Transmission
Background
79. The way in which transmission services are provided and priced impacts directly and indirectly on all parts of the electricity industry, the economy and the environment. Transmission has strong natural monopoly characteristics, which makes 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, which would waste scarce capital resources and cause unnecessary environmental effects.
Objectives for the Provision of Transmission Services
80. 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
- the services should be provided at the standards of power quality and grid reliability required by grid users and consumers as determined by the Electricity Commission
- the efficiency of transmission services should be continuously improved so as to produce the services grid users and consumers want at least cost, and
- 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.
Connection to and Use of the National Grid
81. 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.
82. 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.
83. The common standards for the grid should be determined by the Electricity Commission, following consultation with Transpower and affected parties. The Electricity Commission should ensure that the interests of end-customers are properly taken into account.
84. Transpower's customers should have 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.
85. All transmission customers should be required to have a transmission agreement with Transpower, and the Commission should develop a benchmark agreement as a default if the parties are unable to agree.
Investment in and Maintenance of the Transmission Network
86. As part of its modeling and forecasting work, the Electricity 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
- be prepared at least biennially.
87. Transpower should submit grid upgrade plans to the Electricity Commission for approval. The grid upgrade plans should be consistent with statement of opportunity forecasts and demonstrate the rationale for all expenditure (operation, maintenance and capital), taking into account the prescribed reliability standards. 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. The Electricity Commission should ensure that affected parties are fully consulted.
88. Where the Electricity Commission approves investment by Transpower, the cost of that investment should be recoverable by Transpower in accordance with the pricing methodology determined by the Electricity Commission.
Transmission Alternatives
89. As part of its consideration of transmission investments, the Commission should ensure that transmission alternatives are properly considered to the extent practicable.
90. 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, among 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
91. Transpower should determine its total revenue requirement (covering both sunk and new investments) subject to the constraints of Part 4A 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. The transmission pricing methodology should include the allocation of any net FTR auction income, rentals and FTR-related payments.
92. The Electricity Commission should prepare and consult on a paper on pricing issues. The Commission should determine the pricing methodology after consideration of proposals from Transpower and consultation with affected parties.
93. Prior to the determination of a new pricing methodology by the Commission, the Act requires connected parties to continue to pay Transpower for connection and access to the national grid on the basis of Transpower's current pricing methodology.
Cost Recovery and Pricing Principles
94. The Government expects transmission services to be priced as efficiently as possible and, subject to Part 4A of the Commerce Act 1986, Transpower's charges to recover the full economic costs of its services.
95. The principles to be applied by Transpower in developing the transmission pricing methodology, and the Electricity 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, and
- transmission pricing for investments in the grid should recognise the linkages with other elements of market pricing (including the design of FTRs).
Timetable
96. The Government recognises that implementation of new transmission arrangements will be very demanding on the Electricity Commission, Transpower and affected parties. Nonetheless, it is clear that important decisions on transmission are becoming urgent. Accordingly, the Government wants the Commission to meet the following timetable:
| Development of draft benchmark agreements | June 2005 |
| Publication of transmission pricing guidelines | December 2004 |
| Approval of initial grid upgrade plan | September 200510 |
| Progress report on development of FTRs | June 2005 |
97. The Government requests the Commission to publish a detailed workplan for achieving these timetables, including intermediate steps.
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