SA Power Networks Electricity Tariff Reform in South Australia. Consultation Paper October 2015

Transcription

1 SA Power Networks Electricity Tariff Reform in South Australia Consultation Paper October 2015

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3 Contents Foreword...2 About SA Power Networks...3 What s changing?...4 Our stakeholder engagement: what we have been told so far...5 What is cost reflective pricing?...7 From revenue to prices understanding tariff structures...9 What will be the impact on customers?...11 Our questions for you on our tariffs...15 Complementary measures...16 Our questions for you on complementary measures...16 Transition options...17 Our questions for you on transitions...20 Next steps...21 Appendices...22 a. Stakeholder engagement program...23 b. Postage stamp pricing...24 c. Useful links...24 d. Glossary...25 Electricity Tariff Reform in South Australia Consultation Paper 1

4 Foreword Foreword At SA Power Networks we recognise that electricity is the lifeblood of our community. As South Australia s sole electricity distributor, we understand the responsibility we hold in delivering our services for all South Australians. Apart from ensuring reliability and safety of supply today, we have a key role of ensuring the distribution network is able to meet and respond to the emerging needs of South Australian consumers. In recent years, the way our customers use electricity has been changing. Air conditioning has become ubiquitous; the number of electrical appliances in homes has increased, as has their efficiency; about 25% of residential customers now have solar panels on their homes; and there is significant interest in the emergence of battery storage and in-home energy control systems. Similarly, business often has large capacity equipment in use, and we are witnessing an increasing penetration of solar PV and batteries in the business sector. In response, the rules that governments and regulators have in place to manage the electricity market are being reformed. One of the major changes is to accelerate reform of the way electricity network businesses like ours charge for use of the distribution network. By providing better pricing signals to customers, tariff reform is expected to subdue future demand growth leading to lower expenditure on the network and lower prices for customers in the long run. A particular focus is also on ensuring cross-subsidies amongst customers are reduced so that everyone pays a fairer share of the costs associated with the way they choose to meet their energy needs. Importantly, the changes to tariffs being contemplated will not result in SA Power Networks collecting any more or less money in total during the regulatory period what we are talking about in this discussion paper is not the size of the pie, but how the pie might be divided more fairly between customers. To progress the reform program, we have been engaging on matters related to the structure of our future tariffs. Our engagement has involved a wide range of customer representatives, and a number of direct customers. This engagement has helped to further develop our thinking on these matters. The purpose of this paper is to report on the work we have done to date and to pose some questions to a bigger range and number of our customers and stakeholders on how we should progress this significant reform. This paper considers various options for transitioning customers over time to more demand-based tariffs. Similar reforms have already been introduced for the largest of our business customers. In our discussions on the implications of the changes, stakeholders and customers have been very generous with their time. They have given us very frank feedback on how to communicate around complex reforms, and their feedback has also been focused on the impact on customers from implementation of new tariff structures. This consultation paper tries to avoid too much technical detail. Stakeholders interested in further details of our tariffs are encouraged to read our Annual Pricing Proposals to the Australian Energy Regulator (AER) 1. It is important to note that as part of the 2015/16 Annual Pricing Proposal, we proposed to implement a Residential Solar tariff, reflecting the specific load profile of solar PV customers, as well as a Residential Social tariff to support the State s most vulnerable electricity customers. These tariffs were rejected by the AER and are currently subject to judicial review. SA Power Networks will further consider its position on these tariffs pending the outcome of the review in November this year. Current electricity pricing structures can already be difficult to interpret when making choices about electricity suppliers, appliances, solar panels, battery storage, electric vehicles and so on. Unfortunately, the changes we implement may not make electricity pricing simpler, but we expect they will help make clearer for all customers what drives electricity costs and how changes in their behaviour can reduce their network charges (noting that network charges make up about half of the retail bill). We are, however, aiming to keep the changes as understandable as possible, while still meeting the requirements of the rules. Responses to this consultation paper will inform the development of our first Tariff Structure Statement (TSS) our plan for introducing more cost reflective pricing from 2017 to In this paper we: discuss the changes we are required to implement as part of the national reform process; discuss the implications of cost reflective network pricing in the South Australian context and the challenges posed by the lack of appropriate metering in SA; present the demand-based tariff structures we consider must be put in place to meet the new requirements; present the impact of the proposed tariffs on a sample of household and small business customers; recap the discussions we have had with our customers, retailers and other stakeholders; discuss the concept of complementary measures and how these might accompany ongoing cost reflective network pricing reform; and present options in the timing and way we introduce these new tariffs to customers based on the availability of metering and allowing enough time for customers to understand the changes. We pose a number of questions at key points in this document and look forward to your comments and feedback SA Power Networks

