A higher fixed price network charge in electricity bills, axing the “loyalty tax,” and making retailers compete for customers on standing offers are among a series of reforms being proposed to make energy pricing fairer and more efficient for the market and consumers.
The Australian Energy Market Commission on Thursday published a 164-page report that makes six draft recommendations, most of which look to be eminently sensible, including a move to ensure retailers charge all customers on the same plan the same price.
The reform follows up on a so-called super complaint made by consumer advocacy group Choice to the Australian Competition and Consumer Commission (ACCC) in May that consumers are missing out on an average of $430 of savings a year because they are unknowingly on a higher-cost version of their retail electricity plan. It’s known as the “loyalty tax” and the AEMC wants rid of it.
In the same vein, another draft reform proposes to introduce a competitive franchise for customers who have been assigned to the default market offer (DMO) – a mechanism intended to protect vulnerable consumers but which usually lands them with higher power prices than most.
This, too, seems a welcome reform, along with the recommendations to fund upgrades to the federal Energy Made Easy website and to “periodically review whether energy market regulations are supporting good consumer outcomes in the evolving market.”
But the AEMC’s proposal to raise the fixed charge component of network tariffs – a move it argues will spread the cost of the grid more fairly among consumers – promises to reignite a debate last thrashed out over the “sun tax:” who should pay what for the grid, and why?
Network tariffs are a mix of fixed and variable costs paid for connection to the distribution grid that are charged to electricity retailers then passed on to consumers, often accounting for up to 50% of the final bill.
The AEMC argues that while the shift to dynamic pricing has created winners – those who invest in solar and storage and are able to adjust their energy use to proactively engage with price signals – it has created losers, too, disadvantaging customers like renters and high-use households with no means to cut grid power consumption or to change behaviour.
“Our understanding is that under the current framework nearly all retail customers are assigned to a volumetric network tariff – that is, one that charges the customer based on how much electricity they use,” the report says.
“This means that the costs of infrastructure are not shared fairly among electricity consumers. For example, customers with rooftop solar and a battery contribute less to sunk network costs than customers with the same electricity consumption who only use grid power, despite both groups of customers depending on the network.”
The AEMC thinks that a higher fixed network tariff, that charges the same set fee per billing period per customer, regardless of how much electricity they do or don’t ues, could even out the ledger.
“We like fixed charges because they have a limited impact on customers’ decisions,” the Commission says.
“When customers are deciding to heat their home, buy a new television or install solar panels, the fixed charge should not influence their decisions. This helps customers make good decisions.
“Transitioning towards network tariffs that have a larger fixed charge component will help ensure that consumers can make the best use of network infrastructure to power their homes and businesses and to send power back to the grid.
“In the longer-term this will create the lowest cost electricity system.”
The AEMC concedes this approach will likely create winners and losers, too, but hopes it can be managed such that it is a more equitable approach, overall.
“These changes are intended to lead to more efficient tariffs that are predominantly fixed, but with a dynamic element designed to reward consumers for avoiding grid consumption that increases network investment costs,” it says.
“This would support the development of consumer offerings, such as retail plans, that reward behaviours that place downward pressure on costs for all consumers.”
Plenty, however, will disagree.
In an article published on Renew Economy last week, IEEFA analysts Johanna Bowyer and Jay Gordon argue that this approach could weaken incentives for energy efficiency and peak demand reduction at a crucial time in the energy transition.
And they say increasing fixed network tariffs could penalise households that use less energy from the grid, such as many low-income households, and those with energy efficiency upgrades, rooftop solar and storage.
“Moving to a higher portion of fixed network charges appears to go in the opposite direction of where we need to go to contain costs, reduce emissions and ensure an equitable energy transition,” the IEEFA analysts say.
Before messing with tariffs, they argue, “we should undertake a first-principles review of electricity network economic regulation to ensure costs, risks, and benefits associated with network services are sized and allocated appropriately across all stakeholders.
“With that in place, the appropriate network tariffs are likely to follow.”
Stephanie Bashir, the founder and CEO of Nexa Advisory, says increasing fixed network charges would be an “outrageous” backwards step in the consumer-driven energy transition.
“It’s an equity issue,” Bashir told Renew Economy this week. “Raising fixed network charges would be a betrayal of Australians who have invested in solar and batteries to save on their bills.”
Bashir is also concerned that a change to fixed tariffs will pave the way for a new era of network gold-plating, where spending on grid augmentation is favoured above other more innovative and efficient solutions.
“It disincentivises market efficiency and innovation right when those are the two things that we need the most to underpin the transition,” she says.
As Bowyer and Gordon put it, we face a pressing question about tariffs:
“Should households and businesses be incentivised to a greater extent to improve their energy efficiency and lower their peak draw from the grid, particularly as electrification and automation of energy assets ramps up? Or should that signal be dampened by moving a higher portion of network costs into a fixed charge?
“In IEEFA’s view, customers should be encouraged to reduce their peak grid demand and to use energy more efficiently – as this can ease pressure on both network costs and wholesale costs.”
