The long and winding road to tariff reform

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In first of three articles on electricity network tariff reform, we look at Tariff Structure Statements, and why you should care about them.

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It’s that time again in the regulatory cycle when the 11 distribution networks in the National Electricity Market (NEM) get down and dirty with consumer advocates and the regulator before the structure of their tariffs is set for the next five years.

The process starts in NSW, the ACT and Tasmania, moves on to Queensland and South Australia before finishing in Victoria (assuming no state goes rogue and secedes from the NEM).

Why should you care about Tariff Structure Statements (TSSs)?

  • Because network costs make up between a quarter and half of your bills – although that proportion is slowly decreasing as networks reduce their gold-plating efforts and wholesale prices make up a bigger slice of the pie.
  • Because how tariffs are structured can play a big part in driving (or delaying) the decarbonisation of the energy system.
  • And because tariff structures can also help or hinder the equitable distribution of the costs and benefits of the clean energy revolution.

In coming weeks RenewEconomy will publish three articles by the Total Environment Centre on network tariff reform. This first one is an overview. The next one will argue that solar owners should learn to love demand tariffs (which may increase their total bills). The third one will be on what to do about fixed charges and sunk costs.

Background

This is the second round of TSSs following changes to the National Electricity Rules in 2014 which required networks to gradually move away from flat (or nearly flat) tariffs to ones which send a price signal to consumers about the cost of future investment.

Because more than a quarter of all investment in poles, wires and substations is to service critical peak demand that occurs for as little as 40 hours per year, the argument went, consumers should pay more for energy used during these critical peaks.

They can either choose to pay through the nose to run their appliances as normal during hot summer afternoons and cold winter evenings, or they can shift their demand and keep their bills down. Thus was born the idea of cost reflective network tariffs, which networks were expected to implement over the long term, bearing in mind the impacts on consumers of sudden, radical changes.

Elegant plans like this crash against the brick wall of retailer tariffs, however. Your retailer may pass through the underlying network tariff, or it may hide it to ostensibly make things simple for consumers. (One of the worst examples is Origin’s all-you-can-eat-style Predictable Plan, which offers identical bills every month for a year, irrespective of how much energy you actually use from day to day.)

Networks have no control over retail tariffs, which frustrates the hell out of them; but that’s the way the market works, for now at least. In theory at least, consumers can shop around for retail tariffs that suit their consumption patterns and ability to shift loads.

The journey

Traditionally, network tariffs have combined a fixed daily charge with a volumetric charge for the amount of energy consumed every half hour. Some energy charges increased with the volume consumed per billing period; others actually decreased, incentivising greater consumption (good riddance, Networks NSW!).

Over the last decade, time of use tariffs have become more common, but they have not been popular with consumers. Who wants to think about whether they are in the peak, shoulder or offpeak period every time they use an appliance, especially if these ‘charging windows’ change between days of the week and seasons of the year?

Now we are seeing the gradual introduction – starting with business customers – of demand tariffs, which (for those customers with a smart or interval meter) add a charge per kilowatt for the peak usage during the peak time of use period during a single half hour or hour over the past month or year. This is supposed to send the price signal referred to earlier to dampen or flatten peak demand.

It ain’t necessarily so

So most networks are on a gradual, decade-long path from flat, through time of use to demand tariffs. But there are two big problems with this gradualist model of tariff reform.

One is that – as some excellent modelling by UNSW and the APVI has shown – demand tariffs based on a consumer’s maximum daily demand show a poor correlation with coincident network peak demand. In other words, it’s pretty hit-or-miss whether your or my monthly peak happens to coincide with the eight or ten network peaks per year that drive the need for new infrastructure spending. If this is the case, then a tariff reform process that ends in ‘maximum monthly demand’ (MMD) tariffs will be inadequate and incomplete.

The other problem is that networks going down this path will (unless retailers completely ignore the underlying network tariff, which will become increasingly difficult) involve consumers in a tortuous process of change as they move from flat through time of use to MMD tariffs of often bewildering complexity and poor visibility (Who knows what their peak was last month until they get their next bill?).

For its next TSS one network is even proposing a new residential tariff that uses total consumption during the five hour peak period as a proxy for peak demand. Say what? God help the poor consumer.

A better model

Fortunately, there are simpler, faster and more elegant solutions available.

One is a true capacity tariff* like Horizon Power’s MyPower trial in Port Hedland and Broome, which works like a mobile phone plan. You choose a plan based on your likely maximum demand. Stay under it during the summer peak and you get a rebate of up to $300.

Go over it consistently and they move you up to the next plan. This helps the network plan the grid capacity it needs, while giving consumers an incentive to keep their peak demand in check. And no bill shock.

The only problem with it is the one identified above by the UNSW/APVI team: my or your peak may not match the network’s. But there is another tariff type that seems to tick all the boxes. It correlates well with actual network peaks, so can help to dampen peak demand. It is easy to understand and respond to. And it puts more money in consumers’ pockets.

