Grattan capacity tariff idea still prices electricity unfairly

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:

“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.