Energy & Utilities

Why is network tariff reform necessary?

In the lead up to the Summer Energy Briefing next month we had the chance to ask Darryl Biggar and Andrew Dillon the importance of network tariff reform – is it necessary and why?

Darryl Biggar, ACCC
The discussion on network tariff reform refers to the tariffs for distribution networks. Transmission network tariffs were more thoroughly reformed in the 1990s and are not the subject of current debate.

Distribution network tariff reform is essential for two reasons:

The first reason relates to the incentives for customers to make use of and invest in electrical appliances and devices. The cost of producing and delivering electricity to an individual customer is not constant over time – rather it varies according to both supply and demand conditions in the wholesale market and with congestion on the transmission and distribution networks. As long as end customers are insulated from these costs they will not make correct decisions about when and how to use their appliances and devices. For example, customers will tend to use their air-conditioners at peak times, even if that means the local network reaches or exceeds its limits. Customers will not have an incentive to reduce their consumption (or defer charging of their electric vehicle) or to use their local generation at such peak times.

At the same time customers do not take these network costs into account when making decisions whether or not to invest in, say, air-conditioning, or an electric vehicle. As long as customers do not face these costs network businesses must size the network for the maximum demand (even if it would be cheaper for customers to take action to curtail their demand at peak times). This results in low average network utilisation and high network costs. If we are to improve the efficiency with which customers use their devices and appliances and if we are to improve overall network utilisation and reduce network costs it is important that networks reflect their costs each moment in the network tariffs.

“If we are to improve the efficiency with which customers use their devices and appliances and if we are to improve overall network utilisation and reduce network costs it is important that networks reflect their costs each moment in the network tariffs” Darryl Biggar, ACCC

The second reason for network tariff reform relates to the problem of declining demand. Under the current network tariff structures network businesses receive most of their revenue through charges which depend on the volume of electricity carried. In recent years demand for electricity has been falling – resulting in a fall in the revenue received by network businesses. This could lead to pressure on distribution businesses to raise their prices, which could encourage customers to further reduce their demand for electricity, in a process known as a “death spiral”. The death spiral scenario seems unlikely in the short run but the network businesses are eager to change the tariff structure to better insulate their revenue stream from future changes in demand.”

Andrew Dillon, ESAA
Network tariff reform is required because the way we charge for electricity is out of date. It is creating all sorts of cross-subsidies and is on an unsustainable path. Pricing needs to reflect costs better to remedy this.

You can hear more from Andrew and Darryl at the Summer Energy Briefing to be held on the 24-25 February 2015 at the Marriott Melbourne.

Summer Energy Briefing 2015

Summer Energy Briefing 2015

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s