Outdated power pricing burden Australian households

Electricity network businesses around Australia are currently reviewing how they collect revenue, as more and more customers turn to sourcing a significant proportion of their energy needs from solar.

At the moment, the network businesses are at risk of an own goal by pursuing regulatory changes that will drive more solar uptake and even more disconnections from the grid. Within some utility businesses in sunnier parts of the country, including northern NSW, QLD and WA, this is already considered to be a serious issue.

In the last few months the network operators (such as those in Victoria) have been running internal reviews and hiring consultants to try and figure out how to make their cost recovery “more cost reflective.”

There are rumblings that they are even considering making users pay for access to the network and network capacity, something they essentially receive for free today. This could even extend to small and medium businesses being treated in a similar way to domestic consumers, so that users pay for the network capacity (i.e. amount of power currently around 5 kVa on average for a domestic customer) they require.

In this regard, Energy safe Victoria has already given the green light to a significant reform that would clean up much of the massive distortions that currently exist in the electricity market.

According to a forgotten ESV document released back in 2011…

“There are two types of capacity control products that could be implemented if the utilities have their way:

• supply capacity control and

• load control.

“Supply capacity control operates by switching all power supply off when the customer’s load reaches a certain limit. The power would then resume after a short interval of say 5 or 10 minutes. The system will continue to assess the load and every time the load exceeds the customer’s agreed load limit, power will again be disconnected. Supply capacity control could be used by distributors in emergencies to ration power and avoid power outages. Supply capacity control could be used by retailers to offer capacity limited tariffs (where a customer is charged a reduce amount per kWh if they agree to a limited load capacity), again to ration power and possibly avoid disconnection. Load control is possible using smart meters that allow the use of the Home Area Network based in the meter to turn individual appliances on and off .”

“Load control does not disconnect all power to the customer’s premise s . This feature might be offered to customers by retailers for use when the cost of power is very high and by distributors when a segment of the network is near capacity. An example of load control is to remotely switch a customer’s air conditioner off, to reduce load on the network on a very hot summer’s day, only switching it on when overall power demand drops. The customer would be offered a saving on their bill for allowing their load to be controlled by the retailer, which would cycle their air conditioner on and off in such a way that the customer’s comfort would not be materially affected.”

Despite the regulator’s approval of this forward-looking use of our costly smart meters, for customers to voluntarily opt in to capacity-based contracts, the network operators aren’t even bothering to entertain this idea. They are anticipating that the public will object to having their supply restricted and/or possibly interrupted during critical peak events.

However this option is only being allowed by the regulator on a voluntary basis, and given the financial benefits of giving up your use of the network during critical peak times, many people, myself included, would opt for voluntary capacity constraints and redeploy the money saved to more important things in our lives.

Instead of offering new services such as voluntary capacity constraints, the networks are merely offering an extension of the old tariffs that were developed in the 60s and 70s by economists pricing power for the coal and nuclear dominated grids of Britain and France. They’re called Peak/offpeak or Peak/Offpeak/Shoulder Time-of-Use tariffs and are outdated in a world of smart grids and home solar generation, they mean people do not pay appropriately for network access.

*Victoria has renamed them “Flexible Pricing* but it’s just another Peak/Offpeak/Shoulder tariff offering 40 years past its use-by.

In most locations around Australia, network and supply critical peaks occur, at most, 20 or 30 days a year and are driven by the cumulative heat from multiple days of hot weather and resulting high levels of air conditioner use.

To service these peak demand times (which occur on less than 1% of hours in a year) network capacity needs to be built, including more transformers, poles and wires cascading throughout the grid, along with expensive ‘peaking’ power plants. It is these peaking power plants that raise the cost of electricity for consumers as their capital cost flows through to the amount charged per kWh at the customer end.

However, the current application of electricity tariff theory, that was mature in the 70s, with so called “Flexible” or TOU pricing with a peak, off-peak and shoulder period, does not address these peak times directly and will have a marginal impact on the requirement for building out an ever bigger network and more of these expensive peaking plants.

Perhaps that is what the network operators are trying to achieve, so that they can keep doing tomorrow what they did yesterday, which allows them to gather increased revenue through greater volumes of sales throughout the year by putting up financial blocks to solar?

According to the Victorian government we got smart meters so we could have Flexible pricing: “flexible pricing provides an incentive to use power at times when there is less demand for electricity, reducing the need for expensive energy infrastructure upgrades – a cost that is passed on to all consumers.”

But actually flexible, or TOU pricing is getting the entire community to follow behaviours that do not reduce the cost of providing the network or generation capacity. The network was built as a cascade of transformers between the big centralised generators and consumers; it is built to satisfy the greatest projected demand that will occur in any one instant or split second in time. So, while we are all trying to do our washing after 11pm or before 7am or cooking a deliberately late dinner at 10pm, our efforts are in vain 99 per cent of the time, as 99 per cent of the time the system is not experiencing peak demand, and therefore there is plenty of regular (non-peak) generation and network capacity to satisfy demand.

