The case against "demand tariffs" for electricity
My submission to an AEMC inquiry
The Australian Energy Market Commission (AEMC) is undertaking a review of electricity pricing, which should issue a report in April. I put in a submission criticising so called “demand tariffs”. I had an interesting discussion with the review team. It appears that the design of demand tariffs, and their adoption as the default when smart meters come in was undertaken not by AEMC but by the Australian Energy Regulator (AER), another ingredient in the alphabet soup that is electricity regulation in Australia.
My submission is here. It’s quite long so I will just send the introduction and conclusion.
The case against demand tariffs: introduction
The rollout of smart meters has been accompanied by the introduction of retail tariffs which include both a time-of-use charge and “demand pricing”. The two are often confused, including by the AEMC in both its policy proposals and its explanations of the rationale for demand pricing.
The term “time-of-use pricing” is self-explanatory. Customers are charged varying prices for electricity, with higher prices at times of high demand. By contrast, the term “demand pricing” is meaningless - it is just as applicable to a flat-rate tariff as to any other. All consumers pay for the electricity they demand one way or another. The actual basis for the charge is the highest half-hour of use during the peak demand period in any given month.
The purpose of this submission is to argue that
(i) all of the purposes supposedly served by demand pricing are better addressed by time-of-use charges,
(ii) demand pricing is inefficient and inequitable. Moreover the arbitrary imposition of demand pricing has further weakened the already fragile social license for consumer market reform
(iii) demand pricing should be scrapped as an option for customers switching to smart meters. Existing customers should be offered the opportunity to switch either to time-of-use or to flat tariffs.
Conclusion
The introduction of smart meters should have been an important step forward in managing Australia’s electricity market. Instead it has been a fiasco, beginning with the premature rollout in Victoria and the decision to charge consumers for meters they did not need. rather than leaving it to retailers to bear to cost if they decided to proceed with the rollout.
There is still time to remedy this failure. However, the proposals currently being considered by AEMC are nothing of the kind. Rather they represent a minimal adjustment, based on the assumption that the existing pricing policy is correct and that consumers who object are ill-informed and irrational.
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The collective peak load determines the overall need for supply capacity. It is not the sum of everybody’s individual loads, so JQ’s case looks sound to me. Beyond that, I’m actually missing a lot of background information on the Australian system, so can only offer general remarks from my Spanish eyrie.
I pay a standing charge for my grid connection, and flat import and export tariffs per kwh. This is pretty standard IIRC. Since I have 5kw of solar panels, the standing charge is in effect a fee for an option contract to buy and sell electricity from and to the grid, up to a modest cap of 5.7 kw. The fee includes a payment towards grid capacity. Looks fair enough in principle. Working out a fair level is a pig, as it includes the right to buy, the right to sell, my contribution to the capital cost of the grid, and my small contribution to overall capacity. ToD pricing schemes are available, for larger-consumers than me. At all events it looks as this well-tried system can accommodate all the competing interests, with no need for an additional peak demand surcharge.
A lot of things are changing at the same time, starting with the shift in generation to WWS, implying more long-distance transmission and storage for firming. Storage can be centralised and run by utilities (generally cheaper) or decentralised and owned by consumers (more resilient): regulators should be pretty agnostic on the balance. The joker here is V2G, which will be very cheap as households will have already paid for the large car battery. However, the spare capacity is not fully despatchable – another option contract, this time with algorithmic complications that can’t be avoided.
Another change coming our way is home AI. An AI smart home controller will be capable of running transactions in the market of any degree of complexity, up to the theoretical economist’s wet dream of instantaneous arbitrage across multiple options markets in real time. I doubt if the ordinary citizen will be happy to happy to surrender control of their home to such incomprehensible algorithms, especially as the AI will probably be the slave of Jeff Bezos rather than you and me, and the monthly electricity bill is a very small part of disposable income. ToD management – with parameters set once or twice a year - is about our cognitive limit.
Regulators don’t have infinite bandwidth either. They have more important and more urgent problems to deal with over the next decade than a confused effort to complicate capacity charges. If it ain’t broke ...
I see a lot of ads on Facebook from companies touting "wholesale electricity pricing", i.e. demand tariffs. The comments usually contain some horror stories.
I've recently installed solar panels on a new (to me) house. Amusingly, in NSW, you don't request a smart meter until after your install is complete, and from then until the meter is installed, your 'dumb' meter simply runs backwards while you're exporting power. My feed in tariff is effectively over 20c/kwhr right now.
When I requested a smart meter, my electricity retailer insisted that I go onto a time of use plan, even though they seem to advertise a single rate plan with a solar feed in tariff. I was okay with that, as I need to watch my consumption for a while to figure out what works best for me, and whether a battery has a positive ROI. (I will be using a diverter to heat my hot water instead of exporting, a poor man's battery)