Commerce Commission Halves Transpower Bonuses on $200M Upgrade

The Commerce Commission has decided to reduce the bonuses that Transpower can earn from a $200 million grid upgrade project designed for Canterbury and the upper South Island. This decision stems from concerns regarding the accuracy of the company’s cost estimates, which have seen significant increases since the project’s initial proposal.

In a draft decision released on February 17, 2024, the regulator approved a $200 million budget for Transpower’s Upper South Island Stage 1 project. This amount includes $193 million allocated for new and upgraded transmission assets, along with an additional $7 million for a fund aimed at supporting demand-response and other non-transmission solutions. Initially, the project was estimated at just $77 million in 2022, indicating a nearly threefold increase in projected costs.

Once completed, the upgrade is expected to add approximately $35 to the annual bill of a typical household in Christchurch. However, the actual impact on consumer bills will depend on how Orion, the local electricity distributor, adjusts its tariffs and the rate of demand growth in the region. Transmission charges typically account for less than 8% of an average power bill. The Commerce Commission maintains that enhancing the grid will also help stabilize wholesale prices by enabling retailers to access cheaper South Island energy and alleviate potential price spikes during peak demand.

The commission has set a new incentive rate of 7.5%, down from the standard 15%. This adjustment determines how much additional profit Transpower can earn if it completes the project under budget. Under the revised terms, Transpower would retain 7.5 cents for every dollar it saves against the approved budget, while facing similar losses if it exceeds the budget. For example, if Transpower saves $10 million, it would receive a bonus of approximately $750,000.

The regulator expressed skepticism about the reliability of Transpower’s cost estimates, citing a history of prior projects that collectively came in $114.8 million under forecasted budgets and generated substantial incentive rewards. To further safeguard consumers, about $13.7 million in cost contingencies for the South Canterbury switching stations and related infrastructure will not be included in the incentive scheme. This means that Transpower will neither earn bonuses for savings in these areas nor be penalized for necessary expenditures.

This decision follows criticism from Orion regarding previous cost estimates and the responsibility for addressing transmission line clearance issues identified in a recent survey. The project includes the construction of new switching stations at Orari and Rangitata in South Canterbury, as well as the upgrading of critical 220 kilovolt lines to increase the capacity for hydroelectric power from the Waitaki River to reach Ashburton, Timaru, and Christchurch.

According to commission staff, without the upgrade, existing circuits are projected to reach their limits by 2029, thereby constraining load growth and jeopardizing the security of supply in the region. Alongside the hardware improvements, the commission has approved the $7 million budget for demand response initiatives, which will incentivize large consumers like irrigators and factories to reduce their load during peak times. This strategy aims to delay the need for further grid investments, ultimately resulting in lower costs for consumers.

Public submissions on the draft decision will close on February 17, 2024, with a final ruling expected later in the year.