However, someone does benefit from this pricing regime – and that is the owners of oldest, most outdated and inflexible baseload coal plants. Generally, the older the plant, the less flexible it is and, therefore, configuring the billing system to require baselond power increases the amount of time these older plants are utilised – which benefits the least flexible, most polluting of the existing generators. The more they are used, the more power they are able to sell to customers. Providing baseload power is all about providing a high volume of energy as much of the hours of the year as possible.

When the wholesale price of electricity is increased across every hour of the year to pay for the cost of peaking power plants, when it comes time during those rare critical events for customers to cool themselves with (usually) old inefficient air conditioners, customers don’t notice the effect that paying for power during these peaks is having on their bill.  And given they don’t notice the disproportionate effect on overall power price the result will be no reduction or very little reduction in supercritical peak demand days; the ones which are causing the accelerated build out and augmentation of the networks and peak capacity supply.

So why don’t we just start charging in a cost reflective manner, charging people for the amount of power  (e.g. 1,2,3,5, 10 or 15 kW) they want or need to draw from the grid during a critical peak event?

The French went some of the way there with their Tempo tariff, naming certain days Red, Blue or White, and announcing (on the company website, in the news) the night before that a special red price would be imposed the following day. Consumers could even receive phone calls or SMS letting them know when they could receive special discount pricing for reducing their power use.

In the French case, however, they didn’t go quite far enough, just lifting the rates modestly for those days, so the impact was modest.

A better option would be to actually sell different sized ‘pipes’ or capacity into the house (think of the line that connects your house as a pipe that can be sized according to what you are willing to pay). This has also been done by the French, as well as in Italy, where it is not unusual to have a mains fuse rated at 3kVA (about 3000Watts) or 5kVA (~5000 Watts).

These special fuses allow customers to go over the limit for a short amount of time, allowing them to boil the kettle without kicking the supply fuse, but any prolonged draw above the agreed limit results in an interruption. This approach is, unfortunately, even cruder than straight ‘Time of Use’ pricing, which is being considered here.

The best of both worlds

We now have an advanced communication network transmitting network data at 30 minute intervals. We have the ability to monitor a customer for 30 minutes during a critical peak. Which means we have the ability to warn them if they breach a pre-agreed pre-paid capacity limit via SMS/Phone call/Email.  The network could request a special extra read at 10 minutes for those customers who have breached their capacity limit for 30 minutes. And if they are still in breach one of the following will occur depending on which type of plan they have chosen.

#1 Cap plan with no hidden costs: customer opts for 5kVA but goes to 7kVA at 30minutes. An SMS is sent to them warning them they are over their agreed capacity limit and they must turn off non-essential power consuming devices such as air-conditioners. A special read is requested from their meter at 40 minutes (10 minutes later)  and if this customer is still using over 5kVA they are disconnected for 5 minutes, at the same time a phone call and SMS is sent to them explaining the situation and offering them a change to their kVA limit if they ring their retailer’s call centre. A warning will be sent to the customer that disconnection will occur every 10minutes if they do not reduce their demand under the pre-agreed 5kVA limit until the end of the peak event.

#2 Pre-agreed soft kVA limit: Under this scenario, the customer has agreed to get hit with a penalty if they breach their limit. In this case, the customer gets a warning SMS/Phone call/Email and if they fail to curtail their use they will be hit with a capacity penalty which is 200% or 300% of the past 6 months price for the capacity band that they have reached.

#3 A customer is billed based on whatever their highest capacity was in the past 12 or 18months, on a rolling basis.

#4 A customer is charged just on capacity (kVA) they use on the super critical peak days. In this case access is almost free (apart from a metering charge) for the rest of the days of the year and with only power used during super critical peaks contributing to their power bill. To implement the above options distributors would have to expose retailers to aggregate capacity charges who would then package up fully hedged plans at a cost premium or full pass through plans for consumers making for a dynamic and fair market place.

The likely outcome of a new system of billing called “critical peak minimum pipe” separating the cost of kWh from the kVA capacity costs would be to end the needless upgrading of networks for extreme events, events that happen less than 1% of the time within the National Electricity Market.

In practice, this means that when a distributor like Citipower or United is looking at upgrading an asset, such as a transformer setup in parallel at a zone substation that is 60 years old, this asset will instead be retired as there is no need to build a new one given reduced peak demand. Consequently, network revenue would shrink, but the network itself would be right-sized for delivering our electricity service increasing utilisation to levels that are similar to most other comparable developed countries.

The alternative:

If the network operators are belligerent and choose not to fairly charge for capacity then consumer campaigns could include protesting households deliberately stressing the grid by making use of their full 20kW circuits during critical peak events and bringing the grid to its knees.  Let’s not go there.

Critical Peak Minimum pipe schemes will stop the wasted spending on more and more poles, transformers and wires, whereas current Time of Use pricing will keep coal fired power plants economic for longer, keeping the cost of power for consumers much higher than it has to be. It is time we made the switch to ‘Critical Peak Minimum Pricing’ for our network access, separating the volume and capacity proportion of our bills and, in doing so, making it fairer and more cost reflective and reducing the cost of power to consumers overall.