5 About SA Power Networks About SA Power Networks SA Power Networks has always valued its key role in ensuring our electricity distribution network supports the needs and development of South Australia and its communities. We have proudly served South Australians for almost 70 years, initially as part of the Electricity Trust of South Australia, and then as a stand-alone distribution business established in the late 1990s when the State s electricity supply industry was transformed by a new regulatory framework. As the South Australian Distribution Network Service Provider 2 our primary responsibility is planning, building, operating and maintaining the South Australian electricity distribution network an essential community asset and core component of the State s energy infrastructure. We do this in a safe, reliable, efficient and prudent manner. Our role Our business is about connecting residential and business customers to a safe and reliable electricity supply. SA Power Networks key distribution activities include: maintaining the network s safety and reliability to meet the current power supply needs of our customers; extending and upgrading the network so that the future power supply needs of customers are met when required; operating the network on a day-to-day basis; ensuring power supply meets voltage and quality standards in an environment characterised by an increasingly two-way flow of electricity and rapidly evolving energy technologies; connecting new customers to the network; maintaining the public lighting system; reading electricity meters; providing meter data to retailers; and facilitating the connection of new energy technologies such as solar panels. Figure 1 The South Australian electricity supply chain Power Station 132kV to 275kV Terminal Station Windfarm (Transmission Linked) Windfarm (Distribution Linked) 66KV Sub Transmission Zone Substation 11,000 Volts (11kV) High Voltage Customers Roof-mounted Photo- Voltaic Solar Panels 11kV to 230/400V Pad Mounted Distribution Transformer 230/400V Low Voltage Customers 11kV 230/400V Pole Mounted Distribution Transformer Underground Cables Generation Transmission Network Distribution Network Source: SA power networks 2 In this paper, we may refer to businesses like ours as either a distributor, or a Distribution Network Service Provider, or a distribution business. Electricity Tariff Reform in South Australia Consultation Paper 3

6 What s changing? What s changing? The National Electricity Rules (NER) changed in late 2014 and these changes affected both the process and the principles for setting tariffs. 3 In simple terms, the Australian Energy Regulator (AER, or the Regulator) sets the level of revenue that a distributor like us is allowed to collect over a five-year regulatory period, in return for delivering the services, safety and reliability that customers and regulators expect. Tariffs are then set on an annual basis to recover that revenue so that by the end of the five-year period we collect no more than allowed. In the past this process has involved SA Power Networks submitting an Annual Pricing Proposal to the AER for approval prior to implementation in the coming year. 4 As part of the 2014 rule change, we now are also required to submit a Tariff Structure Statement at the start of each five year regulatory period, to outline our approach to tariff setting to be used in our Annual Pricing Proposals throughout the period. This process provides more opportunities for the involvement of customers, retailers and other stakeholders in both the underlying thinking and tariff setting approach. The pricing principles have also been changed to require that prices for all customers must be set on a more cost reflective basis. A transition period can be used to enable this change. By cost reflective, we mean prices that are closer to reflecting the true cost of serving a particular customer. Currently, tariffs for most small customers are based on how much energy they use, but accumulated energy use has little bearing on the actual cost for the network to meet a customer s needs. Network costs are driven by the capacity required by the customer to meet their peak demand on a particular day. In general terms, moving to cost reflective tariffs means we must start to reflect in our pricing the costs related to providing this network capacity at those times when electricity demand peaks. Refer to the break-out box to the right Measuring your peak demand. What do the changes mean for customers? Out of approximately 850,000 electricity customers in South Australia, around 5,000 of the largest electricity customers are already utilising cost reflective prices, based on demand, which comply with the rules. What is being discussed as part of our Tariff Structure Statement consultation is how this demand-based approach can be extended to our residential and smaller business customers (numbering approximately 750,000 and 95,000 respectively). The implication for a customer s electricity bill is that, rather than being based entirely on their total accumulated energy consumption since their last meter read, the bill will be based on a combination of energy used and a peak demand charge. In general terms, we can say a few things about what the rule changes mean for customers in South Australia. The time when we see peak demand varies across the network but almost universally coincides with times of high temperatures. We are required to price electricity in a way that reflects our costs at times of maximum utilisation of our network and this occurs on summer afternoons and evenings. Since demand varies across the year and across the day, we will need to be able to measure more precisely when each customer uses electricity, and how much at each time. Currently, 99% of metering at customer premises is unable to record the demand information required to implement cost reflective pricing. The rules around roles and responsibilities for metering are also changing. The Australian Energy Market Commission (AEMC) will deliver its final determination on changes to these rules on 26 November We have to lodge our Tariff Structure Statement with the Regulator the following day (27 November 2015). Metering is clearly a challenge in finalising our approach to implementing tariff reform. 5 Introducing a peak demand charge may mean higher prices at peak times, but this will be accompanied by a reduction in charges at other times since the total revenue we can collect from customers is capped by the Regulator. Electricity charges will increase on summer afternoons and evenings but decrease at other times. The overall bill impact for a particular customer from the tariff changes will therefore depend on their energy use patterns and the balance between an increase in costs during the peak demand period and a decrease in costs at other times. Measuring your peak demand A customer s peak demand is measured as the total electricity consumed over a 30 minute time interval. Accumulation meters simply add up consumption but have no record of when consumption occurred. Interval metering differs from accumulation metering in that these meters have a digital memory that records consumption over each 30 minute interval. The unit of electricity on the current bills of households and small businesses is the kwh (kilowatt hour), a measure of energy consumed. We refer to Peak Demand in the units of kw (kilowatt) or kva (kilovolt amp), a measure of the rate of energy consumption. kva is the more accurate measure of electrical demand from our network than the kilowatt (kw). kva is always equal to or more than power measured in kw and depends on the equipment customers have connected. The ratio between the two is what s referred to as the power factor of a site. In essence, a kw is what a customer uses but a kva is what they require from our network. 3 New-rules-for-cost-reflective-network-prices SA Power Networks

