How do you solve a problem like fixed charges?

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Everyone hates the fixed charges on their electricity bills, so why do they keep going up? Is it because retailers take us for mugs?

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"Climate proof" the West's power grid, or the region's utilities may not be able to generate as much electricity, according to a new study. Credit: David Kingham/flicker
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Credit: David Kingham/flicker

Everyone hates the fixed or daily charges on their electricity bills, right? So why do they keep going up? Because retailers take us for mugs, right?

What to do about fixed charges represents one of the gnarliest issues in relation to transforming the way consumers pay for the cost of the grid as we grind slowly but inexorably towards a decarbonised and decentralised energy system.

It is an issue even if (like me) you think that the value of networks that are being used less thanks to rooftop solar and batteries should be written down accordingly. But that’s another, even gnarlier issue.

With over $100 billion of capital invested in networks around Australia and annual revenues of around $14 billion, clearly the issue of sunk costs isn’t going away any time soon.

The retailer’s fixed charges, which range from under $200 to over $500 per year, are typically double the underlying network fixed charge. Retailers justify their margin on the basis of their overheads – staff, office space, billing systems – which don’t vary much from day to day.

This article is about the underlying network fixed charges, which vary between networks from a mere $75 (Citipower) to a whopping $700 or more (hello, the network formerly known as Ergon) per year for households.

(Alarm bell #1: does it really cost ten times more for networks to service some customers than others? When you compare inner city apartments with homes on isolated rural lines, yes it can. But alarm bell #2: does it really also cost retailers more than twice as much to service rural as urban customers?* The small added cost of meter readers aside, that’s debateable.)

Networks justify fixed charges on the basis that they are not selling energy but access to the grid, and that their costs vary little whether you are sleeping like babes in the wood or chilling out in front of the aircon while glued to the plasma tv screen with the dishwasher purring away in the background.

To explain: networks have three kinds of costs:

  1. Sunk costs: the cost of building the network, including the ongoing cost of the money they borrowed in the past to build infrastructure.
  2. Present or short term costs: the ongoing cost of operating the network (staff, IT, vegetation management, etc.)
  3. Future or long term costs: the cost of building more poles, wires and substations to meet increases in peak demand and/or higher reliability requirements; and possibly also the cost of replacing them as they wear out.

Future costs are what demand tariffs are intended to reflect. How much of your total bill they constitute should depend on how heavily constrained or close to capacity different parts of the network are, as well as the timeframe over which calculations of the cost of meeting future demand are made.**

Where there are significant network constraints, up to half your network tariff could be related to the cost of investment to meet future increases in demand. Where networks are relatively unconstrained, due to flatlining demand or past overinvestment, future costs may be negligible within the next 10-15 years (the typical timeframe for these calculations). In these areas (most of NSW and Queensland in particular), most network costs may be past or sunk.

Network tariffs have traditionally been composed of fixed and variable charges. With the recent need to also consider future costs, a convenient form of shorthand has emerged, whereby networks primarily seek to recover sunk costs through daily fixed charges (per day); present costs through variable charges (per kWh); and future costs through demand charges (per kW).

Where present and future costs are low, if they could get away with some networks would ramp up their fixed charge so that it constitutes nearly all of your network tariff. That’s one reason why they are creeping upwards. The other main one is that networks recover less revenue from energy charges whenever consumers do laudable stuff like install PV, solar hot water, LEDs or energy efficient appliances, so they ramp up everyone’s fixed charge to make up the difference.

This is bad. It is regressive, because low and high income households pay the same. It is also environmentally irresponsible, because it doesn’t encourage us to conserve the energy we import from a grid that is still 84 per cent fossil fuelled. And it doesn’t comply with the rules about cost reflective pricing, which state that recovery of sunk costs should not distort the price signal for efficient usage coming from a tariff based on future costs. A charge that encourages consumption because much of your bill is fixed obviously distorts another price signal that encourages lower peak demand.

