Electricity prices explained

Electricity prices include the cost of:

• Energy (the cost of generating electricity).
• Transmission and distribution of electricity (the cost of moving electricity between power stations and your home).
• Retail services (charges relating to servicing customers, Electricity Commission levies and so on).

New Zealand's electricity prices reflect both the cost of providing electricity and the cost of building new generation to meet New Zealand's electricity demand in the future.

The New Zealand electricity market is unique in that:

• Most generation is from renewable sources (hydro, geothermal and wind). Hydro lakes have only limited storage capacity which means conditions can swing from wet to dry relatively quickly.
• New Zealand is an isolated market, with no means of importing or exporting electricity.

The costs of generating electricity and moving it from power stations to homes and businesses across the country in many cases are increasing, as is the cost of building new power stations.

• Growing demand for electricity means we will need new power stations, which are more expensive to build and run than existing power stations. These power stations will most likely use geothermal, wind or water for fuel.
• Electricity transmission and network distribution prices are also increasing in some areas.

The 'Components of our price' graph shows the cost of the energy reflected in today's retail electricity prices (9 cents per unit) and the cost of energy for future electricity generation options. Based on what we know today, the energy component of our price will need to move to between 9 and 15 cents per unit on the basis that wind and/or hydro options will need to be developed. While gas-fired generation may appear attractive at 9-12 cents, at this stage it is not regarded as feasible due to lack of available gas reserves in New Zealand.

To ensure that investment in new electricity generation occurs to meet future demand – and keep New Zealand's lights on – electricity prices will need to rise over the coming years.

Energy prices are increasing around the world for very similar reasons to those listed above. However, New Zealand's electricity prices are still relatively low by international standards.

Source: Ministry of Economic Development 2011 Energy Data File (most recent data available).

Why don't retail prices come down when lakes are full and wholesale prices are low?

Wholesale prices can change rapidly as a result of weather events, a change in demand, an unexpected power station outage that reduces supply, and transmission constraints. Wholesale prices can vary anywhere between $0 and more than $1,000 per megawatt hour. Fixed retail prices shield customers from these fluctuations, providing you with greater certainty around costs from month to month.

Where does New Zealand's energy come from?

In New Zealand, electricity is generated from a number of sources with hydro and gas representing 77 per cent of New Zealand's total electricity generation in 2009.

Where will our electricity come from in the future?

New Zealand's electricity will continue to come from a range of different sources in the future. This is likely to include geothermal, hydro, gas and wind. Contact is currently building a number of new power stations to help ensure New Zealand has enough generation, not just for today, but for the future.

Why do my bills vary?

Bills mainly vary because of changes in your electricity use. This could be a result of:

• Weather being cooler than usual.
• A change in the number of people occupying the house.
• Increased electricity demand as a result of new appliances, for example heat pumps.

Another reason that bills can vary is that some are based on estimates. We usually read customer meters every two months, so every second bill may be estimated based on your previous electricity usage.