It is the Peak Time Rebate (PTR). It is the ‘carrot’ equivalent of the ‘stick’ of Critical Peak Pricing (CPP), which penalises consumers for not reducing their demand during those 8-10 critical peaks. Instead, consumers are given advance warning – usually via a text message – of an impending critical peak.

If they respond by reducing demand they are given a rebate – say $10 per kW per hour or two – on their next bill. No participation, no rebate, but no penalty either. The other beauty of them is that they can be combined with simple underlying structures such as flat tariffs.

Downsides? They require advanced metering – near-universal in Victoria, patchy in some other networks, but on the increase everywhere since the metering rule change that came into effect last December. And obviously the rebates have to be paid for, either by slightly higher anytime energy charges throughout the year, or (ideally) by lower capital expenditure requirements in network regulatory proposals.

PTR tariffs are not rocket surgery. Powershop has one (‘Curb Your Power’) for some Victorian households and businesses as part of its AEMO/ARENA demand response funding for this summer.

Apparently it’s working a treat. But all other current network demand tariffs are the clunky MMD type, and as far as I’m aware only SA Power Networks is so far looking seriously at going down the rebate road for their next TSS. The other networks appear to be content to make consumers suffer another decade of minimal reform or outright tariff torture before seeing the light.

Why? Bottom line, no matter whether networks are in private or government hands, they are run for a profit, and in the short term tariff reform won’t increase network revenue. TSSs are about how to slice up the five yearly revenue pie already approved by the regulator. In fact, a network genuinely interested in tariff reform could see a reduction in its capital and replacement expenditure, and thus in its total revenue.**

But looking ahead, networks will need to increase their ‘load factors’ (their efficiency) by incentivising solar, battery and EV owners to stay connected, while minimising the equity impacts on legacy consumption-only households – mostly those on low incomes. Sooner or later they will need to become much more nimble and smart when it comes to reforming tariffs – not only to reduce infrastructure spending but also to go with the new energy flow.

* Confusingly, networks sometimes refer to their demand tariffs as capacity tariffs, even though the former price actual demand rather than a customer’s purchase of a maximum amount of capacity in the network.

** Again in theory at least, there are regulatory incentives for networks to operate more efficiently.

Mark Byrne is Energy Market Advocate at the Total Environment Centre

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14 Comments
  1. bruce mountain 8 months ago

    Mark, thanks, well written and interesting. But let me challenge you. Have you ever seen a retailer advertise their offers on the basis of tariff structure, ever? In the contestable markets they have an incentive to do this, if they could so win customers. How could a customer determine if they are better off on a tariff with a peak demand component that happens to be charged from 3-9pm on week days, a month in arrears? If they can not so determine, what chance do you have of attracting them to it. And it is reasonable that customers should want to pass as little as possible. That’s what yo want, no?

    • Mark Byrne 8 months ago

      That’s exactly my point Bruce. I’m arguing for tariffs that maximise control, transparency and rewards – not a TOU/demand mashup a month in arrears. But networks need cooperative retailers to make these innovative tariffs work. That’s why Powershop’s Curb Your Power is interesting. They could do it as a retailer because they got ARENA/AEMO funding, but they could also do it with a cooperative network without a handout. And Horizon has the advantage of being network plus retailer. So yes, there’s 2 examples already.

      • bruce mountain 8 months ago

        But neither of those are examples. Customers in WA do not get to choose their supplier, and Powershop’s scheme is no more than an Arena funded handout from which Powershop profits. When you say “co-operative” retailers you mean some kind of mandatory obligation they can foist on their customers who have no interest in demand-based tariffs? My distributor tells me they have no more than a small handful of customers on demand-based tariffs and only a few (6 to be precise) retailers in Vic even bother to offer them – in their fact sheets only. None of them offer them in their marketing material in their retail offers and the Vic government’s price comparison website does not price them. And they are perfectly right in this. Why should we possibly believe that these ridiculously complex tariffs are in customers’ interests? If you think they are, then why do you not promote them in other markets where demand is highly peaky (taxis, airports, trains, roads, water, telecoms etc. etc.).

        • Mark Byrne 8 months ago

          Customers in the Horizon area can choose whether or not to participate; and Curb Your Power is simple, not ridiculously complex. Both of these tariffs are simpler than the alternatives that networks in the NEM are lumbering towards.
          Not sure what your alternative is – flat tariffs for all? That wouldn’t help prevent further gold-plating.
          And there are plenty of other markets where there is congestion pricing.

          • bruce mountain 8 months ago

            No Mark this is a misdiagnosis. Flat tariffs (with controlled load for off-peak water heating) for residential have been the norm in Australia from the start, as they are in other countries, though capacity differentiated in France. We have not suffered a gold plating problem over this period other than under the AEMC and AER’s regulatory oversight (and to a lesser extent under the last regulatory controls from the jurisdictional regulators in NSW and QLD). The gold plating did not occur because we did not have demand tariffs. It occurred on account of gross failure of the rate of return regulatory model that provided excessive compensation for capital costs. As you know, this is all well documented. In terms of innovative involvement of the demand side: there is little to stop this now. The best innovation is from those that don’t resort to the public purse to bring their ideas to life.