(One network is proposing to double its fixed charge between 2019-2024. If retailers also double their fixed charge accordingly, that’s an extra $200 per year before you flick a single switch. They say it’s revenue-neutral because they’ll reduce energy charges correspondingly, but by their own modelling you’ll be worse off if your total consumption is below average.)

There is nothing sacred about recovering sunk costs through fixed charges. As the AEMC put it in 2014, ‘this principle [minimising distortions to efficient usage decisions] does not require that residual costs are recovered though increases to fixed charges.’

Instead, recovering sunk costs through a combination of fixed, energy and demand charges may be the most equitable solution. The ideal way to spread these costs around will vary, and this approach needs more research.

It is unlikely that we can avoid fixed charges altogether. Think of holiday houses. If the grid costs almost the same to run year-round, would it be fair for them to only pay for access a couple of months a year?

But energy consumer advocates are united in resisting the shift to higher fixed charges. Networks and the regulator need to recognise that ramping them only sends a signal to the wealthy, the angry and early adopters to go offgrid. Under revenue caps, this just places more financial pressure on those of us who choose or are forced to remain on the grid.

Whether we will prevail will become clear when the regulator responds to the first tranche of tariff structure statements (from the NSW and ACT networks) mid-year. They are close to being finalised now, and the signs are not good for anyone who expects networks to introduce innovative tariffs that support decarbonisation, distributed energy or demand management.

Meanwhile, if others have better ideas, feel free to contribute to the discussion. For instance, in the long run maybe the cost of access the grid should be tied to property values, so the wealthy pay more?

Mark Byrne is Energy Market Advocate at the Total Environment Centre

* Ergon retail aside, since its service area is covered by a massive cross-subsidy from urban consumers to the tune of $700 million per year.

** Here I am avoiding discussion of the finer points of long run marginal cost (LRMC), but invite an economist to step into the breach.)

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36 Comments
  1. MaxG 1 year ago

    Why even bother to analyse the basics of capitalism?
    This is what it is… profit maximisation. A whole bunch of academia and marketing is working on finding the best ways of extracting money from their customers… ideally by having the ability to blame someone else.

    Energy retailers are leeches. Full-stop. No matter how you look at it. Artificial competition, where everyone screws the customer in the same fashion, is not competition. — As long as greed drives the system, there will be no benefit for the public, because the public does not own it.

    Band-aiding the system, by dishing out subsidies: think about the utter idiocy; we have cheap power, we privatise, prices go through the roof, we then pay money to people to circumnavigate the current system to (hopefully) achieve lower cost for the consumer … insane. Yet, it is just another scheme by corporations to chew up this subsidy by a twisted market set-up. E.g. Sonnen, knowing that tens of thousands of SA homes get some sort of battery subsidy, this is a guaranteed market, because these unit sales are up for grabs; so quickly install a local branch to fit the ‘local’ label and profit on it… and certainly move out when not viable anymore. No benefit for an Aussie business; but then, we sign trade agreements to kill Aussie business, like we just did with Indonesia with Mango and Dragon Fruit; i simply killing the massive invest made recently made NT growers. simply insane.
    But this is the world we live in = insane.
    Why I have set-out on a mission to reduce my bills and reliance on others wherever possible. My only bills: Internet, land tax, car rego/insurance and food bill… and I m working on the latter with a 300m2 aquaponic system.

    • Joe 1 year ago

      I’m your average backyard Tomato grower and I’m intrigued by your Aquaponics idea. How are you working this and what type of goodies do you hope to grow?

      • MaxG 1 year ago

        🙂 It’s probably off-topic… and 300m2 is quite a thing (maybe 10x20m2 will do); you can start out on a few m2. Key ingredient: a fish tank, raised garden bed, water circulating through both, watering the plants with nutrients from the fish, while plants filter these; feeding fish is nutrient input. Plants and fish is output. Google it. I am in planning/design, done this in a previous life, know how to run it. I can grow whatever suits the climate all year round. Grow for myself and for small trade/barter… but mostly to get good stuff that is getting harder to buy (no GMO, chemicals, etc.)

