We're now more than halfway through the low-user electricity tariff removal process. Canstar Blue explores what its removal could mean for you.
What is the low-user electricity tariff
When a customer signs up for a power plan, they are asked one important question: Are you a low user or standard user?
To be considered a low electricity user, a household must be:
- A household that uses 8000kWh a year or less (0r 9000 kWh for households from Christchurch southwards, due to the cooler climate)
- A main abode (holiday homes, vacant houses and offices are not eligible to receive low user rates)
Whether you're a low-user or a standard user affects how much a power company charges you for the energy your household consumes. This is because a power bill is made up of two key charges:
- Fixed-rate daily charge – a fixed rate charged every day regardless of how much power you use
- Variable usage/per unit charge – a rate that is charged for every kWh used
The way these charges are implemented varies depending on whether you are a standard or a low user.
Standard user
A standard user consumes relatively high amounts of electricity each month. As a result, power companies offer competitive variable usage rates. To balance this, they charge a higher fixed-rate daily charge.
Low user
Low users pay a much lower fixed-rate daily charge, but significantly higher prices for the power they use. This means that their fixed costs are much lower than those of a standard user. As long as they don’t use much power, their bills will be lower.
Why is the low-user electricity tariff changing?
The low-user tariff was introduced back in 2004. The two-tier system was designed to help low-income households that don't use much electricity.
High users receive a discount on the power component of their bill, but pay more for the daily charge. Low users pay reduced daily charges, but more for their limited power consumption.
The idea was that the extra cash from high-use households would pay for the upkeep of the electrical network, partially subsidising the bills of low-users, who burn less power and are less reliant on the national power grid.
Back then, average NZ households consumed over 8000kWh a year, so most were on the standard rate. However, over the past two decades, despite all our modern gadgets, energy consumption has fallen dramatically.
Due to the increased use of more energy-efficient technologies, such as heat pumps, and the push towards properly insulated homes, average household consumption now sits around 7000kWh a year. And the majority of Kiwi homes (around 68%) are now in the low-user tariff.
This means three things:
- The drop in the number of households paying the standard user tariff means there is less money available to fund the upkeep of the electricity network.
- Low-user tariffs come with higher power prices, this disincentivises people from choosing clean, green NZ electricity, which is 85% renewable, over dirtier heating fuels, such as wood and gas. It also pushes up the cost of using electric vehicles.
- Less well-off families on low-user tariffs are discouraged from heating their homes due to higher electricity costs.
As a result, the government changed the regulations, and from April, 2022, electricity companies began a five-year phase-out of low-user tariffs.
What does the removal of the low-user tariff mean for consumers?
The government hopes that it will produce a "fairer, more equitable system" and estimates that:
- 60% of households should see smaller electricity bills. This includes: all households on standard-use plans and those on low-use plans using over 6500kWh per year
- 40% of household should see larger electricity bills. These are mainly very low-use homes (under 6500kWh per year), such as those that use gas as their main power source or have solar panels
For each year of the five-year phase-out, power companies are able to increase daily charges for low-users by 30c*, until they are on a par with standard-user charges. Over the five years, it looks like this:
5-Year Phase Out | Daily Charge* | Daily Charge Per Year* |
2021-22 | 30c | $109.5 |
2022-23 | 60c | $219 |
2023-24 | 90c | $328.5 |
2024-25 | 120c | $438 |
2025-26 | 150c | $547.5 |
2026-27 | 180c | $657 |
* Prices excluding GST.
By 2027, low-users could be paying approx. $630 (inc. GST) more each year for their power supply, not including the cost of the power they use. But, as the fixed rates increase, the cost per kWh should reduce.
Long-term benefits of the removal of the low-user tariff
While the removal of the two-tier tariff system will undoubtably cause many people's bills to increase. The long-term benefits will, hopefully, outweigh any short-term pain.
Just a year into the phase-out process, analysis by the Electricity Retailers Association New Zealand (ERANZ) revealed that while bills for low-users had increased, the increases were being offset by lower power prices, and that standard users bills had reduced by around $80 per year.
The ERANZ report also noted that more retailers were offering time-of-use power plans. These plans encourage people to spread their energy use throughout the day, reduce peak-hour demand, and, in the process, help all households reduce their power bills.
As the low-user phase-out continues, if you're finding it difficult to manage your rising power bill as a consequence, there is assistance available. You can find out more about the assistance on offer, here.
