Understanding Network Tariff Reform

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1 Understanding Network Tariff Reform A guide for small to medium business and residential customers who use less than 100MWh of electricity a year Ergon Energy is restructuring the way it charges for the use of its distribution network to help ensure it maintains a viable network for its customers into the future. This process is expected to take a number of years, with the first changes happening in the coming financial year. These changes will help Ergon Energy s customers to see the costs associated with their demand on the electricity network and will provide greater choice and control in how customers use the electricity network to deliver value. WHY DO WE NEED TO CHANGE NETWORK TARIFF CHARGES? There has been a major shift in the way Ergon Energy s customers use the electricity network over recent years. Strong economic growth in the early 2000s, coupled with a drop in the price of electrical appliances (including air conditioning and wide screen TVs), led to a rapid increase in demand for electricity during peak usage periods. In more recent times, while peak demand has remained high, the economic slowdown, the growing use of solar energy and the focus on energy efficiency (as electricity prices have risen) has led to a drop in electricity use overall. This means Ergon Energy s network, which was invested in heavily to respond to the growth in demand during peak times (which can occur for only a few days a year), is now not being used as much as it could be outside peak times. To respond to this, and other considerations, Ergon Energy is restructuring its network tariffs. It is critical that we better align network charges with the costs associated with meeting peak demand, now and into the future. This will enable Ergon Energy to continue to provide a reliable, affordable electricity supply into the longer term. These reforms are similar to those in the telecommunications industry, where new technologies have changed the way providers charge. Telephone bills, for example, are now geared towards line rental and data capacity. 1

2 The changes we are making are also being made by many other electricity utilities across Australia. These changes are being supported by advances in metering systems and associated technologies. The new tariff structures will allow our customers, through their retail account, to better understand the cost associated with accessing the network and the time they use electricity. This will help them to make better, more considered choices around their use of the network, and it will allow Ergon Energy to invest appropriately based on those choices. This is particularly important when making decisions on any future use of new energyrelated technologies, such as solar-fed batteries, electric vehicles and home automation, or any other innovations. Ultimately these tariff changes are designed to help take the pressure off rising prices for everyone. Making these changes now is the key they will help us work together to use the existing network more effectively and efficiently. 2. ADOPTING AN INCLINING BLOCK TARIFF AS THE STANDARD DEFAULT TARIFF AND INCREASING THE FIXED CHARGE This is a transitional step in updating the current tariff structure. It will better reflect costs without requiring metering changes at the premise. The variable rates will go up in blocks. This means Ergon Energy can reduce the impact of increasing the fixed charge on customers with a low consumption by offering a significantly lower rate for the first block of consumption. 1 COMPARING DIFFERENT NETWORK TARIFF STRUCTURES SHOWING PRICING BANDS BASED ON ELECTRICITY USE 2 SO WHAT IS CHANGING IN 2014/15? Current Flat Pricing Inclining Block Pricing Time-Of-Use Pricing Ergon Energy is starting on a path to move network tariffs away from energy charges to an appropriate mix of fixed and demand based charges. To start this journey we are introducing new network tariff structures for small customers in July At the same time Ergon Energy is moving to reduce reliance on charges based on the volume of electricity used. The changes in 2014/15 are: 1. CLASSIFYING CUSTOMERS AS EITHER RESIDENTIAL OR BUSINESS This removes the current distinction in the tariffs between Volume Large customers (>26MWh per annum) and Volume Small customers (<26MWh per annum). This will ensure tariffs reflect the differences in residential and business customer load shapes (load shapes refer to the way and time of day Ergon Energy s customers use electricity). Time-Of-Use Charges Inclining Block Charges Volume Charge Fixed Charge 3. OFFERING GREATER CHOICE WITH AN OPTIONAL SEASONAL TIME-OF-USE TARIFF Similar tariffs are currently used elsewhere in Australia. However, Ergon Energy s offer includes seasonal and time-of-day dimensions that mirror regional Queensland s unique seasonal loads. In regional Queensland the summer weekday peak in electricity use is on average 17% higher than in winter. As a result, Ergon Energy has invested heavily in infrastructure to provide for this demand. Establishing tariffs that reflect this peak in demand will allow Ergon Energy to offer a lower off peak rates for over 90% of the time customers need electricity. 2

