Solar tariff rip-offs, and why utilities may never learn

Greg Bourne, the chairman of the Australian Renewable Energy Agency, has just put solar PV on his rooftop and he is not happy. His beef is not with his solar panels, of course, but with his subsequent treatment by one of the big three energy retailers.

Bourne, who had solar on his roof in Melbourne way back in 2004, had just gotten around to fixing the roof of his Sydney home for leaks, and recently installed 4kW of solar PV with micro-inverters. What happened next infuriated him.

The retailer, EnergyAustralia, will pay him just 5.1c/kWh for the electricity he exports back into the grid. Bourne knew that. But he did not expect the jacking up of other charges that followed.

For the privilege of being a solar household, Bourne’s fixed charge jumped from 85c/day to 91c/day, his peak charge from 49c/kWh to 51c/kWh, the shoulder charge from 19c/kWh to 20c/kWh, and his off-peak charge from 10c/kWh to 11c/Wh. The sum effect was to negate any benefits Bourne would receive from the meagre price offered for his solar exports.

“What they have managed to do is just rip me off completely,” Bourne told RenewEconomy on the sidelines of the Australian Energy Storage conference this week, where he forecast energy storage to be having its iPhone moment and for mass market take-up. “So I told them I’m moving.”

Bourne, a former WWF boss who also once headed BP’s oil exploration activities in Australia, shopped around and decided on another big retailer, Origin Energy. He got a discount for moving (paid for by other households under the retail “headroom” allowance that costs everyone about $140 a year) and slightly better tariffs.

In the meantime, he will use his solar output for underfloor heating in winter and cooling in summer. And then he will install battery storage. And keep a very close eye on tariff changes.

“To me, this is a stupid way of reacting,” Bourne says. “They knew I was going to draw less electricity from the grid, but they were going to continue to draw their pound of flesh, come what may. It is backwards-looking and they (the retailers) are shooting themselves in the foot over a customer who chose to embrace new technology.”

It’s actually quite a typical story, and may explain why the public has such little faith in utilities, something the utilities themselves lamented just a few weeks ago after concluding that consumers son’t like them much. But they have no-one to blame but themselves.

The way tariffs are structured in Australia is often quite scandalous, the treatment of solar households, particularly so – be they in the form of so-called “fair solar” exports, which are anything but, limitations on exports, extra fixed charges for solar households, or even fees for “safety checks”. The complexity of the electricity market means that they often go unnoticed. And for the utilities, as we’ve seen before, confusion means profit.

And there are no signs they are going to improve anytime soon.

One of the big pushes by the big retailers and network operators has been for what they call “cost-reflective tariffs,” as a means to plug the hole caused by reduced demand as people install solar and more efficient devices.

This has caused retailer revenues to fall, so they have responded with proposals for time-of-use tariffs and a new component, demand charges, that are supposedly structured to ensure that those who use the grid most at peak times pay their fair share of the costs.

But the manner in which new demand charges are being implemented are being criticised because they are not cost reflective at all. Instead of focusing on network peaks – which is critical, because it is that which governs the tens of billions of dollars spent on network upgrades – the incumbent utilities are proposing demand charges that cover times when the network is not peaking at all.

Solar households, in particular are penalised. And the upshot is that more households will install battery storage, and more people like Bourne, will be “pissed off.” The proposed charges are not so much cost reflective, as profit protective.

Rob Passey, from the Australian PV Institute and the University of NSW, on Thursday presented his own analysis of demand charges proposed in South Australia. His conclusion is that they are anything but what they claim to be, cost reflective.

To explain, it’s best to use some graphs. This graph below shows a typical network peak. Networks have to be built to accommodate that peak, to ensure their are no blackouts.

But the usage patterns and peaks of individual households hardly ever resemble the overall network. Below is an example of 20 houses out of a sample of 300 taken by Passey. They show huge variation.

The problem comes when the utilities throw a dragnet over the whole sector to try to maximise their revenue. The demand peak, the small red line, is what they should be targeting in truly cost reflective tariffs. Instead, they cast their tariffs over a broader peak, from 3pm to 9pm, representative by the bigger red line.

The result of that is revealed in the next graphs. The first is the impact of flat tariffs for network charges, as most have now.

The second is what happens to those very same consumers with the proposed demand tariffs. Those with low energy use, in the bottom left corner, hardly get any benefit. The high energy users at the time of network peak pay hardly any more. Worse, some houses with low usage at the time of network peaks (top left) are paying higher demand charges than those with high usage at network peaks (bottom right). In effect, hardly anything changes, apart from the utilities securing their revenue.

The irony is that the broader peak will simply encourage more households to pick up battery storage. “If you have a tariff that is more cost reflective, people have less incentive to install storage, compared to a tariff with a broad demand period over every day of the year,” Passey said.

“If you want to drive the uptake of battery storage, you use cost reflective tariffs that aren’t.”

Passey’s comments come as AGL Energy this week quietly posted the first demand charges in Victoria, in the United Energy distribution area, which operates in Melbourne’s south, east and the Mornington Peninsula. And they are similar to those posted for South Australia. And it appears to suffer the same problems.

Muriel Watt, also of APVI, and a consultant at ITPower, says the very wide peak band – from 3pm to 9pm – is effectively price gouging.

She says the daily fixed charge is supposed to cover previous network investment, so the demand charge should only be to cover (or prevent) new investment. She is also troubled that all users would be charged a minimum of 1.5kW demand charge, even if they are not using that much.

“Since they have a (quite high) fixed charge, the demand charge should only be for demand above the standard 1.5kW, which has already been built. Seeking a demand charge for the first 1.5kW, as well as a fixed charge, is double counting.”

And, she notes, the energy charge is low, so the incentive for energy efficiency (and solar PV of course) is removed. “That, presumably, is the aim,” she says.