Under the hood of electricity

For most customers, be they retail or commercial and industrial, two things matter when it comes to electricity: that it’s there when they flick on the switch, and the price they pay is acceptable for the service they receive. This simplicity is a big part of what they value.

But it doesn’t just happen by itself. It is the result of the work that electricity retailers like Contact do in a complex system on behalf their customers to keep New Zealand’s electricity reliable, secure and affordable. 

This article aims to give a very simple overview of the electricity industry to provide an insight into the different moving parts work together, and how this reconciles on customers’ bills.

Electricity is produced from many sources in New Zealand, predominately from hydro dams, geothermal fields, wind turbine farms, and thermal power stations. This power is sold into the wholesale market. Some of this electricity is also sold on the hedge market, where electricity retailers buy futures contracts to smooth out price volatility, and retailers employ specialists to manage their electricity purchases. On average, generation charges account for 30.5%* of the total electricity bill.

Electricity is transported from where it is produced to where it is used via the national grid, which is maintained and controlled by state owned company Transpower. The national grid charges are passed onto the end customer through their electricity bill, and account for 9.9% of the average bill.

There are 29 lines companies in New Zealand, and retailers enter into contracts with these companies to carry electricity from the national grid to their customers’ homes and businesses. The costs or running, maintaining and upgrading the local distribution network are also passed through to customers. On average, distribution charges account for 26.2% of the total electricity bill.

Retailers also enter into contracts with metering companies to record electricity use. These charges account for about 3.4% of the average electricity bill.

There are about 40 electricity retailers in New Zealand, each offering a range of products and services. In addition to managing all the interactions above, electricity retailers own the relationship with the customer and are responsible for reconciling the electricity bought with the electricity supplied. Their charges, which account for 16.2% of the average electricity bill, must also cover the costs of buying electricity, as well as servicing current customers and acquiring new ones.

Taxes and levies
As the regulator and maintainer of the electricity system in New Zealand, the government also charges a levy to recover its costs, equivalent to 0.8% of the average bill. The government also charges GST on electricity purchases, equivalent to 15% of the pre-tax cost, or 13% of the total electricity bill. 

All these moving parts work in a coordinated manner to provide electricity to homes and business. Combined with our high share of renewable generation (86% reported in our 2017 Annual Report) this arguably makes New Zealand one of the most advanced electricity markets in the world. 

*Source: Electricity Authority
11 May 2018
2 minutes to read
By Contact Energy