Grattan capacity tariff idea still prices electricity unfairly

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A slight improvement on the current model, the Grattan Institute’s proposed electricity capacity tariff would still fail most consumers.

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Electricity utilities are in for a shock. A wave of change has hit the global electricity supply industry and it’s unstoppable. The distributed energy revolution has now made it on to rooftops, cutting out the middlemen and reducing costs for consumers. What’s more, this revolution is giving consumers more and more energy independence, and far more choice and environmental performance than the conventional energy industry, with their clapped out old coal and gas plants, could ever dream of.

As a last stand, the electricity industry is desperately trying to reinvent itself to maintain its current regulated revenue level. It aims to fly under the political radar as best it can and avoid the political fallout from the price gouging it has performed on the Australian public over the past decade.

The industry has ‘seen the light’ and suddenly got interested in better pricing regimes to make sure everyone pays for the proportion of the network and generation that they use. Getting the pricing right is the icing on the cake, but an even bigger problem is that the cake is currently far too big, due to the network history of unrealistic demand forecasts which sent costs to all consumers soaring (not to mention their guaranteed rate of return).

The report “Fair pricing for power” No 2014-8, July 2014, brushes aside the gouging of Australian electricity consumers – through misleading and deceptive consumption forecasts done in cahoots with a weak regulator – that have left the community paying for assets they don’t actually need.

Making network access cost reflective (and therefore fairer for everyone) shouldn’t distract from sorting out the issue of the redundant network, coal and gas generation assets that need to be written down and the resultant overall lowering of the total cost of the network to all customers.  In simple terms we are all being gouged for our access to the network, this needs to be fixed through a good pricing model that fairly reflects the cost of network access (using only those assets that are required) by customers.

Although a small improvement on the present situation, the Grattan Institute’s proposed capacity tariff will fail many consumers today and even more customers tomorrow as the opportunity for behaviour change in the future is lost without the right price signals.  Therefore the opportunity to get the highest productivity from the nation’s electricity assets at the lowest possible cost is also lost.

It suggests that customers should use advanced metering technologies, which it defines as interval OR smart meters.  This is a backwards proposal, every meter that is installed from today onwards should be a smart meter with enough memory to store 365 days of 30 minute power consumption data for each channel.  If the backend communications (mesh) network does not yet exist to transmit the data to retailers, then the smart meters would be manually read. When the backend communications network is finally installed and turned on then the full benefit of these meters will be realised.  It is crazy to consider installing a (non-smart) interval meter then replacing it again some years later with a full communications ready smart meter when both meters have a similar cost to install.

To the crux of the report which basically consists of two proposals.   The first proposal is to institute a capacity tariff to replace some of the network charge that is currently smeared on each unit of electricity purchased by small domestic customers. Grattan proposes to base the capacity tariff on an average of a household’s five highest peak demand periods (at 30 minute intervals) over the past year (260 days, Mon-Fri 7AM-9PM).  The problem with this proposal is in the implementation, as it doesn’t directly calculate highest demand using critical demand peaks, which are the driver of network costs. The second proposal is to implement a capacity pricing unit multiplier that will be enacted 15-20 days a year coinciding with local (geo) network peaks or super critical region wide peaks.

Grattan calls these five high peak demand periods “maximum use” and explains that it differs from the main driver of network transmission and distribution costs which is “peak demand.”

From the report:powerlines_1

“A household’s maximum use is different from peak demand. Peak demand measures the highest level of consumption across all consumers in a network, while maximum use measures it for just one household. It is the individual household’s maximum use that forms the basis of a capacity charge.”

Given that smart meters record every 30 minute period of a customer’s usage history,  a better scheme would be to use that information to price a customer’s power supply costs based on their highest 30 minute usage during a critical peak (‘peak demand’) which is more representative of their impact on the network than their five highest usage periods any old time.

Grattan references (but does not adopt) the, well-established, “French” time-of-use (TOU) capacity charging system, which allows for three levels of power pricing for a given day: Red (nine times ‘Blue’ day prices), White (double ‘Blue’ day price) and Blue (low price) days; a system that advertises when critical power grid events are going to happen via sms, giving power users the option to reduce their power use on ‘Red’ days and hence reduce their power bill.

We should adopt a modified version French TOU system over the Grattan proposal by pricing an electricity consumer’s network access based on their usage during critical events. During critical demand times (approximately 20 hours on 15-25 days per year) a warning would be sent out via SMS, phone, email and/or the news media (warnings would also be sent out to those customers in network segments that are experiencing serious congestion during non-critical peak times).

Then the averaging of their five highest power usage periods (30 minute intervals) would be used to establish that customers access charge on a rolling basis over 12 months. While the Grattan proposal includes 260 days from 9am to 8pm, most of which don’t matter at all under this amended version of the Grattan proposal, we’d only look at 15-25 days, removing the remaining quiet 335-345 non-critical peak days of the year from establishing the access charge for a kW access level.

As it currently stands Grattan’s proposal will penalise customers for using power on a ‘quiet’ network: e.g. at 10am during summer holidays, or a fairly underutilised network with lots of solar contribution from neighbouring properties at midday while everyone is at work in the city, as this may be a given users highest use period.