        • Joe 1 year ago

          Good stuff, more power top you young Max.

        • Gordon 1 year ago

          I’ve been running aquaponics here for 5 years, but with quite a bit less than 300m^2 of area, still, I have 250 rainbow trout in the tank now and fresh fish is frquently on the menu. I’m doing it off-grid, so no rip-off retailers’ fixed charges for me 🙂

  2. Mike Dill 1 year ago

    Anyone that has some place to put in solar panels should be doing it now. Adding storage may also make sense now, and will be even easier to justify in the future.

    Having solar and two days of storage gives you 95% reliability or better. In most places, if you can get there, having a small generator to charge the storage in an emergency will be enough to meet all of your demand and allow you to disconnect and not pay that ‘service charge’ ever again.

    That would solve your ‘fixed charges’ problem permanently. Not yet economically rational is most places, but getting there soon.

    Note: in the USA the fixed charges are lower, but I still think disconnecting from the grid will make economic sense here by 2025 as the prices of everything continue to change.

    • Michael G 1 year ago

      Way back in 2010 then US secretary of energy Steven Chu told the electric cos. that they needed to prepare for when PV + battery storage got cheaper than the grid which he said would happen in 2025 for New York State, and about 2030 for California.

      • neroden 1 year ago

        It’s going to happen slightly before that in NY, and PV + batteries are *already* cheaper than grid in California.

        (I have no idea what Chu was thinking: grid prices in California are much higher than in NY, because NY has Niagara Falls. On top of that California has more sun. So it’s obviously going to happen earlier in California than in NY.)

        • Mike Dill 1 year ago

          You are correct. I think that Steven Chu was contemplating grid defection, or going off the grid. I think California had lower service charges at the time, so that would delay it somewhat.
          Going off-grid almost makes sense now in a number of places, as the costs have dropped faster than most people have realized. 2025 or 2030 as a grid inflection point is still a lot sooner than many people realize.

  3. Ian 1 year ago

    I’d like to see regulated demand tarrifs introduced for all electricity users.

  4. greenjenny 1 year ago

    Fixed charge for WA householders went up 95% last July. We have no choice of supplier. I have solar and draw little from the grid so this has made a huge difference to my electricity bills. As a very small energy user I feel I am trying to do the ‘right’ thing but am effectively being penalised. If the fixed charge is apportioned across my energy use my cost per kwh has increased more than 50% whilst my neighbour who runs his air-con 24/7, has multiple large TVs etc would barely notice the increase. Increases in fixed charges are sending completely the wrong message. We should be encouraging people to use less electricity and rewarding those who do. Like our WA water charges why not charge a minimal amount for the first, say 2kwh per day, of usage, with a sliding scale so that heavy users pay a far higher price, say for usage over 20kwh per day. That would be fairer and encourage people to reduce usage.

    • neroden 1 year ago

      Go off the grid!

      • Hettie 1 year ago

        Not everyone can afford batteries sufficient to cover extended periods of heavy cloud. Although I note that the other day, despite rain almost all day, my panels generated 10.8 kWh, more than my heaviest pre solar consumption. But I need the grid to get the FIT, which has been paying not only the power costs, but most of the green loan repayments too.
        I digress. Frequently.
        Do we expect the shops in our town to charge us if we never shop there? The local plumber to hit all households because he is available? Of course not.
        The poles and wires shold be part of the retail mark up on power. A per kWh cost. Why should I pay what amounts to an extra 35c per kWh, while for a household that uses 30 kWh per day, the standing charge adds less than 5c .
        It is grossly inequitable.

