Phasing-out low fixed charge tariff regulations

Low fixed charge tariff regulations are currently being phased-out over a 5-year period starting 1 April 2022. Removing these regulations will create a fairer, more equitable system.

What are low fixed charges?

Low-use plans and standard-use plans

Households on low-use electricity plans pay the discounted low fixed charge, which is capped under the regulations and throughout the 5-year phase-out. This is on top of paying for the actual amount of electricity they use. The rate they pay for the electricity they use is higher than what those on the standard-use plans pay. The low-use plan is a good deal for households that use less than 8,000kWh of power a year (or 9,000kWh a year for the lower South Island).

As shown in the graph below, households that use more electricity than this are better off being on a standard-use plan. Their fixed charge is much higher, but the rate they pay for actual electricity used is lower. This will remain the case throughout the phase-out.

Households will pay more than they need to if they are on the wrong plan.

Fig 1: Comparison between annual bills of standard-use plans and low-use plans before the phase-out began - costs are illustrative only

Line graph of comparison between annual bills of standard-use plans and low-use plans

Households may have low electricity use if they:

  • have a small, or very energy-efficient house,
  • have a low number of occupants,
  • use another type of fuel, such as gas,
  • use another energy resource, such as solar power,
  • deliberately use little electricity, for example under-heating their home, or
  • are a holiday home* or otherwise not regularly occupied.

*Low fixed charges are designed for primary residences only. Holiday homes should be excluded from these pricing plans.

Households may have high electricity use if they have:

  • a large house,
  • a higher number of occupants,
  • a draughty, poorly insulated home that is hard to heat, or
  • many electronic appliances or inefficient appliances.

Problems with low fixed charge tariff regulations

The low fixed charge tariff regulations were introduced in 2004 to provide electricity plans with a discounted fixed charge that aimed to reduce power bills for low-use, low-income households. However, as the regulations are poorly targeted, they only help some low-use households while pushing others into greater energy hardship, including many low-income families with high electricity use. The low fixed charge tariff regulations also have unintended effects on households’ electricity use, create barriers for industry to undertake distribution pricing reform and increase complexity and confusion for consumers.

Phasing-out low fixed charges was a recommendation to government by the independent Electricity Price Review. The Review further recommended the regulations be phased-out over 5 years to help moderate the impact of the increasing fixed charges on most low-use households.

Electricity Price Review webpage

Low fixed charges:

Phasing-out the regulations

In September 2021, the Government agreed to phase-out the regulations.

Minister of Energy and Resources announces phase-out of low fixed charge tariff regulations(external link) — Beehive website

Phasing-out the regulations will see the maximum low fixed charge increase gradually over 5 years until it is about the same as the standard fixed charge. Each year, the maximum low fixed charge will increase by 30 cents. The gradual increase will help minimise the impact of higher power bills on households paying the discounted low fixed charge. While the regulations set the maximum amount, power companies may choose to set lower rates for their low fixed charges.

Maximum low fixed charge
Prior to 1 April 2022 $0.30 a day
1 April, 2022 $0.60 a day
1 April, 2023 $0.90 a day
1 April, 2024 $1.20 a day
1 April, 2025 $1.50 a day
1 April, 2026 $1.80 a day
1 April, 2027 Regulations removed. Power companies are no longer required to offer customers a low fixed charge.

Although power companies will no longer be required to offer low fixed charges after the phase-out, they may choose to do so. Alternatively, they may change their pricing plans to offer lower prices to low-use customers another way.

Electricity companies are not expected to increase their profits as a result of this change. It is expected that, as the daily fixed charge gradually rises, variable rates will be lower than they otherwise would be. Other factors may also impact variable charges, such as increased wholesale costs which might be putting pressure on retail prices.

As the low fixed daily charges increase during the phase-out, the actual rate paid for electricity used is expected to decrease. The degree to which rising fixed charges are offset depends on how much power a household uses and how their power company chooses to pass on the changes. This means the impact on power bills will look different for most households.

There is some uncertainty over how power companies will choose to structure their pricing plans during the phase-out. Some companies may choose to continue to offer low-user rates. The changes to the regulations will not remove the ability or incentive for companies to continue to offer pricing plans with low fixed charges. Electricity companies may also choose to offer a broader range of plans. This could include Time of Use tariffs where there are different rates for electricity at various times of the day.

Time of Using pricing

Time of Use pricing more accurately reflects the time-varying nature of electricity costs than traditional tariffs that charge customers a flat price regardless of when electricity is used. These pricing plans work by using smart meters that provide accurate measurements of how much electricity is being used at different times of the day. These price signals incentivise consumers to shift their non-essential electricity use to times when there is lower demand on the network, providing opportunities to save on their power bill. Shifting non-essential electricity use to times when demand is low can reduce the installed network capacity required to meet high peak demand, helping reduce the need for expensive network upgrades.

An illustrative example of what may be expected for a household on a low-use plan that uses an average amount of power is shown below.

Prior to the phase-out, the low fixed charge paid by this household makes up a small proportion of its total power bill. If this household remains on the same pricing plan during the phase-out, and its power company chooses to increase the fixed charges in line with the maximum allowed each year, then this household could expect to pay more in fixed charges but less for the actual power used. In this example, a household on a low-use plan using the average amount of power may expect to pay slightly less overall.

Fig 2: Example of potential impact to bill components for an average-use household as a result of the phase-out

Diagram of potential impact to bill components for an average-use household as a result of the phase-out

Diagram is for illustrative purposes only

Analysis of the impact on households

There is some uncertainty over how power companies will choose to structure their pricing plans during the phase-out, and therefore what the impact on households will be.

Overall about 60% of all households—about 970,000 households—are expected to have lower power bills during the phase-out as the lower rate for electricity used has a greater impact on their overall power bill. These households are likely to be those on standard-use plans and those on low-use plans using more than 6,500kWh a year.

However about 40% of all households—about 690,000 households—are expected to face higher power bills during the phase-out. These are households on low-use plans who use less than 6,500kWh a year.

Considering the uncertainty over how industry will choose to structure their pricing plans during the phase-out and the impact it may have, the government will conduct a mid-point review of the phase-out. The review, which should be conducted in late-2023, will study the impacts of the phase-out on households and if any additional support measures may be required.

There are other factors that determine how and when households’ power bills change. The estimates above reflect how power bills are likely to change without the influence from other factors.

Long-term benefits

In addition, all households are expected to benefit from the regulations being removed in the long term. The revenue collected from fixed charges goes towards maintaining the national grid – the lines that deliver electricity to households. New Zealand’s electricity use is expected to grow in the future. This could result in the industry having to undertake expensive upgrades so the lines network can cope with the extra demand; and these extra costs could be passed on to consumers.

However by removing the low fixed charge tariff regulations, power companies will more easily be able to manage the extra load by introducing new pricing plans that encourage households to spread their electricity use across different times of the day. (See Time of Use pricing above). This will help power companies to avoid expensive upgrades that could see the costs passed on to consumers. Households also get more options of pricing plans where they can control their electricity use to take advantage of cheaper off-peak electricity prices.

Support for households during the phase-out

Removing the low fixed charge regulations is essential for creating a fairer, more equitable electricity pricing system. However the households that have been benefitting from the regulations may gradually face higher fixed charges and their power bills may go up during the phase-out period.

A power credit scheme is being developed to support households adversely affected during the phase-out and who are struggling to pay their power bills.

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Last updated: 01 April 2022