8
Jul
2014

A practical proposal to make Australian power prices fair

by Tony Wood


Published by The Australian Financial Review, Tuesday 8 July

Australians are paying too much for power. Since 2008 the average household power bill has nearly doubled from $970 to $1660 a year – a 70 per cent increase in nominal terms when inflation has increased by just 12 per cent.

The prices we pay are also unfair: some people are paying too much, others too little. Reforms to electricity network tariffs are urgently needed.

Electricity networks transport power from generators to homes and businesses. Like freeways, they are built at a size to keep electricity moving at times of maximum demand – peak hour, in other words. Yet the price we pay to use networks is the same whatever the time of day or season.

The price provides no incentive to use the network efficiently – to avoid peak times, for example. It also provides little incentive for network owners to change their long-standing imperative to build to meet peak demand and avoid power failures. So we all pay more than we should.

Consumers who use less electricity at peak times and more at other times are particularly disadvantaged. They subsidise other consumers by around $150 a year. Those who use a lot of power at peak times – air-conditioner users, for example – gain an undue benefit from this arrangement.

Trials suggest that better tariffs could reduce household peak demand by between 20 and 40 per cent. As peak demand falls, especially in areas where the network is under strain, the need for expansion investment is removed and network businesses can pass on the savings as lower prices.

TWO PARTS OF ONE TARIFF

Grattan Institute’s new report, Fair pricing for power, shows how this can be done. It proposes to divide network tariffs into two.

The first part would charge all households and small businesses not for the total amount of electricity we use over the year (the current charge) but how much of the network’s capacity we use when we are putting maximum load on it.

Introducing this capacity tariff would not reduce the earnings of distribution businesses on their existing assets, but rather redistribute revenue across consumer groups. Those who require more capacity would pay more and those who require less would pay less.

The second part would charge a different rate in locations where, perhaps due to population increase, the network is under strain at peak times. This occurs for only a few hours on a small number of days, usually in summer.

Consumers on this tariff would pay reduced prices for most of the year. Yet the day before a critical peak day – probably about 10 times a year – consumers would be told that the price during peak demand hours will be much higher than the regular price. They could then make informed decisions in their interest, which would align with the interest of all.

We are used to peak demand pricing in other areas. It costs more to rent a beach house in summer. Airline tickets cost more during holidays. Most of us could and would use electricity differently if we had a price incentive to do so.

The changes would have large financial consequences. If they had been in place five years ago, householders who made more informed choices could have reduced peak demand by enough to avoid nearly $8 billion of network investment. The saving would have reduced bills for all.

But the changes will not be easy to make. Consumers will only get the benefit of lower prices if they use electricity differently. Losers of the implicit subsidies in the current system will object. There will be other obstacles, real and imagined.

The Council of Australian Governments’ Energy Council of Commonwealth and state ministers must take the lead on reforming network tariffs. Over the past year it has worked with the Australian Energy Market Commission to establish the framework to make tariffs more cost reflective but it needs to ensure the changes are implemented and benefits delivered.

Smarter electricity meters will be needed to get the maximum benefit. Most Victorians already have advanced meters, as do households with solar PV systems. Introducing a market for the provision of smart meters in other areas will complement network tariff reform.

Politicians may decide it is all too hard. If they do, an opportunity to save billions of dollars, and hundreds of dollars a year for individual consumers, will be lost. So will an opportunity to prepare consumers for the more price and consumer-sensitive electricity grid of the future. It is time for a power shift that benefits ordinary people.