3 DEMAND PERIODS FOR REGIONAL QUEENSLAND TIME-OF-USE TARIFF PRICING This table shows the demand periods for the pricing bands of the Time-of-Use tariff option: PERIOD RESIDENTIAL BUSINESS Peak Shoulder Off Peak pm pm and pm summer weekdays, and pm summer weekends 11.30am-5.30pm am and pm Outside the above summer time periods (December, January and February), a lower rate would apply for over 90% of the time across the year. Note: the structure of Ergon Energy s off-peak controlled network tariffs are not changing in 2014/15. HOW WILL THESE CHANGES IMPACT PRICES IN 2014/15? The changes Ergon Energy is making in 2014/15 will NOT impact customers on the Queensland Government gazetted tariffs or Notified Prices. These are the only tariffs offered to Ergon Energy s retail customers. For those on a market contract, the retailer or the contract the customer is on will determine if, how and when the changes will be passed through. In the small number of cases where the structural changes are passed through to customers, some will experience decreased network charges, while others will experience an increase due to the way they use the network. It is important to note that Ergon Energy s revenue overall will not increase as a result of these reforms. Ergon Energy has made every effort to minimise the cost impact of these changes. We have aimed to limit the direct impact of the tariff changes on individual customers in 2014/15 to less than 10% of the network charge. Network charges for this tariff class are typically around half of the retail price of electricity. Where increases as a result of the changes could be more than 10%, the increase will be limited through a cap linked to the fixed charge component. 3 It is important to note that other cost pressures may impact the final price customers pay for electricity. Ergon Energy s network tariffs undergo an annual adjustment, which is separate to the structural changes discussed here. We re restructuring how we charge retailers for delivering the electricity our network tariffs. These distribution and transmission costs account for around half of the price our small customers pay in electricity bills. 3

4 THE NETWORK TARIFF REFORM PATHWAY A SNAPSHOT Current Flat Energy Tariff Structure Rates applied based on two categories of volume Energy Based Inclining Block Tariff Standard tariff for residential and business for 2014/15 Energy Based Time-of-Use Optional for 2014/15 Applicable for new and upgraded connections in 2015/16 Demand Based Time-of-Use Introduced for both residential and business over the medium term WHAT OTHER REFORMS ARE PLANNED? Ergon Energy will continue to engage with its customers, electricity retailers and those representing regional Queensland s energy users as the reform process continues. Once the 2014/15 network tariffs changes are made, Ergon Energy proposes that, in 2015/16, while the Inclining Block Tariff would remain the primary tariff for existing customers, the Time-of-Use network tariff would become the default tariff for new premises, connection upgrades or where an existing customer has chosen to opt in (this would require metering and retailer support). In the medium term Ergon Energy also plans to explore the option of introducing demand based Time-of-Use tariffs for both residential and business customers. 1. Ergon Energy is proposing a $0.00 per kwh network charge for the first block in the East Zone, however, transmission and retail charges will apply to the final retail price paid by the customer. The indicative rates for the other zones are provided in the pricing proposal summary. 2. Indicative comparison only for East Zone Standard Asset Customers Small. Price outcomes will depend on usage patterns. 3. Based on 2012/13 customer billing information and comparing existing and new tariff structures at 2014/15 rates. 4. Ergon Energy Corporation Limited indicative estimate November

5 MORE INFORMATION How are network tariffs different to retail electricity tariffs? Network tariffs are the way Ergon Energy charges for the use of the distribution and transmission network. These charges are typically included in a customer s retail electricity bill. They make up around half of the retail price of electricity. The retail electricity bill also includes costs for electricity generation, a range of government schemes and electricity retailing services, in addition to the network tariffs. How does this review link to others relating to electricity prices? The Queensland Competition Authority is currently reviewing the regulated retail tariffs for the coming financial year and is expected to release its final determination in May The changes to Ergon Energy s network tariffs for small customers outlined here will have no impact on these Notified Prices, as they are based on Energex s network charges in Queensland s south-east. This review does not impact the overall revenue Ergon Energy collects across each tariff class. The amount of revenue Ergon Energy is allowed to collect has already been set for the current regulatory control period ( ) by the Australian Energy Regulator (AER). This revenue allowance is expected to translate to a 14% increase in network charges overall for 2014/15. 4 The AER, through a separate process, will again independently review the amount of money that Ergon is allowed to recover through charges for the use of the network for the next regulatory control period ( ). For more information please go to Does Ergon Energy have different network tariffs for different customers? Yes. A separate guide to the changes taking place has been developed for customers in each of the following tariff classes. Individually Calculated Customers (ICC) (>40GWh pa) these are the very large energy users this customer class is dominated by coal mining. Connection Asset Customers (CAC) (>4GWh pa) these customers represent a broad mix of activities including smaller mine operations, pumping loads, large resorts, port facilities, sugar mills, large manufacturing, education, defence, government facilities, larger shopping centres, abattoirs and hospitals. Standard Asset Customers Large (SAC-Large) (>100MWh pa) this group includes commercial, industrial and rural industry customers (such as irrigators) who are embedded throughout the distribution network. Standard Asset Customers Small (SAC-Small) (<100MWh pa) this class describes the majority of Ergon Energy s customers, including small to medium businesses and residential customers. The changes for this class are discussed in this guide. How can I find out more? Please go to 5 Ergon Energy Corporation Limited ABN