Cost-reflective tariffs will do little to reduce network costs

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So called ‘cost-reflective’ tariffs proposed by networks may accelerate uptake of battery storage. But they are targeting household peaks and not network peaks, so may not be cost refletive at all, and may not cut network spending.

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The majority of the distribution network operators develop what they call ‘cost-reflective’ tariffs that charge customers based on their monthly peak demand, but it can readily be shown that this isn’t what causes the annual network peak. The annual network peak is important because it determines the possible need for network augmentation, and so determines the capital costs faced by the network.

We have analysed the load data from 3,876 households from the Smart Grid Smart City database for 2013. Their aggregated load profile, which is a proxy for the load profile of the network that serves them, peaks in summer at 6pm on Fri 18 Jan.

As shown in the chart below, about half of the houses actually peak in winter, with only 31% peaking in summer. Only peaks between 2pm and 8pm are included in this analysis because this corresponds to a common period when demand charges are applied.

Screen Shot 2016-02-18 at 3.04.48 PM

The chart below then compares each household’s annual demand peak with each household’s demand at the time of the network peak (which is what causes the network peak). All the households above the red line have an annual peak that is greater than their demand during the network’s annual peak. For example, the red circled point has an annual peak of 19.3kW but was contributing only 1.7 kW during the network peak.

This means that charging a household based on their annual demand peak would not only result in them being charged too much, but would also mean they are charged for network augmentation at times when their demand is not affecting the cost of augmentation.

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The network’s ‘cost-reflective’ tariffs compound this problem by applying the demand charge to the monthly peak for every weekday of the year (sometimes every day). The chart below is the same as the chart above except that instead of using each household’s annual demand peak, it uses the average of each household’s monthly peak (which is what the network’s demand charge would be applied to).

It can be seen that, in addition to most houses being charged more than they should be (generally those who are less responsible for the network peak), now some of the households (generally those who are more responsible for the network peak) would be charged less than they should be. The correlation between payment under the demand charge and responsibility for the network peak is very low, at 54%.

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This has a number of important implications.

  1. Because the demand charge is applied through the whole year, households have a stronger incentive to install load control devices such as batteries.
  1. However, batteries will be programmed to shave a household’s peaks, not minimise demand at the time of the network peak, which will make them less effective at reducing the network peak. Similarly, suggestions of a ‘pipe approach’, where a household’s grid connection capacity is capped at a certain level, will be ineffective.
  1. Having larger networks increases the size of the network operators’ Regulated Asset Base, and under revenue cap regulation they are able to increase their tariffs to maintain their revenue.

It is clear that a more rigorous approach to ‘cost-reflective’ tariff design is required. There is also a need to allocate the sunk (residual) costs fairly, as well as design tariffs that households will wish to take up. While the AEMC’s decision to provide non-prescriptive guidelines for the setting of cost-reflective tariffs is understandable, it has resulted in the approval of network tariffs that are unlikely to be efficient or fair or voluntarily taken up by most customers.

This is an ongoing area of research for CEEM and we will soon be releasing a discussion paper on this topic.

Rob Passey is a Senior Research Associate at the Centre for Energy and Environmental Markets (CEEM) at the University of NSW, Policy Analyst at the Australian PV Institute and Senior Consultant at IT Power (Australia).

Navid Haghdadi is an (excellent) PhD Candidate at CEEM UNSW.

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19 Comments
  1. solarguy 3 years ago

    Just as I thought the greedy will keep on being just the same. No wonder people want to leave the grid. Some body kick some sense into them.

  2. Math Geurts 3 years ago

    “Because the demand charge is applied through the whole year, households have a stronger incentive to install load control devices such as batteries”. Right. Cost- reflective tariffication at the end will be advantageous for those households.

    It may be admitted now that it is also true that uncontrolled devices like solar panels, which do not deliver during peak time, have hardly any value for the grid. There is no reason for their owners to pay less for using the grid than housholds without solar panels. If solar panel owners without batteries don’t want to pay their fair share they should leave the grid and solve their own problems.

    • Catprog 3 years ago

      Is the reason for the peak being pushed to 6pm due to solar panels providing power during the day?