7 Our stakeholder engagement: what we have been told so far Our stakeholder engagement: what we have been told so far This consultation paper is not the only mechanism we have for seeking feedback on tariff reform. It forms part of a comprehensive engagement program (Appendix A) that has been running in earnest since July and has comprised a series of workshops and bilateral meetings with customers and stakeholders. Their feedback to date has informed much of the thinking in this consultation paper. The main themes of our discussions with stakeholders have related to: The proposed tariffs and tariff structures, the signals they send and their impacts on customer bills. The complementary measures that will need to be considered and the existing policies and programs that will need to be recalibrated to incorporate the implications of such changes to pricing. An indicative transition schedule for the period out to What we have been told so far: The proposed new tariffs We already have available a set of cost reflective tariffs for each class of customer. Householders told us that the existing minimum demand charge of 1.5kW was too high. Retailers told us they want us to keep our structures and timings as closely aligned to other distributors in the National Electricity Market as possible. Everyone emphasised the barrier to engagement that comes from the complexity of this subject and kept reminding us to keep it simple. Business customers also reminded us of the challenges experienced by them as demand charges have been introduced to large customers over time and queried the cost-effectiveness of the required metering changes for the majority of small electricity accounts. Impacts are material In order to discuss the customer impacts of the transition to demand-based pricing, we developed 13 residential case studies, based on a variety of demand/consumption scenarios, and 12 business case studies, based on a range of different load profiles. 6 All case studies were based on actual interval meter data. We also prepared summaries of the redistributive effects of a change in tariff to illustrate the extent of winners and losers under cost reflective tariff reforms. It was clear that for a minority of residential customers, and assuming no change in their behaviour, applying the new prices to past consumption patterns increased network charges by more than 40%. Given network charges account for roughly half of the average residential bill, this implies an impact on the total retail bill of more than 20%. Understandably, stakeholders were most concerned with the biggest losers and understanding how many, what size and the range of the impacts. For business customers, it was clear that for a more material number of customers, applying the new prices to past consumption patterns increased network charges by more than 50%. This implies an impact on total retail bills of more than 25%. A further observation was that, even for the winners, a rebalancing of costs across the year occurs with summer months becoming noticeably more expensive. Vulnerability When we discussed impacts it was clear that those facing the biggest changes to costs were not just residential customers but many small business customers as well. It was made clear that electricity bills are a key input cost for many small businesses and that such significant changes in costs can challenge the viability of an enterprise. We agreed that our approach should continue to include a strong focus on those most impacted whether residential or business. Keep the transition as simple as possible Customers and stakeholders supported an introduction of cost reflective tariffs that was simple and easy to understand. Preference was given for an introduction akin to the digital TV roll-out, rather than a longer, drawn-out transition. A reasonable transition When discussing the bigger picture tariff reform agenda, there has been general support for implementing the necessary reforms over a period of time out to This represents the current and next regulatory periods for SA Power Networks and coincides with the scope of the ENA/ CSIRO Network Transformation Roadmap Project. 7 This project seeks to position network businesses and the entire energy supply chain for the future, by identifying the options for electricity pricing (among other things) that are best able to support delivery of the future services that customers want. However, in developing a Tariff Structure Statement for the interim period to 2020, we must decide how much progress we should make by that date. While it is tempting then to push the harder parts of the reform into the next regulatory period (beyond 2020), this may not necessarily be in the best interests of customers at large. 6 Available from 7 Australia s national science agency CSIRO and the peak national body representing gas distribution and electricity transmission and distribution businesses in Australia, the Energy Networks Association (ENA), have partnered to develop an Electricity Network Transformation Roadmap: Electricity-grids-and-systems/Economic-modelling/NTR Electricity Tariff Reform in South Australia Consultation Paper 5

