The solution to Barnett’s unfair fixed charges

After flip-flopping on his attempt to short change WA solar customers on Monday, Premier Colin Barnett told Fairfax radio on Tuesday that, “It's fair to say that electricity consumers, all of us, whether we've got solar panels or not, maybe we should be paying a fixed component for all the infrastructure, particularly the power line system."

It’s certainly not fair for customers who are having minimal impact on the grid’s capacity, which after all is sized for peak power events. Zero Emissions’ electricity pricing proposal, or ZEEPP, offers a fairer and more efficient electricity pricing structure.  ZEEPP involves:

  • A set per-kilowatt-of-capacity-needed charge agreed between the customer and their supplier; and
  • A per-kilowatt-hour-used consumption charge.

The problem identified by the companies

If consumers keep reducing demand for grid supplied electricity and the pricing structure does not change, then electricity companies will have to increase rates per kilowatt hour to maintain income.  This will send a financial signal to consumers to reduce demand further which will cause the cycle to repeat. This is called the death spiral.

The power companies’ MAD model

The major utilities’ managed adaptive decline (MAD) business model is to shift the cost recovery for the networks onto daily fixed charges, independent of the level of load customers put on the system during peak-demand periods.

The problem with going MAD

In New South Wales, South Australia, Western Australia and Queensland (sorry ACT, Vic and Tas, with today’s technology performance and costs, not enough solar in wintertime to ride through winter) many customers, starting with those who consume relatively little, will take advantage of falling solar system and battery prices to go off grid. This will accelerate the death spiral and exacerbate the electricity companies’ problem. Just 10 per cent of customers leaving the grid would be a disaster for these utilities.

A new model

An efficient pricing model which will allow Australians to take advantage of the electricity infrastructure we have and eliminate future inefficient capital expenditure would price grid supplied electricity via:

  • A fixed annual capacity charge, where the capacity is chosen by the consumer; and
  • A consumption charge per unit of energy.

At today’s prices, an average Australian house might spend $2,500 on 7,000kWh of electricity each year. This consists of $300 in annual connection charges, which is independent of usage, and $2,200 of consumption charges (i.e. charged per unit of energy consumed).  Of the $2,200 of consumption charges, close to $1,100 finances networks which currently operate like eight lane motorways. That is, eight lanes are built to deal with the highest capacity for about 20 hours per year. For the remaining 8,740 hours of the year, four of the lanes are seldom used and two are under-utilised.   

One difference between electricity grids and freeways is that if an electricity grid hit what motorists know as grid-lock, the system will fail. So electricity upgrades tend to get approved and go ahead well ahead of projected peak demand, where such projections tend to be quite cautious.

That is, networks, acting under poor regulatory design, prefer to have a significant margin above likely peak demand in order to avoid potential brown/black outs. It’s good for these regulated businesses too, because the more infrastructure they build, the more profit they are allowed to make.

How would the new model work and what would it cost?

Customers would buy capacity in 1kW (kVA) increments. The most common option might be 4kW for $1000 a year ($4 per day, $250 per kW).  They could opt to go down or up in capacity and would be charged accordingly. Consumption would be charged at 25 cents per kilowatt hour.  That would recover generation, retail, ancillary services and other non-distribution costs.

An illustrative example of the annual cost of kW capacity might be:

1kW = $250 p/a

2kW = $500 p/a

3kW = $750 p/a

4kW = $1000 p/a

5kW = $1250 p/a

6kW = $1500 p/a

Then the consumption charge of about 25 cents per kilowatt hour would be on top of these capacity charges.

How could it work in practice?

Customers would be able to choose from several different options, just as they do with phone and internet plans.

They could choose the hard capacity limit: if they breached their contracted kW capacity for more than five minutes during a high usage period then their meter would disconnect them.  They would be reconnected after a two minute break in service.  When/if smart metering technology allows, lighting circuits could be exempt from the supply interruption. During the five minutes of overuse a text message would be generated and sent to relevant registered mobile phones.

Customers would be pre-warned that today would be a high demand day and therefore pre-agreed capacity limits would likely apply.  

Other customers might opt for softer capacity limits: there would be a significant price penalty if the pre-agreed cap was breached – but only during high network demand periods. Audible and phone alerts would also be available.

Customers could also opt to have certain circuits and/or grid aware appliances automatically idled during high demand events to keep them within their contracted capacity.

A customer would not be able to buy additional capacity for one-time events. Capacity would need to be contracted for at least one year in order to avoid seasonal disconnects and gaming whereby customers might attempt to shift up and down within billing periods.

Alternatively, a capacity change fee could be applied for increases in capacity. This is quite similar in principle to some phone pricing – and there should be no surprise that this pricing suggestion is similar.  Both industries need to recover similar fixed network costs.

Concerns about the impact on the disadvantaged can be addressed by retailers applying rebates to bills of such consumers on the basis of their welfare status. If well designed, such rebates would retain the appropriate price signals, both for consumers and industry, while providing suitable consideration for society’s more vulnerable.

Remember the capacity limits would only apply during peak events which presently account for about 20 hours per year. The rest of the time real time usage patterns would not be impacted.

What’s the impact on solar PV / battery storage industry?

With Zero Emissions’ electricity pricing model, customers would choose between buying additional capacity from the grid or provisioning it themselves from onsite generation with ’grid connected‘ production shifting battery inverters and storage.

This would incentivise sales of the most economically-efficient or otherwise consumer-preferred method to meet peak electricity demand.

Matthew Wright is Executive Director of energy and climate security think-tank Zero Emissions.