Causes of residential electricity bill changes in Victoria, 1995 to prepared for: Victorian Electricity Distribution Businesses

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1 Causes of residential electricity bill changes in Victoria, 1995 to 2013 prepared for: Victorian Electricity Distribution Businesses

2 DISCLAIMER This report has been prepared for the Victorian electricity distribution businesses to promote understanding of the components that go into consumers electricity bills and their relative contribution to electricity price increases from FY1994/95, the year before Victoria s electricity distribution businesses were privatised, to FY2012/13. The analysis and information provided in this report is derived in whole or in part from information prepared by a range of parties other than Oakley Greenwood (OGW), and OGW explicitly disclaims liability for any errors or omissions in that information, or any other aspect of the validity of that information. We also disclaim liability for the use of any information in this report by any party for any purpose other than the intended purpose. DOCUMENT INFORMATION Project Causes of residential electricity bill changes in Victoria, 1995 to 2013 Client Status Report prepared by Victorian Electricity Distribution Businesses Lance Hoch Rohan Harris Tim White Date

3 Table of CONTENTS 1 Background Purpose and approach Findings Changes in Victoria residential electricity prices from 1995 to Comparison with other states... 9 Appendix A : Detail of residential electricity price changes in Victoria, A.1 Calculation of the bill components FY A.2 Calculation of the bill components through Appendix B : Changes in the residential bill in Victoria from 2001 to i

4 Table of FIGURES Figure 1: Composition of the annual residential electricity bill in Victoria (4,000 kwh; without electric offpeak hot water), FY1995 and FY2001 to FY2013 (2013 dollars)... 4 Figure 2: Per cent composition of the annual residential electricity bill in Victoria (4,000 kwh; without electric off-peak hot water), FY1995 and FY2001 to FY2013 (2013 dollars)... 5 Figure 3: Sources and relative sizes of the increase in the average residential electricity bill in Victoria, FY2001 to FY2013 (2013 dollars)... 8 Figure 4: Composition of the bill (exclusive of GST) of an average residential electricity consumer, NEM, FY Figure 5: Contribution of various components to the change in the average electricity bill (exclusive of GST) in different states between FY2012 and FY Table of TABLES Table 1: Composition of the annual bill of a residential electricity customer in Victoria using 4,000 kwh (without electric off-peak hot water) FY95 & FY01 to FY13 (2013 dollars) Table 2: Composition of the annual bill of a residential electricity customer in Victoria using 4,000 kwh (without electric off-peak hot water), FY01 to FY13 (2013 dollars) ii

5 1 Background Residential electricity prices which had been fairly stable in real terms from the mid-nineties through to about began increasing significantly in 2007 in some jurisdictions and in 2008 in others. By 2012, after four to five successive years of increases that in several jurisdictions were over 10% annually, electricity prices had become a topic of national political concern. In much of the media commentary about these increases, network charges the costs included in consumers bills for the physical delivery of electricity and related services 2 had been identified as the main cause of the increases. As part of the discussion about electricity prices the Victorian electricity distribution companies asked Oakley Greenwood to provide an independent analysis of the various charges that make up the bill of an average residential electricity consumer in Victoria, and how that has changed over time. The results of that analysis were published in March That analysis demonstrated that the amount by which the price of electricity had increased and what had driven the increase varied significantly from state to state. 2 Purpose and approach This report provides updated information on the extent to which residential retail electricity prices have changed in Victoria and the five other states and territories in eastern Australia that make up the National Electricity Market (NEM) and what has driven those changes. It also goes beyond the earlier report in two ways: it extends the timeframe of the analysis back to , the year before Victorian electricity distribution businesses were privatised, and it identifies the impact of government policies on the retail portion of the bill as well as on the network portion 4. In undertaking this analysis we have relied on publicly available data from three primary sources: 1 In Victoria the amount paid by the average residential consumer actually declined in real dollar terms between 1995 and Further detail is presented in Section 3.1 and Appendix A. 2 The term networks refers to both electricity transmission and distribution companies. Transmission companies transport electricity in bulk (at high voltage) from major generators directly to very large customers, and to the start of distribution networks. The voltage is then reduced and distribution companies deliver electricity directly to industrial, business and residential consumers. 3 Note that all years are expressed as financial years. For example, 1995 and FY1995 are both used in this report to refer to the year running from 1 July 1994 through 30 June The previous report addressed bill changes over the period. 4 The previous report only identified those policy costs associated with environmental impacts and metering that affected the network portion of the bill. By also separating out the policy costs that affect the wholesale/retail portion of the bill, this revised report treats the network and wholesale/retail components of the bill equally and also allows the full impact of government policies on residential electricity prices to be seen. 1

