Phasing-out low fixed charge tariff regulations

What are low fixed charges?

Video Transcript

[A man is looking at a computer screen and comparing 2 electricity plans – one plan is a low-use plan for households that don’t use much power, that other is a standard-use plan for high electricity use.]

[Narrator:] “When you sign up with an electricity company, you can choose from either a standard-use or a low-use plan – depending on how much electricity you think you’ll use.

[The scene changes to a suburban street and scans past a row of houses that are connected to power lines.]

[Narrator:] “Regardless of what plan you’re on, you’ll pay a daily fixed charge that covers part of the costs of being connected to the electricity grid. You then pay for the power you actually use on top of that.”

[The next scene shows a man and a woman inside a home – they represent a household that pays low fixed charges because they don’t use much electricity.]

[Narrator:] “If you’re on a low-use plan, your power company can’t charge you more than 30 cents a day for the daily fixed charge. This is a big discount towards the actual cost of providing and maintaining power to your home.”

[More people are added to the scene to show an intergenerational household. This represents a household that pays standard fixed charges because they use a lot of electricity.]

[Narrator] “But if you’re on a standard-use plan, your daily fixed charge could be quite a bit more. You may be contributing more than your fair share.”

[The scene changes again to show a scroll of paper appears on the screen that says ‘2004 regulations’.]

[Narrator:] “Regulations introduced in 2004 require power companies to offer customers the option of a low-use plan, where the fixed charge is no more than 30 cents a day.”

[The next scene is a single house at night time with the lights on. Some lights turn off to show the household is trying to use less power to save money.]

[Narrator:] “It was created to help reduce bills for households with low electricity use and also encourage people to use less power.”

[The next scene shows 3 plinths with people standing on top, representing 3 different households. The first plinth shows a man and a woman. They are a low-use household that pays the low fixed charge, but a higher rate for the electricity they use. They are wearing winter clothes because they are trying to save money by using less electricity and aren’t heating their home. Their plinth goes down to show they are disadvantaged by the regulations.]

[The second plinth in this scene shows a small family who represent a household that uses an average amount of power. Their plinth stays the same height because the low fixed charge regulations do not greatly change their power bills or negatively affect their health. The last plinth shows a wealthy couple who represent a low-use household. They can afford to live in an energy-efficient house, which means they pay the cheaper low fixed charge. Their plinth rises because they are advantaged.]

[Narrator:] “While it did help some, it unintentionally harmed others.”

[The next scene goes to the home of the couple on the first plinth. They look sad and are wearing winter jackets inside.]

[Narrator:] "Many households can’t afford to reduce their power use by improving the energy efficiency of their home or installing solar panels. Instead, they limit their power use by under‑heating their homes. This can lead to cold, damp homes and more health problems.”

[As the narrator says this, the scene zooms in on the heater dial, which turns off because they can’t afford the costs of running it. There are tissues and medicine on the table as the couple get sick from living in a cold home.]

[The scene changes to the wealthy couple who are outside their home that is being built. They are having double glazed windows and new insulation installed so their home will be energy efficient and not require much power to heat.]

[Narrator:] “Households that have double-glazing and proper insulation, and can afford energy-efficient appliances or solar panels, don’t need as much electricity to heat their homes. These households don’t use as much power and can benefit from the low fixed charges.”

[The scene changes again to show a large, intergenerational family outside their home. They have an electric car and there are antenna on the roof to indicate they use a lot of electricity.]

[The next house over is run-down and looks cold and draughty. Inside there are 3 students who look cold and miserable. There are trying to heat their home with inefficient bar heaters.]

[Narrator:] “Households on the standard-use plan use more power. This could be because they are a large family, have lots of appliances like electric vehicles or have a cold and draughty house that’s hard to heat.”

[The final scene shows 5 plinths at different heights, with the figures of each household on top. The plinths are at different heights to show different levels of advantage or disadvantage caused by the low fixed charge regulations.]

[Narrator:] "About 68% of households are now able to go on a low-use plan. This means fewer are on standard plans, including some households that can least afford it.”

[Narrator:] “The system is unfair, which is why it needs to change.”

[As she says this the plinths then move to the same height to show removing the regulations creates a more even playing field for all households.]

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

Text description of graph

The graph has 2 lines rising upwards from the lower left-hand corner. The blue line represents the amount people on a standard-use plan pay for power across different levels of annual power use, while the orange line represents the amount people pay on a low-use plan. The graph shows that households on low-use plans pay less than households on standard-use plans if they use less than 8,000kWh of power a year. While households on standard-use plans pay less than households on low-use plans if they use more than 8,000kWh of power a year. The 2 lines intersect at 8,000kWh, which means households using this much power would pay the same amount, regardless of whether they’re on a low-use plan or a standard-use plan. For households in the lower South Island, the 2 lines would intersect at 9,000kWh.

