The Australian Energy Market Commission has released a draft rule it says will lead to more cost-reflective electricity network charges for consumers, and could lead to capacity-based charges being employed by retailers.

AEMC chair John Pierce said the way consumers were currently charged for electricity had not kept pace with changes in technology.

At present network prices are charged based on fixed charges and through the volume of electricity consumed, and account for around 50 per cent of electricity prices paid. A large component of network costs is meeting infrastructure requirements of peak demand, and those causing increases in peak demand – such as those running airconditioners on hot summer days – don’t pay more.

“Existing network prices over-recover revenue for off-peak use of the network and  under-recover for peak use,” Mr Pierce said. “It means that consumers who use most of their energy at off-peak times are paying more than the cost of supplying network services to them while those using energy at peak times are paying less than it costs.”

For example, someone with a five kilowatt airconditioner running at peak times would cause $1000 of additional network costs but pay only an extra $300, leaving $700 to be paid by those without airconditioners.

The AEMC also provided another example that stated that north-facing solar systems, because network charges are levied partly in electricity use charges, might save $200 in network charges to the owner, but only reduce the network’s cost by $80, leading to $120 being covered by non-solar households.

The AEMC said the draft rule set out a new network pricing objective for distribution businesses that would lead to more cost-reflective pricing.

“This objective is that the network prices that a distribution business charges each consumer should reflect its efficient costs of providing network services to that consumer,” the AEMC said.

The new pricing principles will require distribution network service providers to:

  • set cost reflective network prices that are based on the long run marginal cost of providing network services
  • recover their total efficient costs in a way that minimises distortions to the efficient usage decisions of consumers
  • minimise the impact on consumers of changes to network prices between regulatory years and set prices that can be understood by consumers

AEMC said the majority of consumers were expected to benefit from changes through lower network prices in the medium to long term. Some consumers, it said, would respond to new network price structures by reducing their use at peak times, lowering overall network costs.

Analysis undertaken for the AEMC estimated that up to 81 per cent of consumers would face lower network charges in the medium term under a cost-reflective capacity price.

“But consumers aren’t being given the option of reducing their peak demand to save money, or continuing to use electricity at those times when the value they place on that use outweighs the costs.”

Mr Pierce said a new approach to network prices could lead to consumers making different choices, including:

  • investing in more efficient appliances or new technologies to help manage energy use at peak times
  • installing solar panels to the west to generate more energy at peak times
  • investing in battery storage technology for solar
  • choosing to locate their business in an area where network costs are lower

Further consultation will occur before a final decision is made in late November this year. Submissions on the draft determination are due 16 October 2014.

The AEMC is hosting a public forum on the Distribution Network Pricing Arrangements draft determination on 22 September 2014 in Sydney.