6 The Victorian Electricity Supply Industry Tariff Order (June 1995), and the Annual Pricing Proposals lodged by each of the electricity distribution companies with the Australian Energy Regulator (AER) These documents provide information on the charges that the Victorian electricity distribution companies make to electricity retailers related to their residential customers. In Victoria, the amount charged is broken down into the following categories: transmission services, distribution services, metering charges and charges to recover the costs of the premium solar feed-in tariff that was put in place by the Victorian government commencing on 1 November 2009 and the Transitional feed-in tariff commencing 1 Jan 2012, and which continues, though at a lower feed-in rate 5. Information compiled by the Victoria Essential Services Commission (ESC) regarding the size of the average residential electricity bill in Victoria 6. Starting in 2007, the ESC has published annual reports regarding the standing offers 7 and market offers 8 available in each of the distribution service areas within the state. The determinations made by the independent regulatory agencies responsible for setting the regulated retail electricity price for residential and small business consumers in the other NEM jurisdictions. 5 Note that this does not include any other feed-in tariffs or other incentives offered by electricity retailers or the Commonwealth or local governments. 6 The ESC provides information for two kinds of residential customers: customers on a single rate tariff who do not use off-peak electric water heating (and with an annual average consumption of 4,000 kwh), and customers with off-peak water heating (with an annual average consumption of 4,000 kwh plus 2,500 kwh off-peak for water heating). The analysis presented in this paper is for single rate consumers without electric water heating as this is by far the larger of the two groups. 7 Standing offers are the gazetted retail tariffs that are available in each distribution service territory. From 2002 through 2008 these tariffs were set by the Essential Service Commission (for the first year or two) and subsequently by the Victorian Government. In both cases the regulated tariff was set based on the estimated costs incurred by electricity retailers in serving residential customers. Retail electricity prices were fully de-regulated as of 1 January After that time, while electricity retailers have still been required to provide a standing offer to any customer who has not previously taken up a market contract, that offer is no longer reviewed nor does it need to be approved by the government or the regulator. 8 Market offers include all electricity contracts offered by electricity retailers to residential consumers other than standing offers. There are generally a number of market offers available within each distribution service area, and a single electricity retailer will often provide more than one choice of market offer. In addition to the price to be charged for the electricity purchased by the customer, market offers often include a fixed term, in some cases an exit fee if the contract is terminated early, various types of discounts (e.g., for paying the bill on time) and other features and conditions. 2

7 3 Findings 3.1 Changes in Victoria residential electricity prices from 1995 to 2013 In this analysis we have used the annual cost of the market offers that were available from all retailers in each distribution service area in Victoria in each year for the average residential customer (annual consumption of 4,000 kwh) who does not have off-peak electric water heating. We used the average market offer 9 within each distribution area because significantly more residential consumers in Victoria purchase their electricity under a market offer as compared to a standing offer contract 10. We then weighted the results by the number of customers in each distribution region, to derive a state-wide average. Figure 1 on the following page shows the component and total costs of the average annual residential bill from 1995 to The figures are shown in 2013 dollars to remove the effect of inflation from the results. Figure 2 presents the same information, but in percentage terms. That is, it shows the proportion of the average annual residential electricity bill that each component accounted for in each year. Table 1 in Appendix A presents the actual numbers that underlie both Figure 1 and Figure 2. 9 A simple arithmetic average of the market offers available in each distribution area was used because no statistics are available regarding the number of residential consumers on each of the different market offers. 10 Recent figures from the Department of State Development, Business and Innovation for 2012 indicate that around 75% of the residential electricity customers in Victoria have moved from standing offers to market offers. 3

8 Figure 1: Composition of the annual residential electricity bill in Victoria (4,000 kwh; without electric off-peak hot water), FY1995 and FY2001 to FY2013 (2013 dollars) $1,600 $1441 $1,400 $1,200 $999 $979 $970 $952 $909 $895 $855 $839 $916 $995 $1104 $1138 $1259 $1,000 $800 $600 $400 $200 $ Distribution Transmission AMI Metering Feed in tariffs VEET RET Carbon price Wholesale energy and retailer costs GST Standard network services Policy costs network Policy costs retail Total costs charged in the network portion of the bill All other costs included in the bill Note: The figures at the top of each bar show the total annual bill for a residential electricity customer in Victoria without electric off-peak water heating that uses 4,000 kwh over the course of the year. 4

9 Figure 2: Per cent composition of the annual residential electricity bill in Victoria (4,000 kwh; without electric off-peak hot water), FY1995 and FY2001 to FY2013 (2013 dollars) 100% $999 $979 $970 $952 $909 $895 $855 $839 $916 $995 $1104 $1138 $1259 $ % 80% 70% 60% 50% 40% 30% 20% 10% 0% Distribution Transmission AMI Metering Feed in tariffs VEET RET Carbon price Wholesale energy and retailer costs GST Standard network services Policy costs network Policy costs retail Total costs charged in the network portion of the bill All other costs included in the bill Note: The figures at the top of each bar show the total annual bill for a residential electricity customer in Victoria without electric off-peak water heating that uses 4,000 kwh over the course of the year. 5

