Pricing the Electricity Network

[Post originally drafted 2 years ago, on the basis of my recent post, and discovery of this one, I’ve decided to publish this one too]

How should we share the costs of our electricity grid? – both now and in a 100% renewable energy future. This is my dilemma of the week as SA Power Networks seeks input on its electricity tariff reforms.

While I have a wonderful vision of small scale local solar energy powering a network of microgrids at lowest cost to consumers, we have yet to get there. On our journey through this energy transition we will have to finish paying for our existing infrastructure as we wean ourselves off fossil fuels and the large generators at the heart of a big centralised system. And the way energy (and the grid in particular) is currently priced distorts our incentives to invest in the new – however tariff reform should present us with an opportunity to support necessary change.

SAPNSA Power Networks (SAPN) is expected to charge it’s customers $3.2bn over the next 5 years. There are around 840,000 of us – 740,000 households and 100,000 businesses. There’s only a handful of very large businesses but the top 5,000 businesses use half the electricity on the system. Because the SA Power Networks revenue is regulated the discussion is essentially about sharing the $3.2bn of charges in the fairest manner. And the regulator has asked every network business to move to cost reflective pricing – which means if the capacity in the system has been built for you then you should be paying for it on your bills.

SAPN is consulting on it’s proposal to move to demand based tariffs. The assertion is that the best way to measure the capacity on the system that is allocated to you is to measure your demand at the times that the system is heavily loaded and allocate your share according to the peak demand you draw in those times. SAPN has already indicated that it will target 12pm – 4pm all year round as a business peak and 4pm – 9pm from November to March as a peak time that both business and households will be charged for. This might be a reasonable approach. At the moment we use the volume we consume as a proxy for the capacity that we need on the system. There is a big difference between a load with high airconditioning needs at peak times and one without, even if they both use the same amount of electricity. The former is clearly contributing to the massive investments in electricity infrastructure that have been occurring over the last decade and it makes sense that this sort of load pays more.

Before coming to conclusions about what is the right way to price electricity, lets explore some of the nuance and cast this discussion in terms of where we need to get to.

I thought I would go back to first principles about how I would price the network. (Suffice to say, I got lost and my integrals are too rusty to pull that one off.) But the thinking made me come up with my own principles, which I’ve described below. Firstly a discussion about peak load…

Peak Load and what the system does for us

The peak load tells you what you ask from the system at the time when you need the most energy. The capacity available to you is determined by what size assets have been built and who is demanding energy at the same time. Improving asset utilisation means the same network can do more at a fixed cost – reducing the cost by making the network asset work harder. Traditionally we measured this in terms of load factor – If I divide the system peak demand by the average demand I get a load factor of 42% (down from 50% eight years ago). This is an indicator of how well the system is utilised but not the only story.

For a start the system has higher capacity than the peak demand we have been seeing in recent years. Only parts of the system are constrained during peak load on the hottest days so there might be capacity locally but in the aggregate, the capacity built at a central level has been most effectively sized to match the load. A typical small business might only have a utilisation of 20%. (think about it, a working week is only 25% of all the hours in the week) The business load complements the household load to some extent as people either use energy at work or at home. But we all sleep at night so that is when the state’s asset utilisation is at its lowest level as well as our local asset utilisation. Two households might both use 0.5kW on average but the family with small children who are home a lot might have peak load of 1.5kW and a load factor of 30% while the DINKS with a large airconditioning system demand 5kW at the height of summer and have a load factor of 10%. SAPN are looking to charge the latter family more to reflect their additional utilisation of the system.

So lets jump to a future that might be just around the corner:

At an individual level my future house has a solar generator, an electric car and some storage. The car and the batteries might give us flexibility in future but even now loads can be structured so that some of them are flexible, eg – a storage hot water system that can heat anytime over a 24 hr period and from excess solar energy, my airconditioning can cycle to give part load for a few hours and I can tolerate a small rise in temperature, the thermal mass of my house can mean turning off the airconditioning still give a few hours grace before temperatures rise, I can set many appliances to operate at night – the washing, the dishes and the pool filtering and I can make the most of energy efficiency and my own behaviour changes.

At a neighborhood level we can optimise even better because everyone’s peaks don’t coincide, especially if there is some mixed use and the shops and houses can both help each other. We can ask questions like, who has the best solar resource for local generation? Who really needs the fixed capacity and who can offer flexibility to the system? Who is best placed to invest in storage?

If the future is going to involve a network of neighbourhood scale microgrids, then we don’t invest anymore in growing the network asset, instead we invest at the local level, growing both the local generation and energy use and using the grid input as just one source of electricity amongst a suite of automatically managed options.

Some principles:

If these were truly cost-reflective tariffs, the customer would get a price signal, SAPN would make an associated saving and everyone would be a winner. There is nothing in the SAPN paper discussing this and the electricity rules themselves force a distortion (notably through postage stamp pricing). The risk in this whole process is that it just shares around fixed costs in a different manner – so my first principle is:

  • Network operators and the regulator must work harder together to design a system that brings down the overall costs.

The SAPN savings we could target are part of the $0.5bn per year that will be spent on new kit and also the private contributions from new loads connecting to the system ($100m per year). Much of this investment might simply maintain the system so we need to dig further into the proposed expenditure and understand which investments can be deferred, diverted to alternatives that better suit neighbourhood optimisation or simply cancelled.

In some cases the neighbourhood is not constrained at the moment and these investments need to be seen as part of a long term strategy to get better asset utilisation across the network. This media release by the AEMC praises a Victorian example where a small business reduced costs by 30% by moving demand out of just 20 hot hours of the year. The example highlights the ease at which cost effective solutions to avoid growth can be found, but if the small business savings don’t match real network investment savings then we are just shuffling the costs around the system with poorly designed price signals. My own analysis of the new demand tariffs points to the same story – if the price signal to shift demand from a few hours a year is so strong, why isn’t SAPN racing out to pop storage onto a few constrained transformers and deferring blanket tariffs for a few more years until they better understand what they can achieve?

  • SAPN need to provide transparent costs and opportunities information – I’m not convinced the tariffs do that.

In this sense, the price signals matter less than the actual behaviours. There is no point providing an incentive if it is too difficult to understand or too easy to game:

  • We need a stronger discussion, learning and experimentation about the behaviours that reduce the overall cost of the system.

Useful links

Here is the submission I ended up making. Years later, I am now on a number of SAPN committees and have an opportunity to explore these issues in advance of the 2020 – 2025 price reset. Talking Power is alive and well and I am hoping to create some further spaces for discussion too.

http://www.vtpi.org/vickrey.htm

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About Heather

I am an energy and climate change specialist with a background in industrial energy efficiency and climate change policy.
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1 Response to Pricing the Electricity Network

  1. Pingback: Is local electricity cheaper? | changing weather by Heather Smith

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