8 Our stakeholder engagement: what we have been told so far Productivity make the most of what we have We have discussed the case for change in a number of ways. Peak demand, air conditioners and the integration of distributed energy resources (DER) such as solar, battery storage, electric vehicles and so on have been dominant themes. There is some agreement that success in the long run includes making more productive use of the distribution grid we already have (since it won t shrink if we just use it less). Robust for the future Stakeholders agreed with our assessment that we would have a less peaky pattern of demand today if tariffs such as those we are proposing now had been in place earlier and shaped choices regarding air conditioners and solar PV, to some extent. There was agreement that any changes to tariff structures now must be robust in light of a future of relatively cheap distributed energy resources such as solar PV and battery storage. Getting cost reflective tariffs right is critical in encouraging customers to invest in, and operate, these new resources in ways that maximise benefits to all customers, not just the customers who can afford to invest in them. Metering competition is causing uncertainty No matter how much we talked about it, there was no escaping the conundrum of smarter meters and cost reflective tariffs. Of the 99% of our customers that are not yet charged cost reflective network prices, all but a handful will require a new, smarter meter in order to do so. As mentioned earlier, the Australian Energy Market Commission (the rule maker ) is planning major changes to the rules on roles and responsibilities for metering. This will mean that we no longer will manage metering in South Australia. Instead, this will be managed by retailers (and other potential competitors) in a competitive market. This opens up the possibility of new metering options for customers, but creates a significant level of uncertainty regarding the timing and speed of a changeover to smart meters. One near certainty is that the current accumulation meters will no longer be installed in South Australia from late Lost in translation Another major issue for stakeholders was the potential for network price signals to get lost in translation by the time they reach a customer s final bill. Just how energy retailers or other third parties might enhance or undermine a price signal being sent from network pricing (which could conceivably be smothered by retailers overlaid competitive pricing structure choices) was a recurring point of discussion. There may be retailers who bundle the demand charges into energy prices, others who have a separate demand component, and some who may separately pass through the demand charge. Education Most stakeholders agreed that the changes were significant enough to warrant some sort of public education campaign. There are a lot of stakeholders involved in the State and National reform program but we got a sense that customers were looking for more leadership on this than has been evident to date. Customers also made it clear that simply raising awareness was not enough and this lead to discussions about other complementary measures. Complementary measures We discussed the idea of complementary measures during the stakeholder and customer workshops. The term complementary measures refers to the range of initiatives, policies, and programs that stakeholders felt needed to accompany such a change in the way customers will experience and need to think about the usage and cost of electricity. The issues raised are summarised in the Complementary measures section and are followed by some consultation questions. Under these metering rule changes currently underway, there will not be a compulsory roll out of smart meters, but we understand they will start appearing in the market in a number of ways: As new customers are connected or major alterations are made to an existing electrical supply. 8 The replacement of ageing and failed meters. Customers choosing to have their electricity retailer arrange for the installation of a smart meter. Retailer-initiated smart meter installation. The third and fourth scenarios are the ones we ended up discussing the most with stakeholders but still know the least about. Metering competition is a very fluid part of the market and there is a lot of uncertainty around the pace at which the meters will be installed. 8 Additions and alterations include new homes, major renovations, three phase upgrades, solar PV etc but not the simple replacement of a meter or relocating (but not upgrading) a switchboard. 6 SA Power Networks

9 What is cost reflective pricing? What is cost reflective pricing? The new National Electricity Rules state that cost reflectivity for network pricing is required to be based on the costs at times of greatest utilisation of the relevant part of the distribution network and to reflect differences in costs based on different locations within the network. 9 In the local context, the times of greatest utilisation are referred to as our times of peak demand: those hot summer afternoons and evenings where the demand for air conditioning spikes. Peak demands typically occur on very hot days from the late afternoon into the mid evening and generally when solar PV generation has fallen off (the advent of greater amounts of distributed solar PV generation has tended to lower energy demand from the grid during the late morning and afternoon, but has little to no impact on State-wide demand peaks, other than delaying them to a little later in the evening). The following charts show the impact on demand of air conditioning use and solar exports on different summer days. Figure 2 Network load trace on average vs peak days Residential Summer Demand (kw) hot sunny Thursday 16/1/14 and mild sunny Monday 17/2/14 2,000,000 1,800,000 1,600,000 1,400,000 1,200,000 1,000, , , , ,000 Solar PV export Solar PV export Air conditioning impact 16 Jan 2014: Usage 16 Jan 2014: Usage less export 17 Feb 2014: Usage 17 Feb 2014: Usage less export 0-200,000 Surplus to residential needs 0:30 12 Feb 2014: Usage 19 Feb 2014: Usage 0:30 1:30 2:30 3:30 4:30 5:30 6:30 7:30 8:30 9:30 10:30 11:30 12:30 13:30 14:30 15:30 16:30 17:30 18:30 19:30 20:30 21:30 22:30 23:30 1:30 2:30 3:30 4:30 5:30 6:30 7:30 8:30 9:30 10:30 11:30 12:30 13:30 14:30 15:30 16:30 17:30 18:30 19:30 20:30 21:30 22:30 23:30 Half-Hour ending Eastern Standard Time (half-hour beginning local summer time) 2,000,000 1,800,000 1,600,000 1,400,000 1,200,000 1,000, , , , , ,000 Business Summer Demand (kw) hot Wednesday 12/2/14 and mild Wednesday 19/2/14 Pumping & extra air conditioning impact Half-Hour ending Eastern Standard Time (half-hour beginning local summer time) 9 NER (f) Electricity Tariff Reform in South Australia Consultation Paper 7