There is little economic benefit in doing this and it doesn’t help nearly as much to decrease network (and therefore customer) costs than by increasing network access charges based on when the network hits critical power demand levels as previously outlined. It would be clear to a customer, via the different bands and costs illustrated on their bills, that by reducing their demand during designated critical peak days they could save some serious money.

The net result for electricity pricing is that the per kWh unit charges that are currently so high would significantly drop and customers who don’t have a serious impact on the grid during critical events will save money accordingly.

By implementing network pricing as suggested above, the second proposal from Grattan, “Critical Peak Pricing,” becomes redundant, saving even more money for consumers, retailers and network operators by eliminating implementation, billing, support and marketing costs.

So, in short, the utilities and regulators should not follow Grattan’s current proposal, which is about adding yet another distortion to the market. Instead, we can make a minor adjustment to the first Grattan proposal to only record the five highest usage events at each customer premises during critical peak or local network peak times (15-25 days a year). Only then will the proposal become, fair, worthwhile and a positive for the economy.

Furthermore the proportion of network costs reflected in the per kW (kVA) charge should be a much higher proportion of the network cost and the daily service charge should be eliminated altogether, being replaced with the capacity charge priced in 1kW (kVA) increments.

Finally a significant point missed by Grattan, network access charges to everyone and therefore total revenue to the network businesses must also drop due to their failure to provide the public with fair and accurate forecasts of future network demand. This reduction in costs via redundant asset write downs to consumers will be bigger than the savings made by consumers that are currently cross-subsidising other consumers in the power market under today’s network tariff structures.

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  1. Chris Fraser 5 years ago

    Those are good ideas from a ‘demand’ perspective. Perhaps we can also control costs on grid use from the supply side. If there is a linear relation between costs and the (kVA) size of the load and distance from the generator, perhaps we could have more efficient network design and cheaper running costs. An example might be a large generator bidding to supply energy with assets spread out among the load points to minimise transmission usage. This would favour generators who spread their assets evenly among the end users. Pardon if all that is going off-topic.

    • Winston 5 years ago

      There is already a mechanism for this. It’s called the marginal loss factor.

      Anyway, transmission use of system charges are a small portion of total network charges. It’s the distribution network cost that needs to be brought down. Oh, and the cost to give everyone smart meters.

      • Matthew Wright 5 years ago

        Actually the cost to give everyone smart-meters is paid for by improved productivity. Having hundred’s of meter readers running around costs a fair bit and with smart-meters you eliminate most of that cost.

        • Winston 5 years ago

          That was certainly the position that sold smart meters to the Victorian government.

          However, *shock horror*, the rollout has cost far, far more than originally planned. The 2.1 million customer metering points used to get a read once every three months. That’s 8.4 million reads a year, done by people.

          Now, the meters are read every 30 minutes. There are 17,520 30 minute periods in each year. Over 2.1 million meters that’s 36.8 billion reads per year.

          Unsurprisingly, the distributors are having IT problems.


          Instead of a bunch of low cost jobs they’ve got whopping big IT systems and some high cost jobs.

          Just the rollout itself had cost $2.3 billion by the end of 2012, according to SMH. And it’s still going. That’s an awful lot of meter reading.

          Very few people are taking advantage of time-of-use tariffs because they don’t actually deliver that much in the way of savings. Just like everyone else, I turn the air conditioner on when the temperature hits 36 degrees (OK, maybe I have a higher tolerance than most). I need cool air when it’s hot, and a cooked dinner when I’m hungry. I can’t defer that consumption to off-peak times.

          So the benefit to having the meters for the customer is marginal. The cost of the IT infrastructure is going to keep metering costs high.

          I’m a fan of information being equivalent to empowerment, but honestly I’m left wondering about the value of it. In fact, that would be a great article – find out how long it’s going to take for the investment in smart meters in Victoria to pay itself back.

          • wideEyedPupil 5 years ago

            THere is potential value there with smart systems in place to manage load the way major industrial consumers already do but we are yet to see the evolution towards those systems.

  2. Alan Baird 5 years ago

    Particularly useful article. The combination of demand sensitive pricing and above all elimination of the “system access charge” is really getting somewhere towards rational billing.

    • Matthew Wright 5 years ago

      Thanks Alan! I think I may have lost some readers so to reiterate the counter proposal (or amended proposal) to what Grattan offers. A customer’s usage during the 15-25 critical days when the overall network (super critical peak) or the local (geo) network is peaking, the five highest 30 minute intervals are taken to establish a customer’s capacity impact on the network. They are then billed a capacity charge that appears on each quarterly (or monthly) bill and entirely replaces the daily service charge and much of the proportion of the per unit (kWh) charge which is made up by network costs.

  3. Peter Richard Mckernan 5 years ago

    I am currently installing Hybrid solar installations. I am applying my long experience with Remote Area Power Supplies to the programming of these systems. During off-peak periods my customers “Sip” from the grid in anticipation of tomorrows solar production Vs consumption. Basically we treat the grid like a standby generator that runs best after 11pm. Despite the higher up front costs of the hybrid system my customers are very happy. This is a rapidly developing trend. The introduction of electric vehicles will also add to the flattening of the demand curves. Perhaps we could simply be charged a time of use access fee incorporated into the k/W/Hr charge which encourages people to minimise their peak use but still offers easy to read bills.

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