      • Math Geurts 3 years ago

        For the grid only the year around peak counts. “about half of the houses actually peak in winter, with only 31% peaking in summer”. Do you want us to believe that the winter peak is pushed to 6pm due to solar panels?

        • Catprog 3 years ago

          Is the peak during the day or at night? And how much higher would the day be if their was no solar panels?

          • Math Geurts 3 years ago

            The peak is in winter in the late afternoon, early evening and is not lower if there are solar panels.

    • JeffJL 3 years ago

      “…solar panels, which do not deliver during peak time…”

      Total myth. As has been shown plenty of times on this site when you look at the full usage of electricity PV systems reduce the peak and move it to later in the day.

      “There is no reason for their owners to pay less for using the grid than housholds wthout (sic) solar panels.” I agree, and also put the proviso that they not be required to pay more either.

      • Math Geurts 3 years ago

        Be aware: grid costs are essentially fixed costs. Taking less kWh’s from the grid is no reason for paying less for using the grid.

        • JeffJL 3 years ago

          By not commenting on the myth thank you for acknowledging your statement was incorrect.

          While the grid costs are fixed they are determined by the highest level of expected demand over a year. (note over the last 10 years or so expected demand was greatly overestimated so we have a grid which is over engineered). Should people who contribute only 1kW to the peak have to pay the same as people who contribute 10kW to the peak?

          • Math Geurts 3 years ago

            For the grid only the absolute year peak counts. “about half of the houses actually peak in winter, with only 31% peaking in summer”

            Grid costs are fixed costs. Everybodies contribution to the grid costs should be related to kW peak demand, not to kWh’s (or “the full usage of electricity”).

          • JeffJL 3 years ago

            I think you mean that the cost should be related to the peak demand during the peak period. I concur. I prefer an average over the period of peak usage (i.e. time of use charging) rather than the random maximum peak.

            I think we are in general agreement that cost of power (including supply) should be related to use during the peak usage times. We are just disagreeing how to price it.

          • Math Geurts 3 years ago

            Time of use charging is fair for pricing kWh’s, to pay to the energy provider. For using the grid, fair payment (to the grid owner) is related to demand during time of maximum grid load, untill there is a risk for overloading a local grid during sunny hours on sundays.

          • Jeremy Lawrence 3 years ago

            Hi Math – how should consumers (residential and commercial) be charged for connecting to the grid? Do you have a clear proposal that we can discuss? For example, every customer (residential or commercial) pays the same fixed rate ($/kW) for their contribution to coincident peak demand in the last twelve months?

    • Catprog 3 years ago

      Does this fair share mean they have to pay more like many places have proposed or the same amount?

  3. MaxG 3 years ago

    While I liked solar all along, I was a late adopter. The reason for my adoption was the continual price increases. I am the happiest guy on the planet every time I see my off-grid solution. Yes, it is not ROI, but to stick it to those greedy bastards… saying screw someone else.

    • Jonathan Prendergast 3 years ago

      Hi Max, I wonder if just installing a huge system on the roof but relying on the grid overnight would have stuck it up them just as well?

      • MaxG 3 years ago

        No 🙂 You are still paying the daily supply charge… which might be more than the energy you use at other times. Considering a noise-insulated diesel with 6kVA at 2k$… and I prefer the latter.

        • Jonathan Prendergast 3 years ago

          Yes, but giving them a lot of clean energy into the grid that they don’t want each day is even more problematic than just losing a customer.

  4. Jonathan Prendergast 3 years ago

    Cost reflective charges are difficult for residential customers. They are not sophisticated in the most part, so the current arrangement is for the retailer to manage energy cost risk and to provide a consistent price to households. (I note that this does not reduce network costs which is the issue discussed). The arrangement now is mostly volumetric, and is probably the most realistic fair way of charging for households. You use more, you pay more.

    The type of cost reflected charges discussed in the above are more applicable to large customers that can have capability in managing their demand or installing sophisticated technologies. So I would say this article is a bit of a red herring. Particularly as households are only 20-30% of grid demand.

    1 conceivable cost reflective charge could be an upfront cost when connecting a large AC system. It has been commented that a new home AC system can place a $7,000 cost on the broader network. This would see households with AC less cross-subsidized in the future.

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