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

Context for the mid-point review 

The Electricity (Low Fixed Charge Tariff Option for Domestic Consumers) Regulations 2004 (the LFC regulations) were introduced with the aim of making those who use less than the average amount of power better off. The regulations were introduced in response to concerns about the impact of rising power prices on low-income groups. 

The LFC regulations lowered power bills for some consumers on low-user plans by increasing power bills for consumers on high-user plans. However, the 2018-19 Electricity Price Review recommended phasing out the LFC regulations as it found they are having a number of unintended consequences, namely that the regulations are: 

• limiting distributors’ ability to adopt more efficient pricing (which would ultimately reduce household power bills for all consumers) 
• delaying electrification, and increasing complexity for customers 
• poorly targeted at helping low-income households. 

In 2021, Cabinet agreed to phase-out the LFC regulations over a 5-year period. 

To help mitigate the impact of the phase-out on those who would be made worse off, an industry-funded Power Credits Scheme was put in place. This provides financial support for selected consumers on the LFC who struggle to pay their bills. This scheme will run for 5 years alongside the LFC’s phaseout to smooth its equity impacts. 

At the time it was acknowledged that there was some uncertainty over how the industry would choose to structure its pricing plans during the phase-out and the impact those plans would have on different consumer groups. 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. 

Building an evidence base 

The review will rely on both quantitative and qualitative analysis. 

Analysis of quantitative information will help enable factual, evidence-based analysis. We will seek to access distribution and retail tariff data. 

Given the consumer impacts, focusing the review exclusively on quantitative data may provide too narrow a perspective on the impacts of the phase-out. So we will also engage with a wide range of stakeholders. Engagement with industry groups, regulators, community support organisations, consumer advocacy groups and financial mentors will provide a greater understanding of the real-world impacts. 

Scope of the mid-point review 

The mid-point review will focus on 3 distinct questions 

• How have prices changed during the phase-out (and to what degree was this driven by the phase-out)? 
• Are the original aims of the phase-out being achieved, or will likely be achieved, when the regulations are removed? 
• Could additional support measures be necessary to mitigate the impact of the phase-out on particular consumers - now or from 2027 when the Power Credits Scheme ends? 

How have prices changed during the phase-out (and to what degree was this driven by the phase-out)? 

We will consider changes to both distribution and retail tariff structures as a result of the phase-out and the consequences for household power bills. By analysing this information, this review will consider the effect the phase-out has had on households, particularly on low-income, low-use households. We will also consider if benefits are accruing to low-income, high-use households. 

The review will take into consideration that there are other factors which also impact residential power bills. These include changes to wholesale electricity prices, inflation, investment in electricity network infrastructure and changes to the calculation of transmission charges. It should be acknowledged that it may not be possible to distinguish the impact of these factors from the impact of the phase-out of the LFC regulations. 

Are the original aims of the phase-out being achieved, or will likely be achieved, when the regulations are removed? 

In the advice to Cabinet to support its decision to phase-out the LFC regulations, a number of benefits were identified which were considered likely to eventuate from the removal of the regulations. These were to: 

• limit barriers to distribution tariff reform
• limit any unintended price distortions for consumers which could result in artificial incentives to over- or under-invest in particular technologies
• help enable a more equitable electricity market particularly for vulnerable consumers 
• reduce the levels of complexity and confusion in the electricity market for both 
  consumers and industry 
• support movement towards greater electrification. 

This review will assess if these benefits are occurring as expected or are likely to occur when the regulations are completely removed from 1 April 2027. The review will also assess whether any underlying conditions have changed such that a different decision might be considered. 

Could additional support measures be necessary to mitigate the impact of the phase-out on particular consumers? 

There was some uncertainty as to how industry would structure their prices during the phase-out and therefore what the impact on consumers would be, especially for low-use consumers. A $5 million, industry-funded, Power Credit Scheme was established to support low-income, low-use households which were adversely impacted by the phase-out. However, the Power Credits Scheme is due to expire in 2027 which will coincide with when the cap on the fixed charges is removed. 

The review will consider the effectiveness of the Power Credit Scheme and whether any additional support measures are likely to be required to ensure low-income households are significantly adversely impacted by increased fixed charges. 

Limitations of analysis 

Where possible, we have identified where we can obtain the data required and have undertaken early engagement with those parties to negotiate access to the data. 

We may not be able to access sufficient data to complete all the quantitative analysis we would like to. In particular it may be difficult to link a household’s electricity use data to that household’s demographic information. 

Out of scope of the review 

The proposed benefit of simplifying plans will be excluded from this assessment. This simplification can only fully occur at the end of the phase-out when retailers are no longer required to offer both a standard and low usage option for every retail plan offering. As a consequence, it has not occurred yet and is out of scope of this review. 

Timing and deliverables 

The following is a high-level timeline for the review of the phase-out.  

Governance and management

The Ministry of Business, Innovation and Employment (MBIE) is the lead agency responsible for undertaking and delivering the review.

The review is not a Ministerial Inquiry. 

Once the review is finalised the report will be presented to the Minister for Energy. It will then be published on this website.