Frugal households subsidise rich and profligate energy users

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Households are being forced by incumbent energy monopolies to pay electricity supply charges for grid capacity that they don’t actually need.

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Households are being forced by incumbent electricity monopolies to pay electricity supply charges for grid capacity that they don’t actually need.

It’s an historical legacy of the electricity industry that the cost of providing electricity to households and small businesses is often averaged (or smeared) across customers.

In years past it was difficult for utilities to estimate what was happening with demand at the household level, particularly that which coincided with critical peaks, as the power companies only had access to aggregate data and didn’t have any at the individual household level.

Therefore averaging the costs of building power infrastructure and allocating it equally to customers seemed to be the only practical thing to do.

6500-watts-per-square-meterHouseholds pay for two main services on their energy bill – they pay for the units of energy that travel across the grid from generators as they consume them (volume) and they pay for that point in time when they -combined with the neighbours and/or more broadly their region or state – consume power at the same time.

This is how the sizing and therefore the cost of the network and its future requirements are derived.  Unlike  volume charges, which is somewhat competitive and cost reflective, so if you use less and you pay proportionally less, the use of the capacity component of the networks for domestic and small customers has been uncapped.

Under the old (and current) model, if a customer uses 10 times the electricity of a more frugal neighbouring customer both customers would still pay the same electricity supply cost (as opposed to usage cost which is proportional to kWhs used), even though the cost of providing expensive network assets (the transformers between us and the generators) would be almost 10 times greater for the profligate as compared to the customer who uses 10 times less electricity.his is something an educated more efficient neighbour would surely resent.

Essentially a flat supply charge is a giant cross subsidy where the less than average power user pays to ‘enhance’ the network for the rich who need not worry about large levels of power use, especially with handouts from the rest of those paying for the networks.

The game has now changed with the introduction of smart meters. Almost everyone in Victoria has one and the other states are following slowly, and electricity retailers now know how much power people are using and when they are using it.

Although smart meters are not used in this way yet, they add the capability to sell access to network capacity based on a customer’s actual usage and need, analogous to customers who can pay for more broadband capacity and higher download speeds.

A customer who only needs to buy a small minimum pipe should be able to buy that service rather than being forced to pay for someone else, wealthier than themselves pipe as well.

A more advanced version of this is to pay for a “capped” maximum sized pipe during critical power grid demand peaks (when everyone wants a lot of power all at once i.e. hot days) which are only 20-40 hours per year and the rest of the time be able to use as much power (all you can eat) from the grid as needed with no restrictions, roughly similar to peak and off peak rates. And that’s because the rest of the time the grid is effectively underutilised and the cost of provisioning is not based on provision of grid access at these times.

However, the networks, regulators and government are ignoring the opportunity to now use smart meters, which measure demand in real time and allow the networks to allocate costs to customers based on their peak power usage during critical peaks.

So where does that leave millions of Australians who don’t have average consumption?  Well out of our bill we’re still paying $250 or $500 for our access and throwing in another $500 -$750 to pay for more profligate users of power (on average someone better off than ourselves) for their network access during a critical peak.

This $500-750 shakedown of efficient power users is unfair and unsustainable, and it dwarfs the $10 or $20 or $50 a year that the energy establishment, Tony Abbott and other Chicken Little’s falsely claims the renewable energy target costs power users.

So it is time for this brown madness to end.

The networks need to start charging fairly for the grid, giving customers the opportunity to choose the kind of electricity supply that they actually need and want.  Customers who want to use very little during a critical peak shouldn’t pay for a super sized network, and customers who choose to provision their own capacity with a solar inverter and batteries – only needing it as a small backup to reduce battery costs – should also not subsidise a supersized network.

The networks now need to propose a restructure to tariffs that gives options to consumers and leverages the useful portion of the existing assets for the good of all and in all fairness only charging for the service that people are actually using.

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5 Comments
  1. michael 5 years ago

    interesting actuarial exercise working out how to amortise the chance that the individual not wanting to pay for full access this year, didn’t last year, or won’t in 10 years time.
    For instance, if I want minimum energy this year, however was at high use last year, and will be next year, why do I get a year off paying for the ability to get full whack of electricity when I need it? would be tough to make long term infrastructure development decisions around that sort of system.
    could create a nice derivative insurance financial instrument to sell though…

    • Matthew Wright 5 years ago

      We already do that with the volume based market. Everyone buys on average 6400kWh then it falls. Some people with higher short run marginal costs do there doh and do not operate in that situation.

      If I buy 2kW (kVA) of capacity this year, I’m not at all likely to buy 5kW next year. I’ve set my house up to not require 5kVA or 10kVA during a critical peak, so I’ll just buy 2kVA. Most markets are based on predications of average consumer demand/demand trends.

      So new customers can now buy any capacity that myself and others like me are no longer using rather than building unrequired additional transformers, poles, wires etc.

  2. juxx0r 5 years ago

    Doesn’t matter what they do whether it’s to continue to jack up the access fees or it’s to bring in a size of pipe fee. They’re going to push people away and the price of storage is going to prevent them from ever coming back.

    • Miles Harding 5 years ago

      One plus: Australia is a backwater.
      The development of cost-effective battery and inverter technology will not be influenced by the donkeys (apologies to the quadruped variety) we have in Canberra.

  3. Alan Baird 5 years ago

    I’ve been saying the above since 2001. That’s because the “systems access charge” has been raised (but not electricity costs) as a sneaky way to cash up assets for privatisation. It’s the equivalent to paying a tax to the petrol station for “being there” even if you don’t buy petrol. This issue was never highlighted by anybody since 2001. Congrats for doing this.

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