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:

create an unfair playing field

Households pay for the amount of power they use, and it’s fair that households that use a lot of electricity have higher bills than those who use less. But high-use households shouldn’t also have to pay more for the fixed cost of delivering power to their homes. These costs to electricity retailers and distributors are the same, regardless of whether power is going to a low-use household or a high-use household.

The average electricity use of New Zealand households has significantly reduced since the regulations were introduced in 2004. Now about 68% of all households are low users and can take advantage of the discounted low fixed charge. This leaves an increasingly smaller proportion of households paying the standard fixed charge, and facing even higher power bills to make up for the under-recovery of fixed charges from households paying the discounted low fixed charge.

are poorly targeted

The regulations were designed to help low-income households with low power use. But electricity use is a poor indicator of socio-economic status, so there are many wealthier households benefitting from the low fixed charges, and whose network costs are being subsidised by others, including some low-income households.

Households paying the standard fixed charge, with higher power use, are sometimes those that can least afford it. And the low fixed charge regulations are making it even harder for these households to pay their power bills.

create a barrier to better distribution pricing

Electricity use in New Zealand is expected to grow as we increasingly rely on electricity in our day-to-day lives, for example through electric forms of heating, e-bikes and electric vehicles. This increased electrification will have significant implications for the electricity sector and will require a shift in when we use electricity and how we may pay for it at different times.

The low fixed charge regulations are a well-recognised barrier to distribution pricing reform. By removing the regulations, the electricity industry will more easily be able to manage the increased load on the network through new distribution pricing structures, such as Time of Use pricing. This will allow the industry to avoid costly network upgrades that would otherwise see costs passed onto consumers. All households are likely to benefit from new distribution pricing in the long term.

can encourage households to under-heat their homes

create confusion

The regulations make it harder for households to ensure they’re not paying more by being on the wrong plan. It’s estimated more than 120,000 households have signed up for a low-use plan where they pay a low fixed daily charge, despite being high users of electricity. These households would have lower power bills if they were on a standard-use plan. Of these, about 45,000 households are estimated to be paying more than $200 extra a year because of being on the wrong plan. This is despite obligations on retailers to contact households at least once a year to promote the appropriate plan for the amount of power they use.

discourage uptake of electric vehicles and other electric, more sustainable technologies

Households on low-use plans pay a higher rate for the actual amount of electricity used. This higher rate can discourage people from investing in electric vehicles and other electric appliances, like heat pumps, which would see their power use, and their power bills, increase. Instead, low-use plans incentivise households to choose non-electric options such as petrol cars and gas burners that are worse for the environment.

favour households that can afford to be energy efficient and install solar panels

Households that can afford to be more energy efficient—through double glazing, energy-efficient appliances and solar panels—save on their power bills by using less electricity. They’re getting another discount if these energy-savings mean they can go on a low-use plan and pay the low fixed charge.

Some lower-income households are being unfairly penalised for not being able to afford energy-saving measures to reduce their electricity use.

are impeding environmental efforts

The way we think about electricity use and its impact on the environment has changed significantly since the regulations were designed. In 2004, it was assumed that conserving electricity resulted in environmental benefits.

But it’s now well understood that New Zealand’s largely renewable electricity system will play an important role in helping reduce our carbon emissions and meet our climate change goals. The government and many in the private sector are working hard to replace fossil-fuelled technologies with electric alternatives.

With this in mind, New Zealanders should be encouraged to use more electricity, not less, if it means switching to more eco-friendly electric technologies such as heat pumps and EVs.

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.

Text explanation of table

From 1 April 2022, the maximum low fixed charge will increase by 30 cents each year until 1 April 2027. This means the maximum low fixed charge increased from 30 cents a day to 60 cents per day on 1 April 2022. It will then increase to 90 cents per day on 1 April 2023, $1.20 per day on 1 April 2024, $1.50 per day on 1 April 2025 and $1.80 per day on 1 April 2026. On 1 April 2027, the regulations will be removed and power companies will no longer be 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

Text description of diagram

The diagram shows 2 bars. The first bar represents a power bill of a household on a low-use plan that uses the average amount of power, prior to the phase-out beginning in April 2022. The second bar represents the same household on a new pricing plan in 2027 when the low fixed charge has increased. The bars are divided in 2 to show the proportion of the bill that is the fixed charge, and the proportion that is the cost for power used.

In the first bar, the fixed charge represents a very small proportion of their current-day power bill, with the majority of the bill representing the costs for power used. The second bar pays slightly less in 2027, but the fixed charge is now a larger proportion of the power bill, although the majority of the bill still represents costs for actual power used.

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

Information about support for households during the phase-out

Breadcrumbs

On this page

What are low fixed charges?

Low-use plans and standard-use plans

Problems with low fixed charge tariff regulations

Low fixed charges:

Phasing-out the regulations

Time of Using pricing

Analysis of the impact on households

Long-term benefits

Support for households during the phase-out

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