Phasing-out the Low Fixed Charge Tariff regulations

The Low Fixed Charge Tariff regulations are currently being phased-out over a 5-year period that started on 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 a discounted fixed charge, which was capped under the Low Fixed Charge Tariff regulations, and will remain capped throughout the 5-year phase-out. This is on top of paying variable charges relating to the actual amount of electricity they use. Households on low-use plans pay higher charges relating to electricity used than other households on standard-use plans.

The low-use plan has been 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, under the regulations, households that used more electricity than this have been better off being on a standard-use plan. Their fixed charge was higher, but the rate they pay for actual electricity used was 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 use a low amount of electricity 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-use plans are designed for primary residences only. Holiday homes should be excluded from these pricing plans.

Households may use a higher amount of electricity if they:

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

Problems with the 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 were poorly targeted, they only help some low-use households and have pushed others into greater energy hardship, including many low-income families with high electricity use, for example larger families. The Low Fixed Charge Tariff regulations also have had unintended effects on households’ electricity use, created barriers for industry to undertake distribution pricing reform and increased complexity and confusion for consumers.

Phasing-out the Low Fixed Charge Tariff regulations was a recommendation to government by the independent Electricity Price Review. The Review 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

The regulations set the maximum amount allowed for the fixed charge on electricity plans for low users. During each year of the 5-year phase-out, the maximum amount for the daily fixed charge will increase by 30 cents. The increase, which started on 1 April 2022, is being applied gradually over 5 years to minimise the impact to households who were previously paying a discounted fixed charge.

This decision was strongly supported by electricity retailers and distribution companies who advocated for removing the regulations. Their view is that the regulations limit their ability to introduce pricing reforms to reflect the costs they face.

Removing the regulations will help power companies introduce pricing plans, like Time of Use pricing, where households get cheaper rates if they can shift their power use away from peak periods. This has the potential to save households money while also reducing the need for expensive network upgrades that could see further costs passed onto households’ bills.

Removing the regulations does not change power companies’ ability to continue to offer plans with low fixed charges. The regulations only set the maximum amount that can be charged. Power companies may choose to set lower rates for their fixed charges for low-use households.

The Government has been clear in its expectation that power companies would not increase their profits as a result of phasing out the regulations. This is due to how the regulations were designed. The regulations were designed to limit the amount of revenue power companies could recover from fixed charges for low-user households. The shortfall in revenue recovered from low-use households was paid for by standard-user households, who faced higher fixed charges. The impact of this regulatory change means that, while low-use households may pay slightly more and standard-use households may pay slightly less, power companies will ultimately recover the same amount of revenue overall.

However, it is important to be aware that other factors will also impact household power bills such as: increasing wholesale electricity prices, changes in how transmission charges are calculated, general inflation, and the need for increased investment in electricity network infrastructure.

Maximum low fixed charge (excluding GST)
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.

Time of Using pricing

Time of Use pricing more accurately reflects the time-varying nature of electricity costs than traditional tariffs that charge households 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 are designed to encourage households 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.

Reviewing changes to power companies’ pricing

In May 2023, the Electricity Retailers’ Association New Zealand (ERANZ) published a report that suggests the phase-out is meeting its objectives. Key findings from this analysis show:

  • Variable charges for households, on average, are 2.6 cents/kWh (excl. GST) lower from 1 April 2023 than they otherwise would have been.
  • Average power bills for households with higher electricity use, which include many low-income households, are $78/year lower than they otherwise would have been, while average bills for lower-use households have increased by $39/year.
  • There is greater pricing innovation across retail plans, with an increase in the number of electricity plans on offer with a Time-of-Use component.

This analysis also found that phasing out the Low Fixed Charge Tariff regulations is not resulting in increased revenue for power companies. The data suggests while the fixed charges on low-use plans are increasing, this is being offset by decreasing costs for the power a household uses (the variable charge).

Low-fixed charge phase-out [PDF, 1,021KB](external link) —

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.

Mid-point review of the phase-out of the Low Fixed Charge Tariff regulations

When the decision was taken to phase-out the LFC regulations there was some uncertainty over how the industry would choose to structure its pricing plans during the phase-out. Therefore, it was agreed that there should be a mid-point review of the phase-out to assess any adverse impacts for low-income households and whether additional support measures may be necessary. The review was anticipated to take place in late-2023. However, this was put on hold as the new Government was formed.

In May 2024, it was agreed that the Ministry of Business, Innovation and Employment would begin a mid-point review of the phase-out.

More information on the scope of the mid-point review is provided at the link below.

Mid-point review of the phase-out of the Low Fixed charge (LFC) Regulations

Support for households during the phase-out

Removing the Low Fixed Charge Tariff 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 has been developed to support low-use households who are struggling to pay their power bills during the phase-out.

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Last updated: 15 June 2023