          • Mark Byrne 8 months ago

            OK so now I think I understand where you’re coming from; you are critiquing the whole idea of cost reflective network tariffs embodied in the rule change. I mostly agree re past gold-plating but it seems self-evident to me that if you send a signal via tariffs to dampen critical peak demand, you reduce the opportunity for networks to load up their reg proposals with another round of big capex asks to build to meet those future peaks (whether or not they eventuate – and overoptimistic demand forecasts leading to capex blowouts in NSW and Qld in particular were the other main driver of past gold-plating).
            Re the public purse, under a revenue cap tariff reform is revenue neutral – one reason why, as I wrote, networks are dragging their heels.
            It’s nearly whisky o’clock so I’m going to call it a day and leave the last word to you, but happy to continue the conversation offline another day.
            Cheers!
            ps There’s no reason why a peak time rebate couldn’t complement a flat tariff for consumers who so choose. As for controlled loads, they are an environmental disaster.

          • bruce mountain 8 months ago

            Enjoy the whiskey. Single malt Speyside, I presume, for a connoisseur like you. I am writing this up in a chapter for a forthcoming book. Will send draft for your comment.

          • John Herbst 8 months ago

            Good thread guys!

  2. Peter Campbell 8 months ago

    Thanks for this topic. I am voluntarily on a time of use tariff and find it easy to defer a few loads nearly all the time for a cost saving – electric boost for solar hot water and dishwasher are the main ones. However, I appreciate the option to (say) run the dishwasher immediately on infrequent occasions. Then I am happy to wear the very slight extra cost.
    I was planning to replace gas space heating and a cook top with heat pump and induction stove. In the ACT, we will soon have 100% renewable electricity and I would also save some money eventually by avoiding the gas supply charge.
    Looking at our retailer’s web site, I see that new installations will be charged with their maximum monthly half hour peak time consumption used as a factor to multiply across all their consumption. That strikes me as much less fair than the time of use tariff which looks at what I have actually used in peak times.
    I am then concerned that ACTEWAGL recommends using gas for cooking and heating to avoid this peak demand tariff. They are hardly disinterested when it comes to keeping you on both networks!
    It seems that if I were on this latest tariff, I would lose the incentive to shift major loads into off-peak rather than ‘shoulder’ time. One random occasion of using a few more rings of the cooktop while also using the oven one evening in a month would multiply all my consumption for the period by a premium price. Meanwhile, another person with the same total consumption might match my once a month peak consumption every evening and defer nothing to off-peak times, yet we would be charged the same.

    • Mark Byrne 7 months ago

      Peter, it looks like the proposed ActewAGL tariff is the maximum monthly demand type, which I don’t support as there is no real-time visibility and thus little opportunity to load shift. But in general terms, demand tariffs are more likely to result in behavioural change that would flatten the network critical peaks that drive cost increases than do broad (time wise) and not very sharp (price wise) time of use tariffs.

    • Peter Campbell 7 months ago

      It has been pointed out to me that the ACTEWAGL demand tariff is the default with a new installation of a smart meter in the ACT but one can opt in to a Time of Use tariff instead. I certainly would prefer the latter since I can know what to do to respond to it and would be penalised only slightly for occasional spikes of demand during peak times. It is not obvious why the fixed daily supply charge is greater for people with a smart meter, regardless of the rest of the tariff structure.

  3. Rod 8 months ago

    I would certainly be keen on a Peak Time Rebate if SAPN offer it.

  4. John Herbst 8 months ago

    As long as peak charges don’t turn into fixed, or effectively fixed charges, I’m ok with this. The peak charge must still have a strong price signal, even if there is no peak in a given year.
    ToU consumption, or perhaps a “This Is Just A Drill” Critical peak day would allow the network to observe individual consumer responses to price signals in years where there are few or no critical peak events. The network can estimate the long-run expected peak contribution for each consumer based on these responses, and allocate charges cost-reflectively. If the peak charges are fixed, the network can’t observe responses and would be forced to do some averaging, punishing the most efficient customers (which is probably what they want but is not fair nor efficient).

  5. MaxG 7 months ago

    On a side note: We are looking at a near monopoly situation, in a vulture-capitalist market, hence, no matter what a tariff is tying to achieve; it will screw the consumer.
    I like the SA approach where they are thinking of creating a government-owned or NFP offering low prices. However, I can only encourage everyone who can manage to become self-reliant as much as possible, and escape this nonsense we experience since privatisation and deregulation.
    It needs to be understood, as long as profit-taking takes place, which does not benefit the public, yes, it will not benefit the public; hence, no lower electricity pricing for consumers.
    I wish there was a will to fix the root cause of it all, rather than continued band-aiding.

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