  5. Andy Saunders 1 year ago

    Gotta be careful calling for write-offs when demand drops – what’s good for the goose is good for the gander, so there would then be a case for write-ups if demand grows… with a corresponding increase in the RAB and then tariffs…

  6. Rod 1 year ago

    Is it too simplistic to remove standing costs and move it to the per kWh price?
    Have the distributors and transmission companies extract an amount per customer from the retailer to cover their costs.
    This way low energy users are rewarded and high energy users penalised. As for the cross subsidation for country customers, maybe the regulator needs to send a price signal to the retailers that would encourage them to move to the distributed generation model.

    • Mike Dill 1 year ago

      There is a basic cost for connecting a line up to a meter and doing the billing. That is much lower than most of the standing costs, but it is where a lot of the profit currently comes from. My guess is that my connection, meter, and billing ‘costs’ about $18/year, and the remainder is profit.

      • Rod 1 year ago

        Yes and then throw in retailers cost which in essence is just call centres to manage churn or chase new business and you understand how this “competition” argument is just crap.

  7. jeffthewalker 1 year ago

    Can you go off grid in Australia and pay no fixed charge if the “poles and wires” are still outside your door?

    With a rental property, the tenant signs up for the power. If you have an unoccupied rental property, do you (the owner) have to pay the fixed charges?

    • Gordon 1 year ago

      Yes, I’ve done it since 1991, the power line runs in the paddock across the road, 20m from my front gate.

  8. Ray Miller 1 year ago

    In SE Queensland fixed charges were stable at around $105 in 2013 then peaked at $493 16/17 and now $423 with changed retailer offering a better deal. During the same time the unit rate has only varied $0.23-$0.28 per kWh.
    As I think your are trying to point out the fix charges are not spread equitably. The fixed charges are based on your ‘access’ to the highway not how much you travel or the size, trucks are charged the same as motor bikes. It would also appear the high users are being given special deals and treatment as with many of the yearly fixed charge increases corresponded with a unit kWh price fall, this did result in overall decreases in cost for the top 10% of users.
    Added to the mix is the high sensitivity of our buildings to heat, as they mostly are of low standards (even the new ones) requiring sizable heat pumps to make them safe, of course all at once, causing massive peak network usage and skyrocketing prices for the next year. Again those who are efficient and do not add to the peak cross subsidize those who cause the problem. This has got to be reversed!
    The net result of high fixed charges as you state is a very negative impact on uses who are efficient and/or frugal, removing incentives for efficiency.
    The solutions are obvious, compulsorily add demand charges to the top 10% of users each year and have an inclining block tariff, the more you use the higher the price per unit. It would also be helpful to speed up the wholesale price flow-on to the end user ideally in real time. What is the point getting the speeding ticket in 12 months time, issue it on the spot! Then add a direct carbon cost to the unit charge, but let the customer choose their carbon intensity, even in rank order of availability and quantity.
    So you might get a bill for x units solar, y units wind, z units coal, w units gas.
    This system would be no more complex than the existing dogs breakfast but at least it will have a strategy and purpose.
    But then again I also agree with MaxG’s comments.

    • Barri Mundee 1 year ago

      Agree with your solutions but they would be contrary to the profit maximisation imperative of the owners of the system. Its an environmentally insane system that may only be fixable by taking these gouging businesses back into public ownership.

  9. Nick Kemp 1 year ago

    The network owners should be careful – If everyone starts going off grid because they can ‘grow and store’ their own then the network becomes increasingly expensive for the remainder and more economic for them to go off grid etc etc

    We could end up with a load of stranded assets slowly disappearing from our streets and a network only suitable for energy intensive business who are unable to harvest their own power.

    In an example close to home – TasNetworks have decided that they only own the first power pole on a rural property and the farmer owns the rest. A local who has a freezer shed with a mass of solar on the roof running the freezers and selling the surplus into the grid but now the pole needs replacing at his expense – his solution? See Ya!

  10. solarguy 1 year ago

    If the greedy bastards up the daily charges past the point where I can’t at least break even on the feed in, I’ll simply buy that back up genset to connect to my hybrid/off grid system and give Ausgrid and Energy Australia the good news!

