As summer starts people will be turning on their air
conditioners in ever increasing numbers. One area where the energy
market is currently distorted is in the determination of
electricity prices paid by consumers, particularly as it relates to
peak demand. The White Paper proposes a number of significant
reforms in this area which are likely to be as unpopular as they
In recent years peak electricity demand has continued to
increase, while total electricity consumption has been flat or
declining. The need to meet growing peak demand for electricity has
driven large investment in generation and network
The limited period for which this peak capacity is required (25%
of the capacity of the electricity system is used to supply power
during peak events that last for less than two days each year in
total) has resulted in inequitable cross subsidies between
different groups of consumers to pay for that investment.
The White Paper uses the example of a 2-kilowatt electrical
reverse cycle air conditioner which, while costing around $1,500 to
buy and install, could impose capital costs on the energy system as
a whole of $7,000 when adding to peak demand. The additional system
capital costs are recovered over time through energy bills spread
across all customers, because electricity is generally priced using
a fixed tariff approach. Only a fraction of the real cost of that
energy use is paid for by the purchaser of the air conditioner.
This cross subsidy problem feeds into two reforms advocated by
the White Paper, being retail price deregulation and the rollout of
enabling technologies (principally smart metres). Both of these
present political challenges.
While most Australian states and territories have introduced or
committed to introduce full contestability in the retail energy
markets, only Victoria has deregulated retail prices. While the
balance of the states and territories have committed to the removal
of energy price regulation where effective competition exists, the
White Paper is rightly critical of the lack of progress in this
The White Paper recognises that the transition to a deregulated
retail price market may present challenges where retail margins
have been set below market rates for some time, as there is likely
to be a period of higher transition prices.
However, deregulated retail pricing is in the best long term
interests of service providers and customers alike. Having prices
set through competitive markets incentivises suppliers to be more
efficient and innovative in the range of services and products
offered to consumers.
The White Paper champions the rollout of smart metres and
commits the Government to developing a national framework to guide
smart metre deployment. Smart metres allow time-of-use pricing for
electricity consumption (such that the customer pays the market
price for electricity for each half hour interval). Victoria is the
only State to have undertaken a rollout of smart metres and from 1
July 2013 customers can choose to move to a time-of-use pricing
Smart metres would remove the cross subsidies that exist in
current tariffs. This is likely to see a reduction in peak
electricity demand, where market prices are at their highest, which
in turn could moderate the level of investment required in
generation and network infrastructure.
The States face the challenge of delivering the reforms proposed
in the White Paper. While the reforms are not new, the delay in
their delivery speaks to the political challenges of implementing
them in a period of rising cost of living pressures. The White
Paper reports that on average household electricity prices have
ballooned by more than 40% nationally over the past three
The rollout of smart metres combined with deregulating retail
prices, could initially pose large risks to consumers especially
where their knowledge is underdeveloped. The White Paper
acknowledges that appropriate consumer safeguards and information
tools are needed to mitigate or reduce those risks, particularly
for vulnerable customers.
While other approaches to managing peak demand have been
utilised (such as paying large customers to cut power usage in
times of peak demand) the White Paper rightly promotes a longer
term solution under which all consumers are given the right signals
to change behaviour.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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