10 As can be seen in Figure 1, the annual bill of the average Victorian residential electricity consumer on a single rate tariff using 4,000 kwh per year has increased by $442 from 1995 to 2013 an increase of 44.2% 11. However, the different components of the bill have not changed at the same rate over that timeframe. Since 1995, network-related costs in total including the cost of the Victorian Government s smart meter program and solar feed-in tariff have increased by only 3.0% - an increase of just $15 over those years. The non-network related components of the bill the cost incurred by retailers in purchasing electricity from the wholesale market for use by residential customers and maintaining customers accounts, plus the costs of policy initiatives that affect the wholesale and retail portion of the bill increased by $295 (58.4%) over the period. More specifically: Although the cost of all network-related services increased by $15 over the period, the cost of standard network-related services 12 actually declined by $122 in real dollar terms over the period, a reduction of 24.7%. This reduction was almost fully offset, however, by the introduction of two initiatives by the Victorian government: (a) the mandated roll-out of smart meters, which included the cost of purchasing and installing the meters, and the communications and IT infrastructure required for their operation, and (b) Premium Feed-In Tariff 13, which provides incentives to households whose small-scale solar PV systems feed electricity back into the grid. The costs of both of those programs were recovered through charges that affected the network portion of consumers bills. These programs have added $137 in costs to the annual bill of the average residential customer by In terms of their contribution to the total bill of the average Victorian residential electricity user, network-related costs including the costs of policies that are included in the network portion of the bill - have decreased over the period, from 49.5% to 35.4% of the bill. However, if the costs associated with government policy-related programs 14 are removed, the cost of standard network services can be seen to have actually dropped from 49.5% of the bill in 1995 to 25.9% in Appendix A provides the dollar values underlying the bar graphs in Figures 1 and Standard network services include all the costs associated with physically transporting electricity from generators to end-use consumers. Electricity distribution businesses have traditionally provided metering for residential customers, but until the Government mandated it, this did not include the use of smart meters. The Government s decision to roll out these meters on an accelerated basis increased the costs that the distribution companies experienced on an annual basis for metering. Not only were the meters more expensive than those the distribution companies had been buying, but the schedule of the roll-out meant that the distribution companies had to purchase more meters annually than they would have in the absence of the program. The decision to move to smart meters was made because several analyses had concluded that, over time, the benefits they could provide would outweigh their costs. 13 In this report we have separately identified only those Government policies that relate to smart meters and greenhouse gas emissions reductions because a number of these have been introduced in recent years and have had a material impact on customers bills. In practice, electricity prices are affected by government policies in a number of other areas, including other environmental, health and safety, and other issues. 14 For the purpose of this report, these programs are only the roll-out of smart meters and the cost of the Victorian government s solar feed-in tariff. 6

11 The cost of (a) the wholesale electricity purchased by the retailer for the average residential customer, (b) the other operating costs incurred by the retailer in serving the customer, and (c) the costs of policy initiatives charged through the retail portion of the bill increased by $295 in real dollar terms between 1995 and For reference, an electricity retailer s operating costs include: the cost of purchasing electricity from the wholesale market at spot price and the cost of financial hedges to manage the volatility of spot market prices 15, the cost of billing customers, processing their payments and answering their questions, the cost of marketing and information activities, and the costs associated with complying with relevant government policy initiatives such as the Victorian Energy Efficiency Target (VEET), which commenced in January 2009 and requires retailers to achieve specified targets for improving the energy efficiency of their customers, the Commonwealth Government s Renewable Energy Target, which commenced in 2001 and requires retailers to ensure that a specified proportion of the electricity consumed by their customers comes from renewable sources, and the carbon price, which was introduced in July Over the period, the costs incurred by retailers for wholesale electricity purchases on behalf of residential electricity customers and for all other retail operating and associated policy-related costs have increased in terms of the percentage they represent of the annual bill of the average residential customer from 50.5% in 1995 to 55.5% in However, the costs associated with government policy-related programs recovered through the retail portion of the bill noted above account for about two-thirds ($198) of that total $295 increase. By contrast, the cost of wholesale electricity and retail services account for only one-third ($97) of the increase. In fact, if the costs associated with government policy-related programs recovered through the retail portion of the bill noted above are removed, the costs of wholesale electricity and retail services can be seen to have actually dropped from 50.5% of the bill in 1995 to 41.8% in By contrast, the cost of government policy initiatives associated with environmental issues and advanced metering have grown from zero in 1995 to $335 in These costs now account for 23.2% of the average residential electricity bill in Victoria. The cost of policy initiatives recovered in the retail portion of the bill ($198) account for 13.7% of the average 2013 residential electricity bill in Victoria, while the cost of policy initiatives recovered in the network portion ($137) account for 9.5%. It is important to note, however, that several of these policies are likely to have put downward pressure on wholesale electricity prices even while they put upward pressure on the retail and network portions of the bill 16. This impact has not been separately quantified in this report. 15 Retailers use financial hedges to allow them to offer a set price for electricity to their customers despite the fact that the price the retailer pays for electricity varies every 30 minutes. The financial hedges act as a sort of insurance policy for the retailer and its customers, but there is a cost for that insurance. 16 For example, a number of studies have indicated that the RET puts downward pressure on wholesale electricity prices even though its impact on the retail portion of the bill outweighs that downward pressure. Similarly, work conducted for the Department of Primary Industries and the Department of State Development, Business and Innovation has determined that the VEET has similar impacts on the bill of the average Victorian residential electricity customer. 7