  11. Barri Mundee 1 year ago

    When I read articles like this I reflect wistfully on the days when Victorians were supplied by the State Electricity Commission of Victoria. (SECV).

    It was a State government instrumentality set up to provide electricity at affordable prices. It generated electricity, it transmitted the electricity, it distributed the electricity, all at a reasonable cost. It maintained the system, provided electrical appliances at reasonable cost and which could be paid off over time. Its electricity prices were set by parliament and even after servicing its loans it paid a Public Authority Dividend to the State each year.

    It also employed and trained many engineers, administrative staff, supervisors, technicians, apprentices, trades people, skilled and unskilled workers.

    And then the ideology of economic rationalism came along and convinced politicians and the people of Victoria that the SECV and organisations like it were “inefficient” (yeah sure but only if judged by the narrow criteria of a profit-oriented business) and should be sold off, exposed to “competition” and the “free market”.

    And so we fools exchanged an effective public monopoly which served both the householder and business very well for a private market with sham, faux “competition” where the profit-motive dominated. Much of the industry was bought by overseas interests who had no long term commitment to this country.

    Soon prices rose, services deteriorated, jobs were cut and regions such as the Latrobe Valley were devastated and have never really recovered.

    But we have a “market”! And what a Frankenstein, what a dog’s breakfast it is.
    Is this the best we can do?

    Start again!

    • solarguy 1 year ago

      Ah, the good old days, now completely f#@ked over by the right wing capitalist pollies and their corporate mates.

  12. GraemeR 1 year ago

    More to do with electricity futures and the like, that have to be paid for down the line by ‘us’ in increasing amounts – related to the financial markets and the obligation to look after their share holders and go getters who would rather speculate on foreseen deliberate price rises at consumers’ expence and thus not have to work for a living

  13. Ken Fabian 1 year ago

    I think we need to consider ways to bypass the retailers entirely – I don’t see how they do anything that is so unique and essential that it can’t be done without them.

    Whilst there will be a place for fixed pricing I think the future is with variable pricing managed by smart systems – and they can enable customers, especially those with solar and or batteries, to deal directly with the wholesale market and it’s variable pricing, and eliminate a major cost component. If efficiency matters then cutting the middlemen out is an exercise in efficiency.

  14. itdoesntaddup 1 year ago

    Strange that the discussion failed to mention the grid cost of connecting generators. When you start spreading out generation to try to reduce geographic concentration in the hope of reducing the correlation between one wind farm or solar park and the next, you have to build a lot more grid to hook it up, and more again to handle the variation in flows according to where the wind is or isn’t blowing. Keeping SA supplied with power now requires Victoria to import from Tasmania and NSW when winds are light. When SA had sufficient capacity within the state not to have to worry too much about imports, except in rare circumstances, the grid was much less of an investment. Now, they Haywood connector has had to enlarge its capacity – and since it no longer has a power station at its origin, they need the capacity to wheel power across to it in the first place.

    • Mike Westerman 1 year ago

      Not strange really – transmission use of system charges are a very small proportion of costs, and no generators pay them – they are paid for indirectly by consumers. You obviously live in a dismal place as you incessantly refer to wind not blowing but ignore the increasingly important role of solar. The nature of demand and high number of cloud free days in SA means it will only continue to become more important, while its continuing falling cost will eventually give SA something it has never had – cheap energy.

      • itdoesntaddup 1 year ago

        TUoS costs are low when you have large generators sited close to large centres of demand.

        • Mike Westerman 1 year ago

          Which of course is a situation we don’t have in Australia.

          • itdoesntaddup 1 year ago

            Which is of course why it should have been discussed – especially with the move to distributed wind farms and solar parks.

            TUoS costs are not that much higher when you have large generators a but more distant from centres of demand, since you need N-1 grid support anyway.