10 What is cost reflective pricing? Locational pricing In terms of the National Electricity Rules requirements regarding pricing by location, South Australia has a policy of postage stamp pricing for small customers (ie those customers whose annual electricity consumption is less than 160 MWh). This government policy is discussed in more detail in Appendix B but in practice means that, except for the State s very largest customers, we charge the same prices to access the network wherever our customers are located. This local requirement over-rides the requirement in the National Electricity Rules (6.18.5(f)(3)) for us to factor location in our prices. So, while this is an important equity principle, it must be acknowledged that it creates a significant cross-subsidy. We do not propose a change to this requirement. The reality in South Australia is that 70% of the electricity distribution network serves the 30% of customers who live outside urban areas. Peak demand window The key driver of network costs is ensuring the network has the capacity to meet peak demand whenever it occurs. In practice, this means the network needs to be configured to be able to cope with high levels of demand (often three times the levels of demand on an average day) on just a few hours on a few days a year, when temperatures and air conditioner and water pump usage are highest. A critical element of our approach to cost reflective pricing, therefore, is to provide a price signal to customers regarding these peaks. This requires us to declare the time window during which our peak demand charges will apply. The historical approach to energy pricing in the National Electricity Market for large customers has been based on a peak window of weekdays from 7AM to 9PM. Most electricity retailers continue to differentiate peak and off-peak using this window as it reflects key energy generation cycles. However this broad peak window for energy pricing doesn t necessarily reflect the timing of the peak in network demand we have observed when residential and business customers are utilising the network all at once, which typically occurs later in the day. As an illustration of alternative approaches that are more cost reflective for networks, SA Power Networks has in introduced new (opt-in) demand-based tariffs for residential and small business customers. These have a peak window focussed on a briefer period in the day during the months of November through March. Similarly, our Low Voltage (LV) business demand tariffs use demand windows between noon and 9pm during the period November through March. The peak windows for our current demand-based tariffs are explained in the chart on the right. These current demand tariffs are also the tariffs we are proposing to implement more broadly through our Tariff Structure Statement, and beyond. Agreed demand tariff (LV business) Two demand periods: 1. Annual demand 2. Anytime demand: Midnight Actual demand tariff (LV business) Three demand periods: 1. Peak demand 2. Shoulder demand 3. Off-peak demand: Residential demand tariff Three demand periods: 1. Peak demand 2. Shoulder demand 3. Off-peak demand: Midnight 6am 1. Annual demand period: NOV Midnight 6am 1. Peak demand period: NOV 3. Off-peak demand period: anytime outside of the peak and shoulder demand periods. 6am MAR 1. Peak demand period: NOV MAR MAR Noon Noon Noon 4pm Noon 6pm Noon 9pm 6pm 1 & 2 4pm 9pm 3. Off-peak demand period: anytime outside of the peak and shoulder demand periods. Midnight Midnight Across all tariffs, the peak demand is measured as the highest demand over a half-hour period within the peak demand timeframe. All times are local time. 2 1 M T W T F S S 2. Anytime demand period: anytime outside of the annual demand period. 2. Shoulder demand period: JUL JUN 2. Shoulder demand period: APR OCT 6pm 1 4pm 9pm Midnight M T W T F S S M T W T F S S M T W T F S S M T W T F S S 8 SA Power Networks

11 From revenue to prices understanding tariff structures From revenue to prices understanding tariff structures The changes to the rules require tariff structures to have two main functions: send a price signal for efficient consumption, and recover revenue in a way that as much as possible reflects the total efficient cost of supplying the customer in question. The basic structure of our tariffs is very similar to that of other electricity distributors in the National Electricity Market with three key elements: A fixed supply charge ($ per day, month or quarter) A peak demand charge to send a forward price signal ($ per kw or kva per month) A volume charge ($/kwh) to make up the residual contribution to costs not covered by the other two elements. Our current tariff setting approach to each of these elements is described in the chart below: Figure 3 SA Power Networks allocation of revenue requirement to the tariff classes and tariffs. Revenue SA Power Networks revenue is calculated using an economic building block approach (covering the five year regulatory period) and is approved by the Australian Energy Regulator. SA Power Networks cannot recover more than what the Regulator has approved. Tariff Classes Tariff classes are groups of like customers based on the characteristics of their energy usage and connection to the network. For each tariff class, revenue is recovered through one or more network tariffs which are a combination of network charges (distribution and transmission) and Solar PV Feed-in-Tariff Scheme charges. Major Business Customers Customers connected at 33kV and 66kV or at 11kV from a substation HV Business Customers Customers connected at 11kV LV Business Customers Business customers connected to the low voltage network LV Residential Customers Residential customers connected to the low voltage network Tariff Structure Tariff classes have one or more different tariffs and each tariff has the following structure: Fixed supply charge* (eg $/day) Peak demand charge ($/kva or kw/month) Volume (energy and residual) charge ($/kwh) *Doesn t necessarily appear in all demand-based tariff structures. Electricity Tariff Reform in South Australia Consultation Paper 9

12 From revenue to prices understanding tariff structures Our approach to fixed supply charges Current energy based tariffs We apply a fixed supply charge to residential and small business customers of $0.33 per day ($ pa incl GST). This is based on the estimated annualised cost of the parts of the network that are specifically for an individual customer s connection and not shared with any other customers. We also apply separate charges for metering. These are $ GST per day for the meter and $ per day for the reading and maintenance of the meter. All up this equates to $22.68 pa (incl GST) for the vast majority of existing residential customers. Demand tariffs Our residential demand tariff applies a 1.5kW minimum demand charge ($189 pa). We are considering lowering this to 1.0 kw ($126 pa). There is no fixed supply charge. For business customers, our Actual Demand tariff has no supply charge and no minimum demand charge. Our Agreed Demand tariffs for business include supply charges but the trade-off is found in lower charges for energy used. Our approach to volume charges Our network charges for households and small businesses have historically been based on a $/kwh charge that had a number of steps where we charge slightly more for consumption beyond a threshold level of consumption (in the residential example, the first step aligns with the median consumption 50% of households consume 4000kWh per annum from the grid or less). In recent times we have moved to reduce the number of steps from three to what is now just a single step in the interest of simplification and better cost reflectivity. This same basic structure is then applied to each tariff class with the price levels (but not structures) varied to reflect the different costs to serve based mainly on the voltage level at which customers on the tariff connect to the grid. Our approach to peak demand charges In order to ensure our tariff structures are robust for the future, we aim to send stable and accurate forward price signals that customers can respond to with long term changes such as investments in solar PV, battery storage, electric vehicles and so on. We are of the view that demand-based charges (either based on kw or kva) are the preferred method to signal costs of network businesses across the National Electricity Market. Retailers have expressed a preference for a nationally consistent use of peak demand charges. We propose to continue to use demand-based charges that apply in specific peak time windows (as shown earlier on page 8) to send our peak demand price signal. Our demand charges will continue to be based on annually updated estimates of what is referred to as the Long Run Marginal Cost (LRMC) of supplying the customers paying each tariff. This represents SA Power Networks costs to expand the network s capacity during these peak times. The LRMC estimates that apply for are provided in our Annual Pricing Proposal SA Power Networks

