When voters don't want fair power pricing

Resistance to the Grattan Institute's power pricing model is reverberating across the airwaves and newspapers… but overhauling Australia's unfair electricity tariff system is bound to be a political hot potato.

Will you be happy if your power bill goes up because other customers are getting cuts under electricity tariff arrangements better reflecting users’ calls on network services?

This is the kernel of the new Grattan Institute paper on “fair pricing for power”-- or at least it is if you look at the issue from a politician’s perspective.

This point is underlined by the way the News Corp tabloids have treated the Grattan commentary.

“Electricity prices would rise 700 per cent from one day to the next with households only warned on TV weather reports the evening before” is a lead sentence in the tabloids.

From a political view, the Fairfax “compacts” are no more helpful.

“An overhaul of electricity tariffs could stop the ‘unfair’ subsidy received by households using air-conditioners and those with solar panel systems paid by all other users” is the Fairfax take.

Nor do the radio jocks offer much help.

One on 3AW seized on the fact that, under the Grattan approach, network service providers do not get less revenue – which he parlayed in to less profits – and was apparently unmoved by Tony Wood’s argument that a tariff system causing costs to land more equitably on users is a good thing.

No wonder that Wood and his institute co-author, Lucy Carter, acknowledge in their commentary that “governments should anticipate resistance to (these) changes from customers who benefit from the unfair status quo.” 

Policymakers, they argue, will need to explain how the proposed changes will make the power system more efficient and cheaper in the long run: “They should be prepared to stand up for the customers forced to pay cross-subsidies through the existing system.”

The institute starts from the point that, after five years in which a typical Australian household bill almost doubled to $1,660 a year, more than a few customers are paying on average about $150 a year to subsidise others enjoying the use of air-conditioners and PVs on their roofs.

Wood and Carter calculate that, if their proposals for a different tariff approach had been in place in the past decade, the $17.6 billion that network service providers spent between 2009 and 2014 on expanding east coast grids could have been reduced by $7.8 billion.

Householders will also have to spend money to save money, something the Productivity Commission in its network review tended to mumble and prime minister Gillard of blessed memory skipped over entirely when enlisting the PC study to promise that, under her “big stick,” state governments would be made to embrace changes to deliver household savings.

The institute makes the point.

“Advanced electricity meters (one of the suite of steps it proposes) will need to be installed on most Australian homes,” it says, “at material short-term cost.”

The institute says: “Politicians may decide this is too hard. But, if they do, they will miss an opportunity to deliver cheaper and fairer prices.”

That is cheaper compared to what they otherwise might be, to be clear.

The institute notes that there is widespread agreement more network reform is needed – “yet there is a lack of specific proposals to improve the structure and operation of tariffs.”

What Wood and Carter have set out to do is to fill this gap.

In their own synthesis, the pair propose a redistribution of costs among households without changing the total cost of the network across all customers.

“In the longer term,” they say, “providing consumers with incentives to use the network more efficiently, especially at peak times, will save on the cost of building the grid and reduce costs for all consumers.”

The Energy Network Association has hailed the report as adding to the growing momentum for network tariff reform, “leading to fundamental changes in the way electricity is charged for and used.”

The institute, says ENA chief executive John Bradley, is correct in identifying the barriers to reform as access to smart meters, retail price regulation and the need to support vulnerable customers.

“This is why ENA is encouraging the CoAG Energy Council to develop a national agreement on flexible pricing and smart meters as part of the reform package.”

Bradley argues that the tariff structures recommended by Wood and Carter should not be the only options considered because networks and customers are “very different” across the country and “it is important the (new) regulatory framework permits flexibility in tariff design by networks engaging with their customers.”

From the perspective of suppliers and economists, the need to make changes is urgent, but, for politicians, the way ahead is strewn with booby traps (for them).

As the Grattan Institute points out, this reform will only succeed if its advantages can be communicated and consumers are engaged in the process.

It is only too obvious that there is a long way to go.