Electricity prices should rise at a more moderate pace over the coming years, NZIER says.

It has released a paper that notes while household electricity prices increased 11 percent in the year to March, the rate of change is likely to be slower into the future.

“The increases should be more moderate than they were over the past couple of years,” lead economist Mike Hensen said.

“The driver will shift from increases in generation costs to increase in distribution transmission costs for the next two or three years.”

He said there was a risk of prices rising more quickly if there was a dry year or an unexpected loss of thermal capacity.

The issue for electricity was that it had to be produced and delivered in the quantity demanded by consumers at the time they needed it.

“The assets used to generate and deliver electricity require a lot of investment, take a long time to build and last even longer. This mismatch between fluctuating demand and fixed capacity in the short term has two effects on electricity prices: When demand gets close to generation capacity, a small increase in demand can cause a large increase in price. Transpower and EDB networks’ costs reflect a long history of past investment and a need for future investment to ensure peak demand can be met.”

He said the average electricity generation spot price last year was about 14c to 16c per kWh compared to 9 to 10c in 2021.

That was driven by a steady increase in gas prices since 2018 after a production outage and the declining output, which Hensen said ended the era of cheap thermal generation. There was also an increase in wind generation.

Some commentators have called for any incoming government to work to reduce the cost of power to help New Zealand businesses and households. Hensen said that was hard to do.

“Certainly there is potential for lower generation costs as we stabilise during the transition to renewable costs and then there’s a challenge for EDB and Transpower costs to investment to be made as efficiently as possible so that the cost impact is minimised. But basically expanding a network is expensive to do, requires a lot of capital and to some extent that occurs, that has to occur a little bit ahead of demand so that creates a little bit of pressure on costs particularly in the short term.”