How will the prosumer get paid?

The emergence of solar and the prospect of electric vehicles and affordable batteries is leading to a push to reform how consumers pay for power they consume, but the debate so far has neglected the need to reform how consumers get paid for producing power.

Acting chair of the Australian Energy Regulator, Andrew Reeves gave an important speech yesterday (which we’ve published here) on how energy market regulation needs to evolve given the emergence of a combination of cheap information and communications technology, low-cost solar and the possibility of affordable energy storage including electric vehicles.

Reeves notes:

From a paradigm of one-way centrally managed electricity supply, the industry is transforming to a new paradigm in which the energy network exists to provide a platform for the two-way trade of electricity, with all customers and suppliers, large and small, able to be integrated with and respond to local market conditions.

As I explained several months ago using real-world 30-minute by 30-minute electricity demand data for 300 households (Why solar needn't kill the grid), there are large economy of scale benefits from utilising an electricity grid to pool our demand for energy to share power supply assets, rather than each household going off the grid and having to be self-sufficient.  

This data illustrated that by meeting their electricity needs as a pooled group, these 300 households would more than halve their need for power generating capacity compared to if they each had to be self-sufficient.

This was because each household tended to have peaks in their electricity demand at different points in time. This approach allows for large savings by sharing power supply assets and suggests that even if batteries were to become really cheap there would still be considerable value from continuing to use the grid.

At the same time there is now a range of technologies emerging that can act as substitutes or competitors for grid capacity. The grid itself may be regulated as a monopoly service but, in fact, there are alternatives to augmenting the capacity of the grid by using small-scale power generation, energy storage and also information and communications technology to automatically shift demand in time.  

So how do we deal with this in regulating and designing the energy market?

Reeves provides two guidepoints

1) We must strive to enhance and facilitate competition in the energy market where possible and minimise the scope of what networks can claim as part of their monopoly domain and contain their power to restrict competition.  

2) We need to reform the structure of power prices away from being based on a single flat charge per kilowatt-hour irrespective of what time it is consumed, to a two-part tariff where consumers pay not just for the energy they consume, but also how much network capacity they use during peak periods (what Reeves calls a “demand charge”).

The two points above are highly interrelated. There is scope for networks to be exposed to greater competition. But at the same time for this to happen there needs to be a change in pricing electricity that provides a reward for those who can reduce the need for network capacity. How this reward is allocated should not be at the discretion of network businesses (which is the case presently).

As Reeves notes:

This is what we need to see in the network sector, with a transformation from the network sector seeing itself a one-way carrier of energy, to a platform to support generation, storage and demand management. Tariff reform – from energy-based usage charges to a demand based service charge – is an essential part of this response in redefining the nature of the service provided by the regulated network.

The problem, however, is that there is large room for tariff reform to be done poorly and in a way that rather than facilitating competition, actually inhibits it.

If we are going to start charging customers large amounts of money for demand they place on the network during peak periods, we should also provide them with large rewards for relieving demand on the network during peak periods where they offset the demand of their neighbours via power exports. The debate so far seems to have completely ignored this fundamental counter-requirement for rewarding power exports.

If I install a battery system it can certainly offset my own demand for power throughput and load on the transformer during peak periods. This would be encouraged by charging me (or power retailers more generally) a network peak-demand charge. That’s good and represents progress over the current state.

But I might not be at home during the peak period and that battery system could do exactly the same job in relieving load on the transformer by being drawn upon by my neighbour via my battery exporting to the grid. Yet under the present regime government energy officials seem to think I’m only entitled to be paid the same price for my exported power as generators a hundred kilometres away from my neighbour, who would put load on the network transformer before reaching my neighbour.

In addition, there is no reason why someone who isn’t a power customer couldn’t also install battery systems or some other power supply downstream of the transformer that is capable of exporting power to the grid during peak periods. Why shouldn’t they get paid a price for relieving network capacity approximating the charge a customer is forced to pay for consuming that network capacity?

Presently if I want to get paid more than the wholesale value of electricity then I have to negotiate with the monopoly network business for a payment which is almost entirely at their discretion and subject to a set of rules that they get to define, based on information that I don’t have access to.

Why does a monopoly provider get to decide whether or not I’m allowed to compete with them?