  15. Pedro 1 year ago

    Nikola Tesla apparently figured out a way to wirelessly transmit electricity.

    Hmm….Could be a job for Elon Musk, he could cause another power industry disruption. Jay Weatherill would be on board in a flash just to de risk power poles falling over in a storm.

  16. Mark Byrne 1 year ago

    I’m a little strapped for time so couldn’t respond to all the comments but really appreciate the informed and thoughtful engagement.
    I was sent a paper by someone from the Regulatory Assistance Project (http://www.raponline.org), an international NGO, about fixed charges in Europe that came to similar conclusions to my article.

  17. Hettie 1 year ago

    Reading this, it suddenly dawned on me that we have been accepting a total fallacy.
    Think of a big department store.
    It’s shops represent enormous sunk costs. It’s budget must include provision for future renovations, and the costs of remaining in business such as power, advertising, insurance, staff wages and training are ongoing.
    All these costs are covered by the retail markup.
    Electricity standing charges are the equivalent of David Jones or Meyer charging people a hefty fee simply to enter the shop, regardless of any purchase they may make.
    We wouldn’t stand for that.
    Mind you, I speak as one whose standing charge, before I went solar, was more than half my power cost. Now, it’s about three quarters. So I feel the inequity of the fixed charge very keenly.
    It is surely not beyond the wit of the retailers to figure out what the network cost to themselves is, divide it by the total kWh they sell, and add that to the standard per kWh charge. Paying for the network is part of their cost of doing business. It should be a part of their retail markup on their product, not a nightclub cover charge.

  18. Jim Lazar 1 year ago

    The group I work for, the Regulatory Assistance Project, has written extensively on this issue. Our publications Smart Rate Design for a Smart Future, and Electric Utility Customer Charges and Minimum Bills are both available in our Knowledge Center at http://www.raponline.org In addition, there are webinars to go along with each of these papers.

    The most fundamental role of utility regulation is to enforce on monopolies the pricing discipline that markets enforce under competition. Railroads charged customers with only one railroad more for a short haul than they charged customers with multiple railroads for a longer haul; we addressed that with pricing regulation, since extended to electric utilities (which did not exist in the 1850’s when railroad regulation began).

    We use many grids. Every time we go to the supermarket, we connect to a global grocery grid, that brings us bread from a nearby baker, breakfast cereal from a national producer hundreds of km away, and Brie and Gouda from across the planet. We pay for the cost of the grid in the price of each item we buy. Same at the hardware store and the clothing store. We bear the cost of connecting to the grid (by visiting the store), and the rest of the costs of the shared grid

    Where monopoly utilities begin charging customers for more than the costs incurred at the point of connection (the service drop, meter, and perhaps the final line transformer), they are putting SHARED grid costs into the fixed charge, and this is disadvantageous to any with lower usage.

    The issue of holiday homes can be addressed separately, with a tariff that applies only to customers whose usage is concentrated in a limited part of the week or year. Many regulated utilities have such tariffs.

    The bottom line: customer specific costs belong in customer-specific charges, and shared system costs belong in usage-related charges. Ideally, the usage charges will be differentiated by season and time of day to match the causes of utility investment. The “illustrative” tariff we have proposed in Smart Rate Design looks like this:

    Customer Charge (metering and billing): $4.00/month
    Site Infrastructure Charge (transformer): $1.00/month/kVA of load
    Off-Peak Energy: $.02 delivery; $.06 energy, $.08 total
    Mid-Peak Energy: $.04 delivery, $.08 energy, $.12 total
    On-Peak Energy: $.06 delivery; $.12 energy, $.18 total
    Critical Peak Energy: $0.75/kWh

    Under this rate, if the solar customer places only an off-peak load on the grid, they help pay for a grid actually designed for the loads of others during peak hours. BUT, if the grid is California or Hawaii (or places in Australia), and mid-day is off-peak, with evening being on-peak, the solar customers will pay for the capacity that must be built and maintained for them.

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