12 Figure 3 shows the relative contribution of the change in the cost of each of the components of the average residential electricity bill to the overall bill increase that has been experienced between 1995 and It shows that increases in network related costs including policyrelated costs that are recovered in the network portion of the bill - have accounted for 3.4% of the cost increase, while increases in the cost of electricity from the wholesale market for residential customers, other retailer services and the policy-related costs that are recovered in the retail network portion of the bill have accounted for 66.9% of the bill increases over the period. Figure 3: Sources and relative sizes of the increase in the average residential electricity bill in Victoria, FY2001 to FY2013 (2013 dollars) $1,800 Total bill in 2013: $1,441 (2013 dollars) $600 Change in bill from 1995 to 2013: $442 (2013 dollars) $1,600 $1,400 $1,200 $1,000 $800 $600 $400 $200 $0 $ bill: $999 (2013 dollars Changes since 2001 $500 $400 $300 $200 $100 $0 $100 GST: $131 Wholesale energy & retail costs: $97 Policy costs recovered in retail portion of bill: $198 Policy costs recovered in network portion of bill: $137 Distribution: $120 Transmission: $2 29.7% 22.1% 44.8% 31.0% 27.1% 0.5% GST Wholesale energy and retailer costs Policy costs retail Policy costs network Transmission Distribution $400 $200 However, if the costs of government-policy related programs are removed, standard network services actually tended to reduce the increase in the average residential bill. The cost of standard network services decreased by $122 over the period, representing a contribution of negative 27.6% to the overall increase in the average residential single-rate electricity bill between 1995 and Almost all of this downward pressure came from the change in distribution charges - $120 of the $122 decrease. Similarly, while the portion of the bill associated with wholesale energy, retail services and the costs of government policies that are recovered through the retail portion of the bill account for 66.9% of the increase in the size of the average annual residential bill between 1995 and 2013, the vast majority of this increase is due to the policy costs. The cost of wholesale electricity and retail services accounted for 22.1% of the increase experienced by the average residential electricity customer, while the costs of policies that are recovered in the retail portion of the bill namely, the VEET, the RET and the carbon price accounted for 44.8% of the increase. The $131 of GST, which was introduced in July 2001, accounted for 9.1% of the bill paid in 2013 by the average single-rate tariff residential customer, and represents 29.7% of the change in the bill of the average single-rate residential customer between 1995 and

13 It is clear from all this that standard network services have not been the primary driver of electricity cost increases in Victoria during the years 1995 through 2013 (in fact, network costs have decreased over the period), and neither have the costs charged by electricity retailers for wholesale electricity and retail services. Rather, it is the cost of government policy initiatives associated with improved environmental outcomes, energy efficiency and advanced metering - and that are recovered through either the network or retail portion of the bill - that has been the most significant cause of the increases that have been experienced in residential electricity bills, accounting for 75.8% of the increase between 1995 and Comparison with other states This section of the report compares the increases that have been experienced in Victoria with those that have been experienced in the other NEM jurisdictions, using specific distribution companies in each of the other jurisdictions 17. The previous version of this report (March 2013) determined that the causes of the significant increases that have been experienced in residential electricity prices 18 from 2006/07 through 2010/11 varied significantly by state. Most significantly, that report showed that: while increases experienced in standard network costs had contributed between 40% and 50% of the increase in the annual bill of the average residential electricity consumer in the rest of the NEM jurisdictions, they had actually exerted downward pressure on prices in Victoria; and network costs for transmission and distribution services and associated policy costs (except those related to smart meters) made up between 43% and 51% of the average residential bill in all jurisdictions except Victoria, where they accounted for only 30%. This section updates that comparison for 2012/13. Specifically, it compares the composition of the average annual bill of residential electricity consumers on single-rate tariffs in the various NEM jurisdictions in 2012/13 19, and how the composition of the bill in each state has changed between 2011/12 and 2012/13. Figure 4 compares the composition of the bill of an average residential consumer in each of the NEM jurisdictions in 2012/13. As can be seen, in 2012/13 network costs (not including policy costs that are recovered in the network portion of the bill) made up between 43.5% and 51.1% of the bill in all jurisdictions except Victoria, where they accounted for 30.2%. 17 South Australia, Tasmania and the ACT are each served by a single distribution company, which means that the information shown for those jurisdictions in Figures 4 and 5 is representative of the bills of all residential customers within those jurisdictions. By contrast, NSW and Queensland (like Victoria) are served by more than one electricity distributor. NSW is served by three distribution companies, Ausgrid, which serves the immediate Sydney area and north into the Hunter Valley; Endeavour Energy, which serves the western and southern areas surrounding Sydney; and Essential Energy, which serves the remainder of the state. In Queensland, Energex serves the south-eastern corner of the state including the greater Brisbane area and west to Toowoomba, while Ergon serves the rest of the state. The resources available to this analysis would not allow the additional work required to calculate weighted average state-wide bills for NSW and Queensland as was done for Victoria, so Endeavour Energy and Energex were chosen as the case studies for NSW and Queensland respectively based on the fact that they represented the largest proportion of residential customers in each of those states. It should be recognised, however, that the bills of residential customers served by the other distribution companies in NSW and Queensland will vary to some or a material extent from those in the case study distribution areas that were selected. 18 That comparison was based on the regulated residential tariffs in the other states and average market offer in Victoria because there is no regulated tariff in Victoria. 19 Specific distribution companies have been used as case studies in those jurisdictions served by more than one distribution business. 9