13 What will be the impact on customers? What will be the impact on customers? A redistribution of costs Since the total revenue to be collected by us from our customers is capped by the Regulator, introducing a peak demand charge will be accompanied by a reduction in energy usage charges at other times. The impact for a particular customer will depend on whether the increase from adding a peak demand charge is offset by a reduction in consumption charges, or whether customers can change their consumption behaviour to take advantage of the changes to tariff structures. The scatter diagrams below use data from a sample of households with smart meters to illustrate the diverse combinations of annual consumption and peak demand. With monthly demand on the vertical axis and annual consumption on the horizontal, each dot represents a single household s combination of the two. The charts also show network bill impacts for each household if the cost reflective charges were introduced, and energy usage/demand behaviours did not change. Different colours have been used to show the likely change in network price. Note that network charges (including distribution, transmission and the Solar PV Feed-in-Tariff) are typically about half of the total retail bill. These clearly show that while some customers may have very low levels of energy consumption overall, they can have high peaks. So while they may be consuming much less energy overall, they place a significant capacity demand on the network. In layperson s terms, these customers require a big pipe to supply electricity to their property on peak days, but the electricity is either not flowing, or flowing at a trickle, much of the rest of the time. A typical example of this kind of demand would be from a holiday home. The vertical axis showing the summer peak demand recorded for these customers is labelled as cost to serve to reflect that peak demand is the underlying cost driver of the network. The horizontal axis shows the total annual consumption of these same households. Since our current prices are based on consumption and not demand, this axis reflects revenue contributed. As can be seen, for any given level of revenue contributed there is a range of costs to serve. This illustrates that some customers will end up paying more and some less under cost reflective tariffs. This redistribution of costs between customers is at the heart of our consideration of customer impacts from tariff reform. For some customers, network costs would increase by over 40% (approximately 20% of the total bill) if they were unable to change their demand patterns (note this is the intended consequence of the rule changes, as governments and rule makers want tariff charges that reflect network costs and which provide an incentive for customers to change behaviour to avoid future investment in the network to meet peak demand). For many customers though, the changes represent an opportunity to pay significantly less for their use of the network. The figures on the following pages show similar scatter diagrams for other customer segments. Figure 4 Residential without PV customer sample, showing impact of cost reflective network prices vs current prices. Network costs are about half of the retail bill. Break-even line shown in black. Cost to Serve Average monthly demand kw/month Network charge impact > +50% +30% to +50% +10% to +30% -10% to +10% -30% to -10% -50% to -30% < -50% 0 0 2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000 Revenue Contributed Annual usage kwh The median annual usage for residential customers is 4,000 kwh pa (x-axis measure). Such a customer has an annual retail bill of about $1300 pa to $1500 pa depending on which retailer they use. A 40% network price change/20% retail price change would be about $280 pa. Electricity Tariff Reform in South Australia Consultation Paper 11

14 What will be the impact on customers? Figure 5 Residential with PV customer sample, showing impact of cost reflective network prices vs current prices. Network costs are about half of the retail bill. Break-even line shown in black. Cost to serve Average monthly demand kw/month Network charge impact > +50% +30% to +50% +10% to +30% -10% to +10% -30% to -10% -50% to -30% 0 0 2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000 Revenue Contributed Annual usage kwh The typical outcome for residential customers with solar PV is less favourable than for those customers without PV. The PV customers have already received significant network bill reductions as a result of their PV investment, with usage-based tariffs over-rewarding the network benefit of such investment. Figure 6 Business single rate customer sample, showing impact of cost reflective network prices vs current prices. Network costs are about half of the retail bill. Break-even line shown in black. Cost to serve Average monthly demand kva/month Network charge impact > +50% +30% to +50% +10% to +30% -10% to +10% -30% to -10% -50% to -30% < -50% ,000 40,000 60,000 80, , , , ,000 Revenue Contributed Annual usage kwh The median annual usage for business customers is a little less than 4,000 kwh pa (x-axis measure). Such a customer has an annual retail bill of about $1200 pa to $1400 pa depending on which retailer they use. A 40% network price change/20% retail price change would be about $260 pa. However, there are some customers who use over 100 MWh as well. The spread of outcomes for those on a business single rate tariff is less diverse than it is for those on a business 2-rate tariff. Typically, business single rate customers are paying a higher price today for their network usage than many business 2-rate customers. 12 SA Power Networks

