New Energy Market Model

We have a starting hypothesis...

With yet another increase in power bills for homes across Australia, and the government's solution seemingly being to hand out cash as a temporary fix, isn't it time we reconsidered how to genuinely reduce electricity costs? How can we provide Australian households with real price flexibility so that when they conserve energy, they see meaningful savings?

To understand why this isn't currently feasible, it's important to grasp the system we're discussing. By "system," I mean all the moving parts that contribute to a household's final power bill. For an average Australian household, the annual electricity bill is around $1,600 or approximately $133 per month. This bill is comprised of two main components:

• Daily Network Charges: Ranging from $0.80 to $1.20, these charges account for 43% of your bill. They cover the cost of maintaining a connection through poles and wires to your residence, regardless of how much energy you use.

• Usage Charges: Costing between $0.20 and $0.40 per kilowatt hour, these make up about 57% of your bill. These charges vary based on consumption patterns and can include peak and off-peak rates or time-of-day pricing, especially in larger areas where prices fluctuate throughout the day.

Currently, 43% of your bill is fixed, meaning no matter what you do, you cannot lower your bill below this baseline. Ironically, low-usage households striving for energy efficiency find this fixed charge constitutes an even larger portion of their bill. Conversely, high-energy users have more potential savings by altering habits but are often those who can afford higher expenses.

The situation becomes more complex when modelling changes in usage behaviour and appliances reveals limited incentives for change:

• Average-Saver Scenario – save ~6% off their bill: Implement reasonable changes is behaviour including, shorter showers, less loads of washing, less use of the clothes drier, less lights left on, stand by devices turned off at the switch, use heating/cooling for fewer hours and change the temperature by 1 degree.

• Big change and new appliance saver – save ~15% off their bill: Implement more stringent savings, such as even shorter showers, all LED lights, turn off most standby devices at the switch, rarely use the dryer as well as buy a new fridge, cooker and oven and invest in insulation.

  
  

This means that even doing all the “right” things influences only 6-15% of your current bill. In effect, that makes roughly 85-94% of your bill fixed.

To put it into perspective, for the Average Saver, the saving equates to 1.5 take-away coffees a month; for those making big changes with new appliances, it’s around 3.7 take-away coffees a month, a modest incentive at best.

If you're inclined to delve deeper into my calculations, I'll post a link in the comments that breaks it down further.

This begs the question: how can we empower Australians to effectively reduce their power bills?

For significant change and empowerment over energy use, and thereby their savings, we need to entirely rethink our current model. The existing incentives have shown limited success, and government handouts are not effectively addressing the root issues. Government handouts could incentivise more energy usage at higher consumption households and completely miss those most in need, as they don’t have a private meter.

If consumers could influence more than just small portions of their electricity bill, rather than being primarily constrained by essentially fixed fees, it would encourage greater energy conservation efforts across the board. We hypothesise that we need to adjust the market model to increase the variable component of the bill, thereby incentivising consumers to alter their behaviour and network owners to optimise spend.

When it comes to scenario modelling reductions, we have focused on demand as it represents the easiest and most cost-effective lever for homeowners and residents alike and have excluded solar and PV. We acknowledge that solar, PV and changes in energy pricing due to a shift towards lower-cost renewable energy will also impact consumer bills. However, solar installations require significant investment from homeowners. Additionally, solar is largely inaccessible to 30% of Australians who rent and difficult to access for the 30% who live in non-freestanding dwellings (many of whom rent), and furthermore, the energy mix is largely outside consumers' control.

We don't propose a specific solution for changing the market model yet; however, our basic premise is that consumer bills should better align with optimised operational costs related to maintaining and enhancing the poles and wires network.

The potential changes we are exploring here are by no means a criticism of the current market players. Depending on your point of reference, be it Ice-T or Dr Deming, the phrase “Don’t hate the player, hate the game” applies here. We think the game/system needs to change so that the players (consumers, network owners and generators) change how they play/participate.

Here’s our emerging thinking on how to reshape the market model:

• Reassessing Fixed Daily Usage Charges: These current, effectively fixed consumer charges are, in reality, more of a variable cost for distributors. While there's a correlation between connected dwellings and maintenance costs, network utilisation is potentially a more appropriate key driver. More usage means higher operational costs, and vice versa, making a fixed charge per dwelling less appropriate. Increasing the variable nature of bills will incentive changes in behaviours at the customer level across all types of customers.

• Discouraging Overinvestment or Misguided Investments: The current fixed model incentivises distribution companies to expand assets within their allocated budget rather than optimising asset deployment based on actual demand needs. There is a lot of chatter about “gold plating” the network, and the current fixed model can encourage this. A variable model encourages investments where they are genuinely needed according to local requirements to meet standards and performance levels (KPIs/SLAs). This means that the market would behave more like the rest of the economy, where supply and demand are more aligned and flex based on market dynamics.

• Outcome-Based Charging for Greater Efficiency: Distributors currently operate under a fixed budget for maintenance and operational expenditure (opex). They are incentivised to spend most of this budget or risk losing it, impacting profitability and revenues not only this year but in future years. Incentivising these organisations towards efficiency can reduce consumer bills while enabling funds diversion towards appropriate capital expenditure (capex) projects, while enabling suitable profit levels for distribution businesses.

What could the future look like if we adopted this model?

Let’s say that we changed the model so that 80-90% of a household bill was variable (compared to the 57% today). This would mean that in our two earlier scenarios, consumers could now influence 9.5%-24% of their household bill. That means the savings increase by ~58% compared to today.

In summary: altering the market model seems essential, not only unlocking benefits associated with transitioning towards sustainable practices but also helping individuals sustainably and affordably lower electricity costs.

What do you think needs changing? Share your thoughts here, let’s crowdsource a solution!