14 Figure 4: Composition of the bill (exclusive of GST) of an average residential electricity consumer, NEM, FY % QLD (Energex) $1,472 NSW (Endeavour Energy) $1,754 ACT $1,509 SA $1,827 TAS $1,434 VIC (state wide average) $1,310 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Networks Policy costs network (AMI) Policy costs retail Wholesale energy & retail costs Note: The figures at the top of each bar show the total annual bill for the average residential single-rate electricity customer in each of the NEM jurisdictions. As was the case in the previous report, the information in Figure 4 shows that conditions can and do vary significantly across the NEM states, and that NEM-wide averages are likely to blur material differences between the states. It is important to recognise, however, that the average residential electricity consumer uses very different amounts of electricity in the different states. This is a product of both climate and the availability of other energy sources. For example, in Victoria, natural gas is widely available and commonly used for space heating and water heating in residences. By contrast, natural gas is much less available for domestic uses in Queensland, where the higher cooling loads also increase average electricity consumption in the household sector. The point of Figure 4 (and Figure 5 which appears later) is not to try to compare the average usage or bill size in the different states, but rather the contribution that the costs incurred in each part of the electricity supply chain make to the average bill in each of the states. It is also important to note that certain policy costs have been separately identified in Figure 4. These include policy costs recovered in: 20 Note that the figures for Victoria are based on the average market offer, while the figures in the other states are based on the 2013 regulated tariff. This will make the absolute value of the VIC bill lower as compared to those in the other jurisdictions, and will also tend to make the wholesale energy and retail services portion of the bill lower than it would have been if a regulated or standing offer had been used, as it is this portion of the bill that would be affected by the discounts included in a market offer. 10

15 the network portion of the bill, which for the purpose of this section of the report we have restricted to only those policies that specifically concern the rollout of Advanced Metering Infrastructure (AMI) (smart meters); as this is a major difference between Victoria and the other NEM jurisdictions 21 ; and the retail portion of the bill, which include the carbon price, the cost of purchasing the certificates associated with the Commonwealth s Renewable Energy Target (RET) 22, and (where they exist) the cost of state government mandated energy efficiency obligation programs (such as the Victorian Energy Efficiency Target, the NSW Energy Savings Scheme, the South Australia Residential Energy Efficiency Scheme, and the ACT Energy Efficiency Improvement Scheme). Figure 5 (which also separately identifies these policy costs) provides a different look at the situation in each of the NEM jurisdictions. It assesses how much each part of the electricity supply chain has contributed to the increase that has been experienced in the bill of the average residential electricity consumer in each of the NEM jurisdictions between 2011/12 and 2012/13. Figure 5: Contribution of various components to the change in the average electricity bill (exclusive of GST) in different states between FY2012 and FY % QLD (Energex) $1,472 NSW (Endeavour Energy) $1,754 ACT $1,509 SA $1,827 TAS $1,434 VIC (state wide average) $1,310 80% 60% 40% 20% 0% 20% Networks Policy costs network (AMI) Policy costs retail Wholesale energy & retail costs Note: The figures at the top of each bar show the total annual bill for the average residential single-rate electricity customer in each of the NEM jurisdictions. 21 A number of other policies affect and are recovered in the network portion of the bill. In Section 3.1 we explicitly considered the impact of Victoria s solar feed-in tariff on network charges and therefore residential bills. Each of the other jurisdictions within the NEM has also put in place a solar feed-in tariff, the costs of which (including administrative costs and revenue losses incurred by the distributor) are recovered in network tariffs. The level of effort required to accurately quantify these costs for each jurisdiction was beyond the resources of this project. As a result, the costs imposed on the residential bill by these policies have been included in the network portion of the bill in Figures 4 and 5 including in the case of Victoria. It is also important to note that (a) all of the jurisdictions have moved to reduce the level of their feed-in tariffs (and therefore the level of cost they impose on network charges), and only Victoria mandated a rollout of AMI, the costs of which have had a material impact on customers bills. 22 Since 2011 the RET has included both the Large Renewable Energy Target and the Small Renewable Energy Scheme. 11

