Requirement to develop new tariff structures

Australian Energy Market Commission’s (AEMC) 2014 rule change requires electricity distribution networks to propose new tariff structures by 2017 which will be more cost reflective for customers. One of the objectives is to match the cost of the network to the activity that drives that cost, particularly contribution to maximum demand.

Electricity distributors are required to prepare a draft Tariff Structure Statement by 25 September 2015 in Victoria and by 25 November in other states (apart from Tasmania). A period of consultation will follow. Australian Energy Regulator (AER) has the power to amend the statement if it considers that it does not apply the required principles.

The new tariff structures will not change total network revenues – simply how they are billed to end customers.

The good news

This is an important development because it has the potential to:

  • match network costs to the activity that drives those costs,
  • incentivise customers to reduce their maximum demand – for instance by adjusting their power usage at peak times or by changing their solar panels from north to west facing,
  • ultimately reduce the need for network capital expenditure, and
  • remove cross-subsidies from those without rooftop solar PV to those with it – whose network costs had been calculated by reference to total use (reduced by their solar generation) but could now be charged by reference to their maximum use – typically around 6.30 to 8.30pm on a hot summer’s day.

Overall, these changes should be good for network owners by reducing the pressure for Regulatory Asset Base re-optimisation (see Solar energy and battery storage - opportunities and risks for network owners above) by reducing network capital expenditure and keeping a lid on overall power costs.

Without these changes, higher costs of up to $17.7 billion could be incurred, according to Energy Networks Association.1

The bad news

The bad news is that actually implementing the 2014 rule change in a way that delivers on its objectives will not be easy outside Victoria.

Victorian distributions are likely to phase in new tariffs with a substantial component related to maximum demand between 3.00pm and 9.00pm, derived from their mandatory smart meters – although the proposed 5 year phase in period will blunt its effect. Similar structures could be used in other states where smart (or at least 'smarter') interval meters have been installed, particularly for customers with solar panels.

However for the majority of customers outside Victoria there are limited options for the networks to establish tariff structures which even vaguely reflect maximum network usage.

Various options were canvassed by The Brattle Group and NERA Economic Consulting in their work in support of AEMC’s rule change process, mostly based around mixes of fixed and variable charges related to gross energy consumed. In June this year, the Queensland Competition Authority increased the fixed price component of households tariffs (a process which began 3 years ago).

Incorporating larger fixed price tariff components with a lower usage charge ensures that customers who have reduced their overall usage through solar but still contribute to peak demand will pay a closer share of their usage of the network. But in terms of matching charges to maximum network usage, they are pretty blunt instruments.

Adopting 'inclining block' structures where network tariffs increase disproportionately as more total energy is consumed by a household potentially captures some maximum demand effect if larger customers tend to consume their extra power at peak times, but again, it is a blunt instrument and doesn’t incentivise shifting of load – just reduction of load. 'Declining block' structures can incorporate a relatively higher fixed charge component. 'Seasonal time of use' tariffs could also roughly reflect the cost of higher consumption during peak seasons.

Other AEMC rule changes will eventually see an increasing deployment of smart meters as old meters are replaced and for new or upgrading customers and, in the meantime, those customers who believe they can consume less at times of peak demand and want to be rewarded for doing so could elect to have a smart meter installed. However, you cannot expect customers with high peak load demand to elect to install a smart meter in the face of a tariff with a strong maximum demand component.

Whatever the solution, there will be also be risk for network owners that the costs of gathering and processing the necessary data may not be recovered - some networks may find cheaper or more efficient ways to implement this sort of thing than others - and there will be implementation risk in data handling and IT systems.