15 What will be the impact on customers? Figure 7 Business 2-rate customer sample, showing impact of cost reflective network prices vs current prices. Network costs are about half of the retail bill. Break-even line shown in black. Cost to serve Average monthly demand kva/month Business 2-rate has peak and off-peak prices. The impact of cost reflective prices depends in part on the proportion of off-peak. Network charge impact > +50% +30% to +50% +10% to +30% -10% to +10% -30% to -10% -50% to -30% < -50% ,000 40,000 60,000 80, , , , ,000 Revenue Contributed Annual usage kwh The median annual usage for business 2-rate customers is about 3,000 kwh pa (x-axis measure). Such a customer has an annual retail bill of about $1000 pa to $1200 pa depending on which retailer they use. A 40% network price change/20% retail price change would be about $220 pa. However, there are customers that use over 100 MWh as well. The spread of outcomes for business 2-rate is quite diverse. There are large numbers of customers sampled with significant network price reductions. There is also a large number of customers with significant network price increases. We are reviewing the network price increases to ensure that these pricing signals are warranted. Figure 8 Small business customer sample showing impact of cost reflective network charge saving vs current charge. Network changes are about half of retail electricity costs. Business customer segment proportion for that block of cost change 60% 50% 40% 30% 20% 10% 0 3% 8% 10% 17% 16% 11% 36% 0% No minimum monthly demand 0.0 kw, no supply charge. 41% 34% 29% 21% 19% 16% 11% 10% 5% 4% 4% 6% 0% Network charge impact < -50% -50% to -30% -30% to -10% -10% to 10% 10% to 30% 30% to 50% > +50% -10% 1k 10k 10k 40k 40k 160k Business Customer Annual usage kwh The first third of the chart shows the outcomes for the majority of small business customers (1 MWh to 10 MWh) with 36% of these customers facing network charge increases above 50%. This implies very high amounts of demand being used at peak times without a commensurate use of energy at other times. The second third shows the outcomes for sampled customers in the 10 MWh to 40 MWh pa category. 19% of these customers would incur a 50% or higher network charge increase under the current proposal. For customers using 40 MWh to 160 MWh, the number of customers that would incur an increase in network charges above 50% is 6%. Note that we are reviewing such charges to ensure that such increases reflect price signals that are warranted. The chart also shows the spread of customers receiving other levels of price increases or reductions. Larger small business customers fare better on average than the smallest business customers with these current pricing proposals. Electricity Tariff Reform in South Australia Consultation Paper 13

16 What will be the impact on customers? The significance of these changes on some individual customers has been acknowledged since the Ministerial Council responsible for Energy Policy (the Standing Council on Energy and Resources, SCER) initiated the tariff reform policy in 2013 [SCER Rule Change Request (p3)]: 11 The changes implied by this reform package point to a significant shift in the way customers use, purchase, interact with and are charged for, electricity. Electricity however is an essential service, and major changes to its provision are not to be taken lightly. SCER is cognisant that changes to network pricing through this rule change when combined with enabling technologies may result in significant changes in the distribution of network charges between customers and classes of customers. Sharper, more cost reflective prices will positively affect most users of electricity, but some will be impacted negatively. In recognition of the distributional impacts of such a shift, it is important that changes in network tariff structures are subject to appropriate regulatory scrutiny. In particular, it is important that there are clear plans and pathways to more cost reflective pricing, which are based on all the available information, consulted on wherever possible, and signalled as far in advance as possible. To reiterate, the current consultation process is intended to inform the development of our Tariff Structure Statement to be submitted to the Regulator in November This Tariff Structure Statement represents the plans and pathways referred to above. In this paper we are presenting some options for these pathways over the period Enabling customer choice However, our modelling and discussions have also confirmed that significant opportunities in relation to new energy technologies will be unlocked by those able to respond to the price signals. Investment in battery storage is one example of how a customer may opt to respond to the changes. By utilising batteries, either charged from solar PV panels or from the grid at off-peak times of the day, customers will be able to manage their demand during peak periods. Alternatively, customers may opt to amend their behaviour by shifting the use of some larger appliances (eg a dishwasher, clothes dryer or pool pump) outside of the peak period, or pre-cooling the home with air conditioning before the peak period commences. Modelling we commissioned by Energeia in 2014 indicated that in the future, there will be a much greater uptake of home storage systems under a new demand tariff regime as opposed to existing energy-based tariffs (Figures 9 and 10 below). The modelling also showed that PV would continue to be installed at increasing levels with demand based tariffs. Importantly, network prices were higher if energy based tariffs remained, as peak demands continued to grow. Figure 9 Residential growth in new customer energy technologies (number) under existing energy based tariff structures 700, , , ,000 Our engagement to date has confirmed almost universal acknowledgment that the impacts on many customers will be significant and that this is a reform that will require careful implementation. 300, , , Total Cumulative Solar PV Systems Total Cumulative Battery Systems Total Cumulative Electric Vehicles Figure 10 Growth in new customer energy technologies (number) under demand based tariff structures 700, , , , , , , Total Cumulative Solar PV Systems Total Cumulative Battery Systems Total Cumulative Electric Vehicles 11 Arrangements 14 SA Power Networks