16 As can be seen, the result in Victoria is quite different from that observed in the other NEM states. The increase experienced in standard network costs in Victoria is lower than any other state except Queensland 23 and NSW (as represented by Endeavour Energy 24 ). By contrast, increases in wholesale energy and other retailer costs contributed more to the increase in Victoria than in the other states. 23 It is important to note, however, that the Queensland increase was limited by a government (rather than a regulator s) decision. In May 2012, the Queensland Minister for Energy and Water Supply, the Hon Mark McArdle, directed the Queensland Competition Authority to freeze Tariff 11 (the general electricity supply tariff for domestic consumers) for the 2012/13 year in response to the pressure that increases in the cost of living, including rising electricity costs, are placing on household budgets (see CertDeleg-0512.PDF). The freeze did not apply to the escalation of the carbon tax that went into effect on 1 July The Minister s letter also noted that the Queensland Government remains committed to tariff reform and the need to move towards a more cost-reflective price-setting methodology, and that the freeze would also allow the Government time to consider options for addressing the key drivers of energy cost increases and retail price-setting arrangements over the coming year. Note that this means that the contribution to the bill increase experienced by residential customers is likely to have been quite similar in both of the distribution areas within Queensland. 24 It should be noted that the outcome for NSW as a whole was materially different than that shown above for Endeavour Energy). The document from which the information in Figure 5 on Endeavour Energy s prices was drawn (IPART, Changes in regulated electricity retail prices from 1 July 2012, Electricity Final Report, June 2012), notes that in the state as a whole, about half of the 18% increase in residential bills between 2011/12 and 2012/13 is due to the continuing rise in network costs ; the other half is due to the introduction of the carbon price. 12

17 Appendix A: Detail of residential electricity price changes in Victoria, Table 1 on the following page presents the data on which Figure 1 and Figure 2 are based. It shows the component and total costs of the annual bill in 1995 and from 2001 to 2013 for a residential electricity consumer in Victoria on the average market offer who uses 4,000 kwh annually and who does not have electric off-peak water heating. The dollar values are shown in 2013 dollars to remove the effects of inflation. It also shows the total increase and percentage increase of each component of the average residential bill between 1995 and The market offer figures used for 2007 through 2013 are the straight arithmetic averages of the market offers included in the ESC s annual reports on retail electricity (and gas) prices and performance. No such organised source of information is available regarding the market prices offered in the years 2002 through For those years we calculated the straight arithmetic average discount that was offered in the market in 2006 from the information available for that year from the ESC. This was approximately 5%. This discount was then applied to all years from 2002 through The discount was calculated on the total bill, but the amount of the discount was subtracted from the wholesale energy and retail services component of the bill in each year. This reflects the fact that these are the only components of the bill that the retailer can reduce on its own. Notes regarding how the cost of each of the components of the bill was calculated follow the table. 13

18 Table 1: Composition of the annual bill of a residential electricity customer in Victoria using 4,000 kwh (without electric off-peak hot water) FY95 & FY01 to FY13 (2013 dollars) Bill component Network related charges Total change ( ) $ 2013 % Distribution (including std metering) $427 $294 $292 $301 $297 $290 $270 $274 $260 $258 $257 $266 $284 $307 $ % Transmission $68 $38 $26 $29 $34 $54 $45 $48 $45 $43 $56 $44 $56 $66 $-2-3.0% Subtotal standard' network services $495 $332 $319 $330 $331 $344 $315 $322 $305 $301 $314 $310 $340 $373 $ % Policy costs recovered in network portion of the bill AMI metering $0 $0 $0 $0 $0 $1 $5 $9 $16 $72 $83 $94 $114 $114 NA Feed-in tariffs $0 $0 $0 $0 $0 $0 $0 $0 $0 $1 $3 $14 $23 $23 NA Subtotal network policy costs $0 $0 $0 $0 $0 $1 $5 $9 $16 $73 $86 $108 $137 $137 NA Subtotal all network related costs $495 $332 $319 $330 $331 $344 $316 $327 $314 $317 $387 $396 $448 $510 $15 3.0% Wholesale electricity & retail services Wholesale electricity & retail svcs $505 $557 $562 $534 $493 $467 $459 $432 $513 $553 $595 $573 $534 $602 $ % Policy costs recovered in retail portion of the bill VEET $0 $0 $0 $0 $0 $0 $0 $0 $0 $28 $12 $35 $51 $36 $36 NA RET $0 $0 $1 $2 $3 $2 $2 $4 $7 $6 $10 $30 $45 $46 $46 NA Carbon price $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $67 $115 $115 NA Subtotal retail policy costs $0 $0 $1 $2 $3 $2 $2 $4 $7 $35 $21 $66 $162 $198 $198 NA Subtotal all wholesale/retail related costs $505 $557 $563 $535 $495 $470 $461 $435 $519 $588 $617 $638 $696 $800 $ % GST NA $89 $88 $87 $83 $81 $78 $76 $83 $90 $100 $103 $114 $131 $131 NA% Total $999 $978 $970 $952 $909 $895 $855 $839 $916 $995 $1,104 $1,138 $1,259 $1,441 $ % 14

