, the transmission grid should provide adequate supply diversity to larger load centres, having regard to the load which could otherwise be disrupted and the duration of any disruption
- efficient competition in generation and retail is facilitated and transmission constraints are minimised
- the national transmission grid should be planned and made available so as to facilitate the potential contribution of cost-effective renewables to the electricity system, and in a manner that is consistent with the Government's climate change and renewables policies
- the efficiency of transmission services should be continuously reviewed and improved so as to produce the services that grid users and consumers want at least cost
- the services are priced in a manner that:
- is transparent
- fully reflects their costs including risk
- facilitates nationally efficient supply, delivery and use of electricity
- promotes efficient investment in transmission or transmission alternatives
- promotes nationally efficient use of transmission services by grid users and consumers
- stakeholders and the public are kept well informed about how agreed minimum levels of grid reliability are to be maintained throughout the development and consideration of any grid upgrade plans.
Connection to and Use of the National Grid
90. The national grid is essential to all connected parties, and should be maintained and operated to a common set of grid reliability standards. These common standards should be embodied in grid rules that recognise the interconnected nature of the network.
91. Grid reliability standards should apply to agreements between Transpower and its customers dealing with connection to and use of the grid, investment planning (including replacement), transmission system design and construction, and transmission system maintenance.
92. The common standards for the grid should be determined by the Commission, following consultation with Transpower and affected parties. The Commission should, from time to time, review the standards to ensure that they promote a secure and reliable grid and that the interests of end-customers are properly taken into account.
93. Transpower's customers should be permitted some flexibility over standards (which could be higher or lower than the norm), so long as the integrity of the core grid is not compromised. The Commission should ensure that arrangements are in place to protect the interests of third parties when Transpower and one of its customers agree to a local variation from common standards.
94. All transmission customers should be required to have a transmission agreement with Transpower, and the Commission-developed benchmark agreement is the default agreement if the parties are unable to agree.
Investment in and Maintenance of the Transmission Network
95. As part of its modeling and forecasting work, the Commission should provide for the development of statements of opportunities relating to transmission. These should:
- incorporate electricity demand and supply forecasts
- enable identification of potential opportunities for:
- efficient management of Transpower's transmission network including investment in system expansions, replacements and upgrades
- transmission alternatives (notably investment in local generation, demand-side management and distribution network augmentation)
- facilitate long-term planning for timely securing of easements and resource consents, including to facilitate the connection of renewables.
- be prepared at least every two years.
96. Transpower should develop and submit grid upgrade plans to the Commission for approval.
97. Any grid upgrade plan submitted by Transpower should be as comprehensive as possible, ideally covering and identifying the relationships between short, medium and longer term proposals, except where urgency is required for individual projects. The rigour of analysis supporting projects should be reasonable given the size of the project. This will better enable consideration of the interrelationships between projects and the wider synergies of the grid, including facilitating renewables, least-cost provision of new generation and increased competition between generators. It will also enable consideration of investment proposals for the grid as a whole within a longer term framework (for example, over five years).
98. Unless otherwise agreed by the Commission, grid upgrade plans should also be consistent with the statement of opportunity forecasts and wider Government energy policy, including applicable policies on renewable generation and climate change.
99. Grid upgrade plans should demonstrate the rationale for all expenditure (operational, maintenance and capital), taking into account the prescribed reliability standards and good industry practice for power system operation. The plans should demonstrate that the proposed expenditure is required to meet reliability standards and/or deliver the greatest net benefit after taking into account transmission alternatives and Government energy policy requirements to the extent achievable.
100. In the development of grid upgrade plans; the Government's objective is that:
- Transpower should undertake the detailed planning role (including the assessment of both transmission and non-transmission alternatives); and
- the Commission should, without undue delay, review and approve grid upgrade plans that meet the criteria set out in the Electricity Governance Rules, and reject applications that fail them.
101. The Commission should make available to Transpower and other stakeholders clear and specific policies and processes relating to how grid upgrade plans in general, and any particular plan specifically, will be developed, and then reviewed and approved or rejected. These criteria should be clearly explained so that the review process and linkages to other processes such as the statement of opportunities are transparent and can clearly be understood by stakeholders.
102. The Commission should ensure that affected parties are fully consulted on grid upgrade plans.
103. Transpower should be able to seek a determination from the Commission on updated grid upgrade plans in response to events that significantly affect any capital investment already approved under a grid upgrade plan.
104. Where the Commission approves a grid upgrade plan, the full costs associated with implementing the grid upgrade plan should be recoverable by Transpower in accordance with the pricing methodology determined by the Commission.
Planning Ahead
105. The current pressing need for a number of major upgrades of the transmission system reflects, in part, insufficient planning and securing of consents (or designations) and land access rights in the past. Government is concerned to ensure that this situation is not repeated in the future.
106. The Government expects Transpower and the Commission to ensure that Transpower identifies and secures appropriate interests in land, designations and resource consents required for transmission corridors and, to the extent possible, obtains resource consents (or designations) well in advance of urgent needs. Transpower should be able to recover the reasonable net costs of doing so.
107. The risks to maintaining grid reliability resulting from uncertainties in demand forecasting and easements should be conservatively managed.
108. This should help the essential process of maintaining stakeholder confidence in ongoing security of electricity supply even if, at times, there is some loss of flexibility around investment choices and some additional cost for electricity consumers.
Environmental Effects
109. Final environmental requirements are determined by consenting authorities under the Resource Management Act 1991 which provides the statutory framework for dealing with environmental effects.
110. To the extent that the Commission considers the environmental effects of new lines proposed by Transpower in a grid upgrade plan, it should also take into account any longer term benefits that larger capacity lines may provide by avoiding multiple smaller lines.
Transmission Alternatives
111. As part of the consideration of transmission investments, the Commission should ensure that transmission alternatives are considered to the extent practicable subject to the following conditions:
- only alternatives which have a high probability of proceeding, and where grid reliability can be maintained by contingency measures if the alternative is delayed or does not proceed, should be considered;
- alternatives which are only likely to proceed if they are assisted financially by the Government or relevant body should not be considered unless the Government or relevant body has agreed to provide such assistance.
112. As part of its consideration of transmission pricing, the Commission should consider whether there would be net benefits in providing for a mechanism whereby investments in transmission alternatives receive payments reflecting some or all of the value of avoided transmission investment. This is a complex subject, and the Commission will need to take into account, amongst other things, practicalities, effects on incentives to invest in alternatives, and the extent of assurance that grid reliability standards will be met.
Pricing for Connection to and Use of the National Grid
113. Transpower should determine its total revenue requirement (covering both sunk and new investments) subject to the constraints of the Commerce Act 1986. A transmission pricing methodology should determine how this total revenue is recovered from parties under the agreements for connection to and use of the grid.
Cost Recovery and Pricing Principles
114. The Government expects transmission services to be priced as efficiently as possible and, subject to the Commerce Act 1986, Transpower's charges to recover the full economic costs of its services.
115. The principles to be applied by Transpower in developing the transmission pricing methodology, and the Commission in approving it are:
- the costs of connection should as far as possible be allocated on a user-pays basis
- the pricing of new and replacement investments in the grid should provide beneficiaries with strong incentives to identify least-cost investment options, including energy efficiency and demand management options
- pricing for new generation and load should provide clear locational signals
- sunk costs should be allocated in a way that minimises distortions to production/consumption and investment decisions by grid users and consumers
- the overall pricing structure should include a variable element that reflects the marginal costs of supply in order to provide an incentive to minimise grid constraints.
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