17 What will be the impact on customers? Our questions for you on our tariffs 1. Demand-based tariffs: Our preferred position is to use our current demand based tariff structures 12 as the cost reflective tariffs required under the changes to the National Electricity Rules. To what extent do stakeholders consider that our demand-based tariffs are in fact cost reflective? 2. Peak demand periods: Our preferred position is to retain the peak demand periods that we have in place. Do customers or retailers have views on preferred alternate timings or approaches? 3. Minimum demand charge: Our Residential Demand Tariff currently includes a minimum charge based on 1.5kW of demand ($189 pa in ). Customer feedback has been strong on this point and we are considering lowering the minimum demand to 1 kw. This equates to $126 pa and compares closely to $121 pa in fixed charges on the standard consumption-based residential tariff. Are customers supportive of this change? 4. Measurement of peak demand: Customers have expressed concern that peak demand being based on a single half-hour of each month is too sharp a signal. What alternatives to the current approach would customers prefer? What would retailers prefer? 5. Solar PV Feed-in-Tariff: Our tariffs include a component to recover the cost of payments made to solar PV customers under the State s (now closed) Solar PV Feed-in-Tariff Scheme. We currently recover this by charging a premium (17% in ) on the Distribution Charges for all customers. Do customers have views on whether alternative approaches to recovering the cost of the scheme from different customer groups should be explored? For example, instead of being evenly spread over all customers, a larger premium could be applied only to residential customers. 6. Simplicity: An overarching message from customers and retailers has been to keep it simple! We would welcome suggestions on what we could do. Do stakeholders have any suggestions on how we can make our tariffs simpler? 7. Mitigating impacts: A key pricing principle 13 refers to us having regard to the extent to which retail customers are able to mitigate the impact of changes in tariffs through their usage decisions. How should we interpret this principle? 8. Special purpose tariffs: For many business customers shifting demand to outside of peak periods is not always possible. We have been asked to consider an irrigation tariff (as is available in some other jurisdictions) and would welcome any feedback from stakeholders on this. Note that most requests for special tariffs are related to a lower price level for a particular customer sector and other customers would experience a price increase as a consequence. Should this be an issue for business customers, or for all customers? Are customers supportive of us considering such tariffs? How should we approach this issue in our tariffs? 9. Impacts on business: What significance should we place (in considering changes to tariff structures) on the economic impact on business? 10. Air conditioning costs: Stakeholders have reiterated the point that a major contributor to the peak demand issue is air conditioning use in residential homes. How should we allocate the burden across residential vs business customers? 11. Robust for the future: What factors might need to be considered to make sure that customers invest efficiently in distributed energy resources, maximising benefits to the entire community? NER (h) (3) Electricity Tariff Reform in South Australia Consultation Paper 15

18 Complementary measures Complementary measures Detailed stakeholder and customer feedback around complementary measures included: Customers sought clarity over roles and responsibilities for raising awareness about the changes and educating customers on how to respond. The need for independent, centralised advice was a recurring theme, as was the need to think through the range of communications channels required to reach the diversity of customers that will be affected. Customers need to understand the tariff they are moving to, but there needs to be reasonable expectations about how energy-literate customers need to be (or become). There was concern that too much responsibility may be placed on to customers for the complexity being created. The changes have implications for social policy initiatives such as the Energy Concession and the Medical Heating and Cooling Concession. Increases in the cost of air conditioning need to be considered in the context of heat waves and the safety of vulnerable households such as those of the elderly and those with young children. Climate change policy is also relevant. The changes have implications for electricity price comparison websites such the AER s Energy Made Easy price comparison service. The changes have implications for energy efficiency initiatives such as the South Australian Government s Retailer Energy Efficiency Scheme (REES) and the Australian Government s energy performance labelling of appliances such as air conditioners. Our questions for you on Complementary measures: 1. What are we missing: Are there other complementary measures we need to consider? 2. A coordinated approach: Do stakeholders feel that the reform is significant enough to justify resources to coordinate communication activities? If so, who would stakeholders prefer to take on such a role? Retailers, Government, or SA Power Networks? 3. Network involvement: What sort of education/communication should reasonably be expected from distribution businesses like SA Power Networks? Examples could include the provision of data/ portals/analysis. Should this be the same for retailers? 4. National Electricity Rules: How should we interpret the following clause from the National Electricity Rules? 14 (i) The structure of each tariff must be reasonably capable of being understood by retail customers that are assigned to that tariff, having regard to: a. the type and nature of those retail customers; and b. the information provided to, and the consultation undertaken with, those retail customers. 5. Assistance for vulnerable customers: In we proposed a social tariff that offered lower charges for residential customers on retailer hardship programs. The proposal was rejected by the Regulator but the concept retains support with some stakeholders. We are also seeking a Judicial Review of the Regulator s decision. Whatever the result of the Review we wish to pursue mechanisms for supporting vulnerable customers. How do stakeholders feel we should progress this? 6. For Retailers: What complementary measures or initiatives from us would assist with the implementation of tariff reform? 7. For Governments and Regulators: What complementary initiatives are being progressed alongside the implementation of tariff reform? How well equipped are stakeholders to handle enquiries and complaints from customers about demand-based pricing? 8. Assistance for specific industries: How do stakeholders feel about special tariffs for specific (potentially vulnerable) industries? (eg the special purpose irrigation tariff proposed on page 15). The new tariffs create new opportunities for products and services that are aimed at helping customers understand their consumption patterns and respond accordingly. Many (predominantly larger) customers currently get advice on such matters through consultants and intermediaries. SA Power Networks was encouraged to engage closely with these energy advisors in order to expand their understanding of the tariffs. The degree of alignment in industry policy and approaches was also raised. Various distributors are talking through their peak body, the Energy Networks Association (ENA). The electricity retailers peak body (the Energy Retailers Association of Australia, ERAA) is also talking with the ENA about a collaborative approach to tariff reform. However it is clear that these partnerships do not cover the full scope of issues raised (i) 16 SA Power Networks