19 A.1 Calculation of the bill components FY1995 Distribution and Transmission Distribution and transmission charges, collectively referred to as Network Use of System (NUoS) charges, for 1994/95 were calculated on a per-kwh basis from the schedule of prices for each Victorian electricity distribution business as outlined in Attachment 10 of the Victorian Electricity Supply Industry Tariff Order ( Tariff Order ), dated Friday 30 June Multiplication by 4,000 kwh provided the annual NUoS cost for an average residential customer in Victoria that does not use off-peak hot water. The underlying tariffs have been cross-checked against a document entitled Network Tariffs for Use of Each Distributor s Distribution System for the Financial Year Ending 30 June 1995, which was supplied by Citipower and Powercor. To derive a Victoria-wide weighted-average NUoS charge we applied the same weightings that have been used in all other parts of this report (that being, the proportion of residential customers in each distribution business area). We then calculated the Victoria-wide weighted-average transmission charge on a per-kwh basis based on PowerNet s overall revenue requirement, as outlined in Attachment 6 of the aforementioned Tariff Order, plus VPX s fees relating to the operation and planning of the Transmission system, as outlined in Clause 4.2.1(a) of the aforementioned Tariff Order. This revenue requirement has been converted to a per-kwh charge, based on the volumes outlined in page 57 of that Tariff Order. This per-kwh TUoS charge was then multiplied by 4,000 kwh to estimate the total cost of transmission services delivered to the average residential electricity customer in Victoria. The weighted average annual Victoria-wide distribution charge was then calculated simply as the weighted-average Victoria-wide NUoS charge minus the weighted-average Victoria-wide transmission charge. All figures were converted from nominal dollars to 2013 dollars based on the June 2013 All States CPI divided by the equivalent CPI in December This allows the costs in 1994/95 to be compared directly to the costs in today s bills. Note that all costs associated with electricity meters and metering were included in the distribution charges in 1994/95. Wholesale electricity costs and retail services The cost of wholesale electricity and retail services was calculated by determining the total bill that would have been incurred for the consumption of 4,000 kwh under the then applicable Maximum Uniform Tariff (converted to 2013 dollars) and subtracting the NUoS cost as calculated above. Note that the wholesale electricity market did not formally exist in 1994/95; all electricity was produced by the five state-owned generation companies that had been created in the break-up of the State Electricity Commission Victoria, and which were subsequently sold to private investors. Other cost components Note that there were no other material cost components in the residential electricity bill of 1994/95. The GST had not yet been instituted, and there were no material environmental or metering policy initiatives that were explicitly recovered in the electricity tariff. 15

20 A.2 Calculation of the bill components through 2013 Distribution Distribution costs have been based on the published Distribution Use of System (DUoS) tariffs for single rate customers, multiplied by the assumed average residential consumption of 4,000 kwh per annum. Where a tariff had a block or seasonal component to it, we used information provided by the businesses to split usage between those different charging parameters. Distribution costs include the estimated cost of providing single-element accumulation meters to customers see the discussion below on AMI metering for information on how the costs of these meters were derived. Transmission Transmission costs are based on the published Transmission Use of System (TUoS) tariffs for single rate customers multiplied by the assumed average residential consumption of 4,000 kwh per annum. AMI Metering The costs associated with the deployment of interval and smart (AMI) metering is estimated based on the regulatory filings that the distribution businesses were asked to provide starting in These filings included all meter-related costs both those related to the deployment of interval and smart meters and those related to the distribution business on-going costs associated with accumulation meters. Information on the first years of this timeframe when accumulation metering still represented the vast majority of all metering costs being incurred were used to estimate the on-going costs of metering had the deployment of interval and smart metering not been undertaken. Those costs are included in the Distribution cost line in the table, as they are part of the standard network services. The remainder of the costs associated with metering in the distribution businesses regulatory filings are assumed to reflect the costs of AMI and appear on this line. Feed-in tariffs The cost of feed-in tariffs is based on the published Premium Feed-in Tariffs (PFIT) tariffs for single-rate customers multiplied by the assumed average residential consumption of 4,000 kwh per annum. Victorian Energy Efficiency Target (VEET) The cost of the VEET is based on the reported volume of certificates created between 2009 and 2011, multiplied by the volume-weighted average monthly price of those certificates. This dollar value (converted to $2013) is then divided through by the number of residential customers in Victoria in each of those years, to determine the amount of money to be included in the retail portion of the bill of the average residential customer in order to recover the costs of the VEET in each year. For 2012, the cost is based on the VEET target of 5.4 million certificates per annum, multiplied by the volume-weighted average monthly price of those certificates. 16

