Price hikes not the only answer

Smart meters and flexible pricing are essential but they shouldn't be used to delay a dedicated program to fund demand management, which can be implemented much quicker.

As pointed out most recently by the Productivity Commission (and lots of others), we need a widespread roll-out of electricity meters that can tell the time; and then have network businesses charge customers (or their retailers) on the basis of the capacity they use during peak time periods. 

This may not help solar PV, at least in the short-term, but it’s something we have to do in the long-term interests of managing decarbonising of our energy supply, as well as keeping network costs under control. 

The roll-out of smart meters should enable residential and small business customers to finally get reasonable feed-back on their energy use so they can become more energy efficient.

Without smart meters and flexible pricing, electric vehicles could result in huge additional network and power generation capacity as people charge their cars during peak demand periods. 

Without smart meters and flexible pricing there will be little incentive, nor capability, to rapidly adjust demand as output from wind and solar varies or make use small-scale battery systems.

In addition smart meters could provide network owners with a greatly enhanced understanding of power quality on their own grid. The lack of this information leads network owners towards being conservative about the connection of generation capacity because they can’t be sure what its effect might be.

This might be not such a constraint now. But as shown in remote grids in Western Australia, once solar PV reaches relatively high penetration levels a utility can be tempted to ‘just say no’ for fear of what might happen.

However at the same time the roll-out of smart meters and flexible pricing is not some kind of miraculous and quick cure-all for network costs. 

1. We’ll be waiting a long time before smart meters and pricing will happen.

If Victoria is any guide, it would take about a decade for a roll-out to happen and pricing structures to change. Considering politicians current fear of tabloids on electricity pricing, you could probably add at least a further five years before politicians bite the bullet.

2. If rolled-out poorly, smart meters and time of use pricing may make little difference.

The research suggests it’s not enough to just have a very broad-brush and simple peak and off-peak tariff. For example my retailer charges me 27 cents per kilowatt-hour (kWh) from 7am until midnight and then something like 11 cents overnight. This pricing structure does virtually nothing to reduce peak demand. I would also point out that electric storage water heater off-peak tariffs are an appalling peak demand measure. They do more to improve the bottom line of coal generators than to reduce peak demand.

Instead, what makes a genuine difference is a short but very sharp price rise relatively tightly targeted at the time when demand is at its highest. This might be 10 or so very hot days during the hours of 2pm to 8pm for residential areas, and 11am to 4pm for commercial districts. 

However it’s not much good if you just spring these charges on consumers by surprise (as Gavin Gilchrist found network businesses have done recently to a number of businesses).

Imposing energy price changes and assuming consumers will work it out by themselves is a recipe for disaster. You need to couple these prices with three other interventions:

a) Technology that informs consumers about their electricity consumption (such as the Origin Smart internet portal) and gives forewarning about critical peak pricing events (such as mobile text messages).

b) Devices which act to automatically reduce electricity demand during peak periods, so the customer doesn’t really need to actively think and respond to peak periods.

c) Provision of advice and services that help consumers to understand how they might reduce energy consumption and avoid the critical peak.  

This then brings us to the final point.

3 – Energy costs are a minor thought consideration for most consumers so third party intermediaries are required.

For the vast majority of consumers across both residential and business sectors, no matter which way you cut electricity tariffs, they’ll still be unconcerned and unengaged. As COAG’s Standing Council on Energy and Resources noted:

“Many consumers have limited knowledge of and engagement with their electricity consumption and may not understand the new pricing structures sufficiently well to take advantage of new opportunities.”

That’s why we need to provide a price signal not just to end consumers, but also one direct to energy management and equipment intermediaries. They can then overcome this consumer ignorance and apathy problem. 

Network businesses should not have a monopoly over provision of demand management services.  Nor should they act as the gatekeeper over what is and isn’t a cheaper alternative to them building up their asset-base. 

A market for reducing peak demand is instead best handled by an independent authority, free of conflicts of interest and open to all providers. This could also be implemented far faster than restructuring our entire electricity rules governing electricity networks. It also could happen without waiting until politicians pluck-up the courage to roll-out smart meters and peak pricing.

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