The networks' plan to protect themselves from competition

The lobby group representing powerline and gas pipeline network businesses has called for the regulator to give them the power to unilaterally impose their own choice of tariff on particular customers such as owners of solar and battery systems, without these customers being given any choice.

This could act to undermine the financial attractiveness of such systems by shifting a large proportion of the costs of power into a fixed charge that cannot be avoided or would be very hard to avoid by a customer changing their power demand.

The report states: “It is clear that some use of mandating network tariff assignment will be needed for some customers, if Australia is to protect fair, efficient outcomes for all customers and the general community.”

The report from the Energy Networks Association begins with an entirely valid premise that the current dominant model for charging for electricity from households and small businesses at a fixed rate per kilowatt-hour does not accurately reflect the costs of providing power supply and leads to inefficient outcomes. This model of charging for power – which was based on the inherent technical limitations of historical metering technology that can't measure the time at which power consumption took place – leads to large cross-subsidies to the benefit of customers whose demand is very high during peak demand periods.

This suggests a need to move towards restructuring power charges such that customers (or rather their power retailers, as suggested by the AEMC) see a much higher price for power during peak demand periods (as a general rule, very hot days from 3pm-8pm and very cold days over a similar period) and lower charges for the rest of the year. 

However, while this is the most obvious answer, the energy rule maker and the regulator aren't dictating that this is the way power tariffs should change. Instead they've spelled out some vague principles about the need for prices to reflect the costs of servicing peak demand, but will leave it up to the network companies to design the actual tariffs and, potentially, how they get rolled out.  

And this is where you need to be watching things like a hawk because network businesses' incentives aren't really aligned with those of their customers. They have traditionally been monopolies whose revenue is basically a function of having more transformers and powerlines and, therefore, more power demand.  

What keeps the executives of these businesses up at night is the prospect that customers will use technologies which the network company doesn't have a monopoly over, to reduce their power demand. Then they'll find all these transformers and powerlines face competition and they may find customers begin angrily asking why they have to pay for powerline capacity that they don't actually need anymore. Or they'll start asking why they have to pay a price for electricity that is greater than what they can get from other options.

So the ideal outcome is for these network businesses to restructure tariffs in such a way that it reduces the financial attractiveness of these potential competitors while not deterring customers from increasing their power demand. And even better, if networks can pick and choose which customers see what tariff, then they can custom-design tariffs which penalise customers for adopting technologies that pose a potential threat to their business, while dressing these up as being all about reducing peak demand.

The ENA report makes it quite clear that who they'd target first in imposing these mandated custom tariffs, when it observed:

Up to an additional 7 million customers are likely to install solar panels by 2034. Given a choice many of these customers will remain on unfair inclining block tariffs resulting in over-investment and significant cross-subsidies paid for by other customers. This is despite solar installations including the metering required to permit a cost-reflective network tariff to be provided with no additional investment by the customer.

To illustrate how this might play out, United Energy has proposed a demand-based tariff in its latest pricing proposal which charges customers to a large extent based on the peak in their demand over the month (3pm-9pm). The sting in this is that customers have to pay for a minimum of 1.5 kilowatts whether they use it or not. This lifts the fixed unavoidable charge for United Energy customers from $24.40 per year to $114.70.

Now most customers will probably exceed 1.5kW anyway, so what's the harm? Perhaps not much, but what if networks develop another tariff with a minimum demand of 2.5kW or higher which they then mandate for owners of solar systems. If you don't own an air-conditioner then you probably have just had the incentive to own a solar system substantially undermined even though you probably aren't a network freeloader. Also, such a tariff structure means it only takes one momentary blip in demand over the month to lock in your charges, even if that blip occurred on a very mild day (say, when it's cloudy and the solar output is low) when everyone else's demand was low.    

The reality is that networks do not face the right incentives to design and assign tariffs which are in the best long-term interests of consumers as a whole.

Networks should charge power retailers based on the network capacity all of their customers use during the actual times of the year when demand is at its greatest and they can do this without the universal roll-out of smart meters. They shouldn't be picking and choosing who sees what type of price signal. It can then be left up to retailers how to best to manage these network costs and how they might pass them onto their customers including via the wider roll-out of smart meters.