21 This dollar value (converted to $2013) is divided by the total number of residential and small commercial customers in that year. For 2013, the cost is based on the VEET target of 5.4 million certificates per annum, multiplied by an estimate of the year-to-date weighted average certificate price of $17 per certificate. This total dollar value (which is in $2013) has been divided by an estimate of the number of residential and small commercial customers in 2013, which in turn is based on applying the historical customer growth rate between 2011 and 2012, to 2012 customer numbers, to estimate 2013 customer numbers. The reason that small commercial customers are allocated a portion of costs in 2012 and 2013 is that prior to 2012 only residential customers were eligible to participate in the VEET, and we have therefore assumed that small commercial customers would not be allocated any costs in those years. In addition to the certificate costs, we have also estimated the retailers administrative costs by multiplying the targeted number of certificates in each year by the estimated administrative costs per certificate. This administrative cost is based on information derived from Analysis of Compliance Costs for a National Energy Savings Initiative, Final Report for the Department of Climate Change and Energy Efficiency, December 2012) available at Renewable Energy Target (RET) The RET has taken several forms. It commenced in 2001 as the Mandatory Renewable Energy Target (MRET). In 2011 it was split into two components the Large-scale Renewable Energy Target (LRET) and the Small-scale Renewable Energy Scheme (SRES). The LRET encourages the deployment of large-scale renewable energy projects such as wind farms, while the SRES supports the installation of small-scale systems, including solar panels and solar water heaters. For the period 2001 to 2012, we have estimated historical REC prices, which applied to the MRET and (are also used for the LRET) in each year based on information published in the AER's 2012 State of the Market Report. These prices, converted into $2013, have been multiplied by the Renewable Power Percentages that have been published by the Clean Energy Regulator that applied in each year, as well as the estimated average residential consumption used throughout other parts of this assignment to work out the annual cost per average residential customer. For 2013, we used the same methodology, except that the price was based on the Clean Energy Regulator s published estimate (which is required under Regulation 22ZH) of the volume-weighted average market price for a large-scale generation certificate (LGC) for The SRES cost in the average bill (for 2011 through 2013 only) is based on the Small-scale Technology Percentage (which is published by the Clean Energy Regulator on its website) for each year from 2011, multiplied by the estimated certificate price in each of those years, multiplied by the average residential consumption used throughout other parts of this assignment. Estimated average prices range from between $32.50 per certificate (2012) to $37.50 per certificate (2013), and are based on a sample of information sourced from a publicly available report on the EUAA s website (http://www.euaa.com.au/green-market-prices/). The RET cost in 2011 through 2013 was calculated as the addition of the LRET and the SRES costs. 17

22 Carbon price The carbon price first came into effect in July For the 2012 calendar year, the cost of the carbon price in an average residential bill is based on the sum of total emissions in the Victorian region between 1 July 2012 and 31 December 2012, multiplied by the applicable carbon price of $23 per tonne. This total dollar figure (converted to $2013) was then divided through by the total amount of energy sent out in the Victorian region across the entire year (adjusted for an estimate of losses). This average per-mwh carbon cost has been multiplied by the average residential consumption used throughout other parts of this assignment. A similar process has been adopted for 2013, except we have worked out the average per MWh carbon cost between 1 January 2013, and 19 October 2012 (the point up until which data was available), and applied this to the average residential consumption used throughout the remainder of this assignment. Total emissions have been derived from published AEMO data (http://www.aemo.com.au/electricity/settlements/carbon-dioxide-equivalent-intensity-index), namely, the Carbon Dioxide Equivalent Intensity Index (CDEII), which combines sent-out metering data with publicly available generator emission and efficiency data to provide a National Electricity Market-wide Carbon Dioxide Equivalent Intensity Index. It is calculated on a daily basis under a formal framework contained within the National Electricity Rules. Wholesale electricity costs and retail services The cost of the wholesale energy and retail services portion of annual bill was calculated by subtracting the sum of the other items above from the annual bill of the average residential customer as calculated from state-based regulatory determinations or other publications. NA (not applicable) Where there were no charges for a cost component in 1995, it is not possible to calculate a percentage increase (because the denominator of the calculation that is, the level of charge in the initial year - is zero, and therefore the value of the calculation is undefined). 18

23 Appendix B: Changes in the residential bill in Victoria from 2001 to 2013 This section provides basic information regarding the changes that have taken place between the years 2001 (the year before the introduction of full retail competition) and 2013 in the bill of a residential customer that uses 4,000 kwh in a year and who does not have off-peak electric water heating. It draws on the information presented in Table 1 in Appendix A. Table 2: Composition of the annual bill of a residential electricity customer in Victoria using 4,000 kwh (without electric off-peak hot water), FY01 to FY13 (2013 dollars) Network related charges Bill component % of 2013 bill Change ( ) $ 2013 % Distribution (including std metering) $294 $ % $13 4.3% Transmission $38 $66 4.6% $ % Subtotal standard' network services $332 $ % $ % Policy costs recovered in network portion of the bill AMI metering $0 $ % $114 NA Feed-in tariffs $0 $23 1.6% $23 NA Subtotal network policy costs $0 $ % $137 NA Subtotal all network related costs $332 $ % $ % Wholesale electricity & retail services Wholesale electricity & retail services $557 $ % $45 8.1% Policy costs recovered in retail portion of the bill VEET $0 $36 2.5% $36 NA RET $0 $46 3.2% $46 NA Carbon price $0 $ % $115 NA Subtotal retail policy costs $0 $ % $198 NA Subtotal all wholesale/retail related costs $557 $ % $ % GST $89 $ % $ % Total $978 $1, % $ % 19

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