AEMC targets solar and air-con in power pricing proposal

Proposed changes to Australia’s power pricing rules have lumped rooftop solar households in the same basket as homes with big air conditioning units, as the main targets of new tariffs aimed at recovering network revenue to drive down future electricity costs.

Releasing its draft determination on proposals to amend network pricing arrangements, the Australian Energy Market Commission said on Thursday the proposed new rules would enable consumers to make “more informed decisions” about how they used energy services and the technologies they invested in to manage their energy use.

“There are differences between how individual consumers choose to use electricity, due in part to new technology and changes in the way we live,” said AEMC chairman John Pierce, in a release calling for submissions on the proposal. “The way consumers are charged for electricity has not kept pace with these changes.

“Existing network prices over-recover revenue for off-peak use of the network and under-recover for peak use. It means that consumers who use most of their energy at off-peak times are paying more than the cost of supplying network services to them while those using energy at peak times are paying less than it costs,” Pierce said.

The draft offers two examples of this, the first being a consumer using a large air-conditioner (5kW) in peak times. According to the AEMC, a household with this size air conditioner will cause about $1,000 a year in additional network costs compared with a household without air-con.

While the consumer with the air-conditioner pays about $300 extra for the comfort of cool air, says the AEMC, the remaining $700 is recovered by all other consumers through higher network charges. “We’re all paying for air conditioning, whether we have it or not,” the AEMC says.

No surprises here. As the Productivity Commission noted almost two years ago, around one quarter of all our electricity bills are caused by the cost of the infrastructure built to meet “critical” demand peaks that occur for just 40 hours of the year – almost exclusively when all the people turn on all the air-conditioners at the same time to seek relief from soaring summer temperatures. It’s a problem.

In its second example, however, the AEMC shows that like the Productivity Commission before it, it may be struggling to get its mind around the impact on the grid of distributed generation – and particularly solar PV.

It presents a household using an average-size north-facing solar PV system in South Australia. Today, it says, this household would save about $200 a year in network charges compared with a neighbour without solar.

But “because most of the solar energy is generated at non-peak periods during the day, it reduces the network’s costs by $80, leaving other consumers to make up the $120 shortfall through higher charges.”

As has been noted many times on this site, incumbent utilities don’t generally love the idea of more solar PV on customer rooftops. But as is also mentioned, simply hiking the fixed component of network tariffs is not a smart or equitable solution.

Currently, all payment for solar exports back into the grid take no account of potential grid benefits, which the grid operator in South Australia says are considerable – both in shifting the peak and in stabilising the grid.

As Perry Sioshansi put it in January this year, networks tend to see energy self-generation as competition, rather that seeing it as something that can – and already does in Australia’s southern states – cut demand during peak summer hours by more than half, when it is expensive to serve.

But what about energy efficiency? Would households switching all their light globes from halogen to LED be considered to be a price burden on other consumers?

Not according to the AEMC, whose proposed new approach to structuring network prices is expected to encourage consumers to invest in more efficient appliances and new technologies to help manage their energy use at peak times.

This would, however, include “encouraging” households to install their solar panels facing west, to generate more energy at peak times.

“The majority of consumers are expected to benefit from these changes through lower network prices in the medium to longer term,” the release said. “Some consumers will choose to respond to new network price structures by reducing their use of the network at peak times, which will reduce overall network costs. Those cost savings will be passed on to all consumers through lower future network prices.”

The AEMC said, however, that the current network tariffs had no ability to reward consumers who installed battery storage, “despite its ability to significantly reduce network costs. And there was no incentive to choose appliances that can be programmed to operate at off-peak times.

Responding to the AEMC draft proposal, Australian Solar Council chief John Grimes told RenewEconomy that the review process could be useful, as long as it was genuine in its goal to refine how energy costs were shared across the community, with a particular emphasis on equity.

“We have always argued that impacts like solar PV and air-conditioning must be treated fairly,” Grimes said in an email. “To date the emphasis has been on solar PV with no account of the impact of technology such as air-conditioning.

“With the toxic policy debate surrounding solar PV at the moment, we need to be reassured that this is a genuine attempt to look at all aspects of this, and ensure it is not merely another renewable witch hunt.

“The smart application of distributed solar energy, and energy storage technology, could play a really positive role in bringing network costs down overall.

“Encouraging people to take control of their own energy use is no bad thing,” Grime added. “However, there are many people who are unable to shift their energy demand – pensioners at home, disabled people and others.”

Analysis commissioned by the AEMC estimates that up to 81 per cent of consumers would face lower network charges in the medium term under a cost-reflective capacity price and up to 69 per cent would see lower charges under a critical peak price. Although this appears to refer to future prices, rather than the built-in prices of past investments.

Pierce said that while different technologies impact in different ways on network demands, the rules should be flexible enough to result in efficient outcomes regardless of the technology being used.

“We are focussed on establishing the right regulatory regime for the future so everyone can make clearly informed decisions about their energy use as new technologies emerge.”

The changes proposed would be introduced over the long-term, over five years, with network businesses required to minimise the impacts of price changes on consumers.

Many in the industry would question whether this is fast enough, given the predictions of cost falls in solar and battery technologies, and predictions by leading analysts that this could provide an economic incentive for even households in big cities to leave the grid by 2018.

Pierce said network prices would continue to be developed by the networks with oversight from the Australian Energy Regulator, but under the proposed new rules consumers would have greater influence the decisions made and the prices they pay.

There would be more consultation with consumers and retailers when networks develop their prices and the process for setting prices will be more transparent. Network prices will be finalised earlier, giving consumers and retailers more time to prepare for price changes.

Further consultation will occur before a final decision is made in late November this year. Network businesses would need to start consulting on the development of new tariffs and submit draft proposals to the AER in mid-2015 for new prices to be phased in from in 2017.