Despite what you might hear from the more extreme elements of the conservative right – and our prime minister – the huge increase in electricity bills in recent years has been driven not by the cost of renewable energy schemes, but by the huge investment in network upgrades and expansion.
That has caused a massive problem for the regulators who allowed those investments and the companies which made them. The network operators want their money back, and with electricity demand declining as more manufacturing businesses close, more rooftop PV is installed, and consumers buy more energy-efficient appliances – and react to the soaring cost of grid electricity – they are having to come up with new ideas for revenue raising.
The most popular ideas prosecuted by the incumbent utilities are higher fixed tariffs, or time-of-use tariffs. The former are designed to ensure that the utilities can get money out of consumers even if they use less electricity, as if such a move was not part of Team Australia.
The second are designed to get consumers to pay higher tariffs when everyone switches on appliances at the same time. But the tariffs are rarely pitched just at those peak times, they are often targeted at large parts of the day from early afternoon to mid-evening.
They generally come under the headline of “cost-reflective” pricing. But many are nervous, particularly those in the solar industry, who fear that the tariff changes will simply be used as another tool to reinforce network revenues, and to penalise those who are using rooftop solar, and who will soon be adding battery storage to maximise their “self consumption.”
It is a pivotal time for the industry. Some within the networks are concerned that higher fixed tariffs are self defeating, and TOU tariffs will simply provide customers opportunities to arbitrage between low and high peaks.
Even the Australian Energy Regulator warned recently that simply using tariffs to create barriers to new technologies would be self defeating. It would just encourage more customers to flee the grid, leaving massive stranded assets in their wake.
A new submission from the Australian Photovoltaic Institute highlights the problem. It is highly critical of recent deliberations by the Australian Energy Market Commission, which sets guidelines for network pricing and tariffs.
The APVI is concerned that instead of reducing consumer bills, the new regimes will simply act to protect network revenues.
“It is likely that tariffs will be put in place that aren’t particularly effective at reducing peak demand, but are effective at increasing income for network operators and possibly also retailers,” it writes.
It has many concerns. One of the primary ones is the determination of the networks to recoup the spending on past investments – including the $50 billion spending binge that many have dubbed as “gold plating,” and which some, such as the Grattan Institute, and Carbon and Energy Economics, suggest need to be written down if they are to compete with new technologies such as solar and storage, rather than just loading costs on to consumers.
“Customers should not be forced to pay for investments they did not choose and do not need,” the APVI notes in its submission. And, it notes, the networks should not be allowed to pass on the costs of inappropriate or over-investment, nor should they be allowed to use a high-risk borrowing cost, when in fact they operate in a low-risk borrowing environment. “
It is also scathing of modeling used by the AEMC and prepared by NERA.
It notes that it does not take account of the ability of rooftop solar PV to reduce peak demand; it misunderstands how battery storage would be used by a household and the benefits it could bring to the network and other consumers by reducing peak load; and it over-estimates the peak demand of some households.
NERA puts it at 25kW, which the APVI says is extraordinarily high. The APVI describes it as a “lazy calculation” that could lead to misleading results.
The APVI also says the modeling under-estimates the benefits of rooftop solar PV for the network, and under-estimates the cost of air-conditioning, which has been the primary driver of peak demand.
It is scathing of NERA’s claim that there is insufficient data on PV output in households, saying it is available from Ausgrid data, and from other sources such as PVoutput.org and the APVI’s Solar Map.
It says using modelled, rather than real, PV output data can provide misleading results, which is “unacceptable when suggesting large changes to tariff structures for simplistic models to be used.”
The APVI goes on to note that under some network pricing models, the network benefits from increased sales from air conditioning and electric vehicles. But it cannot share losses when solar PV decreases sale volumes.
“This is precisely the reason that DNSPs have not opposed the widespread use of A/Cs (now at over 70% of households), but are opposing the use of PV (even now at less than 20% of households).”
And the APVI says the NERA modelling completely misunderstands how these costs are allocated, and the benefits brought by solar PV in reducing peak demand.
“The costs that NERA Consulting calculated for households that currently do not own PV systems are actually incurred by the DNSPs, not by the households.
“Hence PV has not increased other customer costs. NERA’s cost calculations were transferred directly through to the draft Determination by the AEMC. It is a major concern that the AEMC seems unaware of the different consequences of the regulatory environment under which DNSPs operate.”
The APVI says its own modelling concludes that a demand component added to electricity tariffs provides a fairer price signal to customers than uniform high fixed network components or time of use tariffs. Some within network operations privately agree. But such views are not seeing the light of day.
These are critical points. The tariff changes being considered by the AEMC, and the submissions from the utilities that will arrive in a few weeks, will influence network pricing for years to come.