The rollout of complex new retail electricity tariffs is causing widespread confusion and leading to higher instances of bill shock, a new survey has found, confirming that more work needs to be done to ensure all consumers benefit from the transition to renewables.
The report, from Energy Consumers Australia, points in particular to time-of-use and tariffs, which it says can work well for a growing number of engaged “energy prosumer” households, but are unfairly punishing households who didn’t actually sign up for them or don’t know how they work.
Overall, the report shows that industry players and regulators are vastly overestimating the current level of engagement and understanding of the average Australian energy consumer, with a whopping 82 per cent unsure or unaware what a “retail tariff” actually is, or what rate they’re on.
Another 54 per cent told the ECA they want a basic relationship with their retailer.
So what are time-of-use tariff’s and why are they a problem? First, a quick look at the basics.
How much a household pays for electricity depends on its electricity pricing plan, which is made up of variable costs – called an electricity tariff – and fixed charges, which are paid for each day or each billing period to cover the cost of grid connection, metering, administration and billing, and environmental fees.
There are a range of different tariffs, including flat rate or single rate, where the same amount is paid for electricity from the grid, whatever time it is used.
But as more and more solar comes onto the grid, and as smart meters are rolled out across the National Electricity Market, more and more retailers are introducing time-of-use tariffs, where the rate paid depends on the time of day, with a higher rate (c/kWh) for electricity use in the peak period and a lower rate in the off-peak period.
Another variety is a demand tariff, which adds a demand charge to a flat or time-of-use tariff. The demand charge is based on the highest amount of power drawn from the grid at any time (called the peak demand). This – most commonly applied in New South Wales – has been particularly controversial.
Demand tariffs are controversial because if a customer happens to unwittingly use, say, their oven, washing machine and air conditioner all at once during an evening peak they will incur a very high demand charge not just on that day, but for every day of that month.
According to the ECA report, Consumer knowledge of electricity pricing and responsiveness to price signal, about a third of Australian consumers have willingly signed up to time-of-use or demand tariffs.
These are people who are keen to have greater choice, control, or flexibility over how they use electricity, and they’re likely to be higher income homeowners who already have the kit to make it work, such as rooftop solar and perhaps home automation tech and batteries.
But while these consumers are using the incentive as intended, time-of-use and demand tariffs are penalising other Australians who aren’t able to benefit from them, didn’t willingly sign up for them, or who just want their electricity bills to be simple.
Just over half of the 4000 consumers surveyed by ECA for the report said they hadn’t chosen to be on a time-of-use tariff by their retailer. Households earning less than $50,000 were most likely to say it wasn’t a tariff they’d chosen.
Conversely, lower income households are considered the most likely to change their behaviour in response to time-of-use tariffs – but not in a way that is particularly beneficial or constructive.
“This is likely for two reasons: Energy costs, as a proportion of income, are much higher for low-income households,” the report says.
“Lower income households face barriers to investing in automation technologies for their homes (either because of lack of disposable income, or because they rent).”
As a result, time-of-use tariffs are more likely to force lower income people to cut their energy use when they really need it, such as heating or cooling in the evenings.
“This is a potentially worrying finding given the importance of keeping homes at a comfortable temperature for health benefits,” the report says.
Shifting heating, cooling is hard
Confusingly, the study finds that those households most able to move large energy loads away from peak times that are the least likely to actually do so.
Heating, cooling, and heating water account for 35-75 per cent of households energy use, depending on where that house is and what appliances it uses.
But just 22 per cent of people on time-of-use tariffs have changed their water systems to cheaper midday periods, and only a handful more are running their air conditioners and heaters outside peak times to pre-cool or pre-heat their homes.
So who are these people? Mainly wealthier households, say the boffins from ECA.
In response to questions from Renew Economy, they said the sort of people who can move large loads (but may not be doing so) are those with energy efficient homes who can pre-cool and pre-heat houses during the day when energy is cheap, and people who have batteries.
- This group also includes people who don’t need electricity at peak times, such as shift workers who aren’t at home.
“Large loads include items like electric vehicles, air conditioners, and clothes dryers. Wealthier households are more likely to own these appliances or, in the case of air conditioners, have more energy-efficient homes, allowing them to be more flexible with their usage,” they told Renew Economy.
For people who don’t live in properly insulated homes – and this is most of us, as the average Australian home has an energy rating of less than two stars out of ten – it means shifting loads that aren’t very energy intensive in the first place, such as washing machines and dishwashers.
“On average, these two appliances would likely account for no more than 10% of home energy use, indicating that the financial benefits of time-of-use tariffs are likely modest for many households,” the ECA report says.
The increasingly technical nature of tariff designs and power bills is also a problem – particularly in the case of demand tariffs, as Flow Power founder and CEO Matthew van der Linden told Renew Economy last year.
“It’s critical that we don’t create a barrier to entry by making the market too technical and setting too high a bar for knowledge,” van der Linden says.
“Explaining that prices can be expensive and cheap is doable. But explaining that there’s this other thing called demand and that it’s not the same as energy – that’s really hard!”
“Telling customers that they must avoid mistakes at all costs because one error could lock them into higher costs for the whole month is discouraging. Once that mistake happens, there’s often nothing they can do to rectify it – it’s already baked into their charges.”
Battle ground between incentive and punishment
Time-of-use and demand tariffs have become a battle ground between retailers wanting to change behaviour, and consumers who are increasingly being surprised by large bills they never expected from a tariff they didn’t sign up to.
ECA chief executive Brendan French told the SwitchedOn podcast last year that many households can’t benefit from time-of-use pricing because they don’t know what appliances are using power, or when.
In many cases, they haven’t even been informed by their retailer that they are being moved onto a time-of-use tariff.
“The whole tariff and pricing regime needs a really good review … to make sure that consumers can really participate in the market,” he said.
“People are far less likely to engage, even when it’s in their best interest to do so, because they feel intimidated, confused, and unsure of themselves and their abilities.”
As the ECA report says, it’s important to provide an incentive for households who can use it and a basic plan at a simple price for those who can’t.
