Power Price Hikes: End of the Low-User Electricity Tariff

New government legislation is removing the low-user electricity tariff. This means that if you’re on the low-user tariff because you don’t use much electricity, you could find your bills set to rise. Canstar Blue explores all you need to know about the low-user electricity tariff, and 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 decade, 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:

1. 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.
2. 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.
3. Less well-off families on low-user tariffs are discouraged from heating their homes due to higher electricity costs.

As a result, the government has changed the regulations. This means that from April 1, 2022, electricity companies will begin a five-year phase-out of low-user tariffs.

What will the removal of the low-user tariff mean for consumers?

How the changes will affect household power bills is still a bit of a grey area, but the government hopes that it will produce a “fairer, more equitable system”.

Government estimates state 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

And for the 40% those bills could be much larger. From April this year, 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, for low-user customers currently paying 30c per day as the max standard charge, it looks like this:

By 2028, low-users could be paying $547.50 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.

Currently, nationally, average prices per kWh for standard and low-users look like this:

Standard:  19.8 cents/kWh

Low rate: 28.44 cents/kWh

For the average Kiwi household, currently burning 7000kWh a year on low-rate plan, the cost of their electricity = $1990.8

As they move to the standard, lower kWh price, their electricity usage bill will reduce to $1386. Which is a saving of : $604.8

So, overall, at current prices, the average user should come out of the changes slightly better off:

$604.8 – 547.50 = $77.3

Long-term benefits: More choice

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.

The good news is that support will be available for those negatively affected, although the government is still working out details. You can find out more about the assistance on offer, here.

And, ultimately, higher fixed charges for all means there will be more money to maintain the national grid. Plus, without their hands being tied by regulations, it’s hoped that power companies will expand their range of plans to include more off-peak pricing incentives.

These will 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.

For more information about off-peak plans, you can read our stories:

→ Related article: Free Power: Contact Energy’s New Good Nights Plan

→ Related article: Save While You Sleep: Off-Peak Night Tariffs Explained

Finding the best power deal

Over the next five years, it will be interesting to see how NZ power companies respond to the new pricing system. And whether you’re on a low-rate tariff, or a standard tariff, it will pay to keep a close eye on the different deals on offer. The market is always evolving, and swapping providers is quick, easy and could save you substantial sums.

But when comparing power companies, it’s important to consider the broader picture – don’t become too focused on finding a deal with a big prompt payment discount or special perk. Be sure to balance all the rates, discounts, fees and contract periods when making a decision, as well as more personal factors, such as customer service and support.

To help you find the best value electricity retailer, Canstar Blue rates NZ power companies for customer satisfaction and value for money, see the table below for some of the results, or you can click on the button below for the full results of our survey.

Canstar Blue’s latest review of NZ power companies compares them on customer satisfaction. The table below is an abridged version of our full results, available here.

Compare electricity providers for free with Canstar Blue!

About the author of this page

This report was written by Canstar’s Editor, Bruce Pitchers. Bruce began his career writing about pop culture, and spent a decade in sports journalism. More recently, he’s applied his editing and writing skills to the world of finance and property. Prior to Canstar, he worked as a freelancer, including for The Australian Financial Review, the NZ Financial Markets Authority, and for real estate companies on both sides of the Tasman.