The Commerce Commission is reviewing the way it sets prices for electric lines companies and other monopolies, any change could ease investment limitations on decarbonising energy

The Commerce Commission is considering rule changes that could make it easier for the energy sector to lower its greenhouse gas emissions.

The Commission could do so by making it easier for local lines companies and the national grid to earn enough money to invest in more new capacity.

This process could allow relatively clean electricity to displace more fossil fuel than it does now. 

The problem is relatively urgent, since New Zealand is in danger of failing to meet the pledges made at the Paris conference on climate change.   

However, progress depends on how the current review pans out. 

The electricity industry is on average 85% renewable. But electricity meets only 25% of New Zealand's total energy needs, so it lacks the critical mass to transform the sector on its own.   

A report last year by the consultancy, Boston Consulting Group (BCG), recommended electrifying the overall energy industry as an effective way of reducing emissions. Two obvious ways of doing this would be to have more electric cars and to use more electricity to heat factories and other large institutions. 

But the cost would be huge, according to BCG. 

It said $8 billion would need to be invested in transmission in the 2020s, $10 billion in the 2030s and $11 billion in the 2040s. This would cover the national grid alone. 

In addition, there would have to be $22 billion invested by local lines companies in the 2020s, $25 billion in the 2030s and $24 billion in the 2040s.   

And that would just be for carrying electricity from one spot to another.  Actual generation of electricity would have to rise by 79% and total generating capacity would have to increase by a still larger amount to provide a buffer for emergencies.

The collective impact of this argument is that decarbonising the energy sector is environmentally worthwhile but it has gigantic sunk costs.

This raises the question over whether local lines companies could get access to capital at that sort of level.    

According to their umbrella group, Energy Networks Aotearoa (ENA), the answer is yes and no. 

Yes, because they can get the money in theory, but no, because the law stops them from doing so, according to the ENA chairperson, Nigel Barbour.

"Lines companies' balance sheets are in pretty good shape to fund the transition and there is a lot of interest from debt capital markets to lend to lines companies," Barbour says.

"The issue is that the regulatory regime needs to support the step up in investment."

By "regulatory regime", Barbour is referring to oversight of lines companies by the Commerce Commission.      

This oversight is done because electric lines companies are natural monopolies, they face no competition, and their product is essential, so they have a captive audience.  

That has made strict regulation essential, according to many successive governments. 

The trouble is, according to Barbour, that the Commission looks backwards, not forwards, when it is seeking data on which to make its calculations.

"Currently the regime is tilted to funding ‘business as usual’ levels of expenditure," he says.

"With the step up (to more renewable energy), the regime needs to move to funding ahead of time, not just in time.  And it needs to ensure that lines companies have sufficient incoming cash flows to service the step up in investment and debt.

"Currently the regime is tilted to back-ending cashflows – and this will need to be looked at given the order of magnitude of increases in investment levels."

In other words, state regulation requires the Commerce Commission to set prices for lines companies based on what they do now, not what they plan to do in future.  

The Commerce Commission says its review is focused on the means it uses to determine final prices. These are known officially as 'Input Methodologies' (IM).   

Commissioner Vhari McWha says this review is important work. 

"A key focus has been to consider how our rules can help support consumers in the transition to a low carbon economy, while encouraging innovation and the delivery of resilient energy network," she says. 

"We want to ensure that the regulations provide suppliers with incentives to invest, innovate and achieve efficiencies that they can share with consumers."

McWha says the IM regime has worked well, but it could be improved.

"We have identified some areas where the rules can be refined, particularly to ensure we are able to respond in an appropriate and timely way to changes in the national and global environment."

The Commission is seeking feedback and will publish its final decisions in December.