Flexible electricity pricing in Victoria a positive step

Flexible pricing is the Victorian Government’s moniker for what is more commonly known as time-variant or time-of-use pricing. This week’s announcement marks another key step in the controversial roll out of smart meters. It’s a firm step by the government, while still treading lightly to avoid serious consumer impacts.

The type of flexible pricing introduced in Victoria from mid-2013 will initially be based around a three-part network tariff, where consumers pay:

• more to use electricity at times of high or ‘peak’ demand, for a few hours during weekday afternoons and evenings,
• less during times of lower demand or ‘off-peak’ overnight
• in between for other times, or ‘shoulder’ periods

It’s worth noting that the network tariff is only one component of what is bundled into the retail tariff that customers pay and retail tariffs aren’t regulated in Victoria, so it remains to be seen what the end product for consumers will look like in terms of cost and tariff shape. Energy retailers don’t have a reputation for innovation, however, so in all likelihood the initial retail offerings in July 2013 (when the moratorium on time-of-use pricing is lifted) will reflect the underlying network tariff shape:

• Peak rates, 3:00-9:00pm Monday to Friday,
• Off-peak rate, 10:00pm-7:00am nightly
• Shoulder rates at all other times, including daytime on weekends

Compared to the flat tariffs most Victorian households are currently on, flexible pricing is a little more reflective of the actual costs of building electricity networks and operating generators to meet demand.

The winners

If designed properly, flexible pricing should result in lower bills for households that already use proportionally less of their energy during peak times, and/or more during off-peak times, when compared with average households.

For these customers, savings can come without changing the way they use energy. This is a welcome reduction in the cross-subsidy provided from those who are not causing the peak demand problem – such as homes without air-conditioners – to those who do use air-conditioning.

With flexible pricing, most consumers should still be able to save some money by changing the times at which they use appliances, such as running the dishwasher in the evenings or doing laundry at night or on the weekends, when energy is cheaper.

Some reports suggest that consumers whose load profile more closely matches the average could save $100-$200 per year by shifting basic loads. These are promising numbers and such estimates seem reasonable for ‘typical’ consumers (if there is such a thing), but of course for individual households there are a broad range of factors, including:

• levels of energy literacy and interest. Pricing signals are one thing, but without informed, engaged consumers they are far less effective.
• the actual price difference between peak and off-peak rates. This won’t be known until the retail products are offered.
• the ability or willingness to manually operate appliances at different times, or afford appliances with timers.
• the position of energy cost in a personal hierarchy of needs. The effort taken to cross the street to pick up $100 in the gutter is much less than that required to manage your energy use every day for a year in relation to a tariff rate that changes 24 times each week.

The losers

Not all households will be better off with flexible pricing. Those who use more during peak times and can’t or won’t change their usage patterns will have higher bills. While cost reflectivity is the point of flexible tariffs, they could pose a huge and unacceptable risk to the most vulnerable people in the community. With this in mind, the government made a safe decision: to make flexible pricing voluntary and give these homes a refuge in traditional ‘flat’ tariffs.

There is still a risk, of course, that consumers who do not benefit from time-of-use end up on it, perhaps as a result of dodgy marketing by energy retailers.

To address this the government, networks, retailers and consumer advocates reached an important accord to allow consumers to try flexible pricing and go back to flat tariffs if it doesn’t work for them, without being locked in to a contract with the threat of penalty fees. This gives households the opportunity to stick their toe in the water to understand the risks and benefits without being locked in.

There is also the risk that if enough consumers move to flexible pricing, the load profiles of those staying on flat tariffs will become ‘peakier’ and the flat tariff rate will increase. For example, if half of all consumers moved to flexible pricing and saved 10% off the variable component of their bill (without behaviour change) as a result, the cost of flat tariffs would increase about 10%.

The impact of this is not likely to be sudden, but definitely needs to be monitored.

I applaud the government for its approach to flexible pricing, handling a sticky situation well. Now it needs to do more to continue to unlock the opportunities for smart meters to reduce household energy bills.

By this time next year, most Victorian homes will have a smart meter, with a wireless radio called Home Area Network (HAN) interface. Smart appliances, including white goods, air conditioners, pool pumps and water heaters, can use the HAN to provide households with an opportunity to respond to energy prices and be rewarded for reducing their impact on the electricity system through reducing peak.

The Victorian smart meters have the basic tools to make this happen, but the networks have no firm plans to allow consumers to use smart devices, other than in-home displays for information purposes.

The government has a vital role to play in building these frameworks to realise these benefits, and this needs political will: in the current regulatory environment the networks have little or no incentive to implement alternatives to building poles and wires.

Craig Memery is the Alternative Technology Association’s energy consumer advocate.