Network Price Reform

In this article Lyle De Sousa spells out the imminent and significant changes to laws governing electricity distribution businesses’ charges for network access. These changes might bring significant opportunities for the renewable energy sector, but they bring risks too. Be alert and prepared and stay informed, says Lyle.

Storage SolutionNew rules being introduced by electricity distribution businesses will impact anyone who has grid-connected renewables. In fact, most people who use electricity or export electricity to the grid will be affected.

Some consumers may be rewarded with reduced network prices. Given, on average, the network component of a residential consumer’s total electricity cost is around 50 per cent, any reduction could mean lower electricity bills.

But merely having solar no longer will guarantee a customer reduced electricity bills. In fact, many solar users may find themselves lumped with much higher network charges.

Whether you have a negative or positive impact will depend on where you live and what choices of provider you have for your electricity supply and export.


The Context

Network businesses have traditionally applied prices based on a consumer’s total consumption. Until recently, when energy demand was increasing and residential consumers generally used electricity in largely similar ways, networks were well recompensed.

[blockquote border_color=”#EEEEEE” bg_color=”#FFFFFF”]There are four immediate lessons for the renewables sector [one of which is] if you can change your energy consumption pattern so you use less energy at times of peak demand, you are likely to benefit. Energy efficiency and west-facing solar become even more relevant.[/blockquote]

However, for the last decade, electricity use has rapidly changed. Uptake of solar and energy efficiency, means networks are faced with ever-declining revenues using their old tariff structures.

While overall consumption has fallen, peaks in demand (especially on hot summer days, with a lot of people turning on their air conditioners) are increasing. If you consume grid electricity during peaks, you contribute to the networks’ need for infrastructure investment to provide secure supply during those peak demand times.

Some distribution network businesses have been responding with new fixed charges for consumers with solar, instead of tariffs based on the amount of consumption. These fixed charges often appear to be arbitrarily high and can make the short term financial case for solar unviable.

Enter the Australian Energy Market Commission. This is the body which makes rules for the National Electricity Market across the eastern seaboard states, including South Australia, Tasmania and the ACT.

The AEMC recognises that existing network prices generally over-recover for off-peak use of the network and under-recover for peak use.

A key mischief which the AEMC wants to redress is perceived cross- subsidisation. The AEMC commissioned research with these indicative outcomes:

  • A Victorian consumer with a 5 kW air-conditioner will cause about an extra $1000 a year of network costs compared with a similar consumer without an air-conditioner. That consumer will face about an extra $300 a year under current network prices as a result of using that air- conditioner. The remaining $700 will be recovered from all remaining customers. Under the existing regime, other customers share in those higher network prices even if they don’t have air-conditioning
  • North-facing solar apparently poses a similar dilemma. A South Australian consumer with a 2.5 kW north-facing solar system currently pays about $200 a year less in network costs than a similar consumer without solar. However, north-facing panels generate only about 18
    per cent of their maximum capacity during the time of peak network demand. As a result, the reduction in network costs is about $80. This consumer therefore pays about $120 a year less than the network costs. That $120 is recovered from other consumers.
  • However, if the previous consumer’s solar panels faced west, the situation is quite different. Output of the panels would more than double at the time of peak network demand. Even though west-facing panels produce less total energy, they produce it at times when it is generally more valuable to the entire electricity system. The reduction in network costs would be much higher, and the consumer’s $200 a year savings in network prices roughly equate to the reduction in network costs from the solar panels. In other words, under current network price structures, some consumers currently pay more than the costs caused by their usage of the network. Consumers who use a greater proportion of their energy at peak times pay less than the network costs caused by their usage.Of particular note is that consumers currently have no incentive to face their solar panels west and benefit more from facing them north.


The New Rules

Outcomes like those above are likely to change under the new AEMC rules.

  • Networks will be required to recover their costs in accordance with pricing principles that reflect the efficient costs of providing network services to particular consumers.
  • Tariffs should be designed so that if consumers use appliances in ways that reduce network costs (e.g. by reducing peak demand), they will benefit from lower prices. If consumers choose to use electricity at peak times, their charges may escalate.
  • Incumbents will need to be consumer-focused in implementing changes to network charges. Tariff structures will need to eliminate potential for price volatility. Also, network businesses will have to set out tariffs in a way that consumers can readily understand and respond to.
  • Networks will also have to be more consultative with, and transparent to, consumers about how network charges are determined.

In the long term, the AEMC believes this approach can minimise overall electricity network costs borne by consumers. The AEMC anticipates there will be better utilisation of the network and deferral of peak demand driven network investment.


Opportunities for Solar and Renewables

The new laws will take effect gradually between 2015 to 2017. The full impact of the changes may take some time to filter through. However, there are four immediate lessons for the renewables sector:

  1. If you can change your energy consumption pattern so you use
    less energy at times of peak demand, you are likely to benefit. Energy efficiency and west-facing solar become even more relevant.
  2. Solar, on its own, may not in future lead to lower network charges. In fact, if you only have north-facing solar, you may be penalised.
  3. Storage, together with larger north-facing solar systems, may come into their own. You may have a clearer incentive to capture as much energy during the day with batteries. You can then consume the stored energy during times of peak demand. In this way, you are less likely to be exposed to peak prices.
  4. If you are a solar business, you should take care not to mislead your customers about network prices. You should explain network charges are changing and may even increase, depending on the tariffs and the customer’s specific consumption patterns.

Being informed on how the new laws will operate may open up significant opportunities for the renewable energy sector. How you respond will be important.

It is also worth noting that changes to electricity rules do not entirely happen in isolation. The renewable energy sector has the ability not only to provide input on how these laws are rolled out, but can itself initiate revisions to the regulatory regime. The industry needs to be more cohesive, educated and professional in its approach to do this effectively.

While not as high-profile as the Renewable Energy Target, the renewable energy sector cannot afford not to engage with these developments.


Lyle De Sousa is principal of Legal Energy Lawyers & Consultants. He is a commercial lawyer with 20 years’ experience and also holds a first class honours degree in mechanical engineering. Lyle acts on behalf of renewable energy project developers and advises on regulatory changes in the energy sector. After working at Freehills Lawyers Lyle spent seven years with Australian Energy Market Operator (and its predecessor, VENCorp) and has since been engaged by the Australian Energy Market Commission to help draft aspects of the National Electricity Rules.


[wide class=”wideone” style=”background:#566D7E;”] While this is a useful description of the changes being proposed AEMC and offers some insightful suggestions on how we might best respond, there is a different view says ASC President Steve Blume. “The bodies charged with regulation and oversight of the electricity market in Australia, the AER, AEMO & AEMC, are too often captives of the industry they regulate. The responses from these regulators to issues and problems arising from the massive technological change being wrought by solar and other renewables is skewed.” he said. “They tend to look through the blinkers of the narrow perspective of all incumbent beneficiaries in the market except the most important participants: consumers – all consumers. “We need to regulate to make the consumer the key. While ever the focus is on protection of the existing business models then the real advantages and benefits that could come from a transformation of the electricity sector will not be seen by consumers. That means we need to have active regulation (or de-regulation in many cases) to encourage a move from unidirectional flow networks with a tiny number of players to multidirectional flow networks with fair and easier access for players at all scales and a mix of technologies.” Blume added that would open up the market with the profits no longer coming just from selling electrons and charging for the poles and wires to send it to customers, but from a variety of business models that focus on services – and customer service especially. “This would also bring a broader societal benefit – distributed multidirectional electricity networks with diverse generation types and wide geographic locations is more robust, more reliable and less vulnerable to threats than the current networks. “Whether from weather, which causes more than three in four outages, or from mechanical failure, or even the threat from terrorism, our transformed electricity production and distribution systems will bring unsurpassed reliability and security of supply to all consumers. They’re the changes we really need!”[/wide]


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