A long overdue reset to the tariff reform agenda promises better outcomes for energy consumers. Plus a new report finds that retailers really do charge residential customers more than business.
Your electricity tariff is a term for how your energy usage is measured, and how you are charged for that usage.
Tariffs nearly always have two main components: fixed charges and variable charges.
Fixed charges
The fixed charge is not based on how much energy you use. It will apply no matter how much or how little energy you consume.
The fixed charge component exists in your bills because there are fixed costs in maintaining the 'poles and wires' that enable your electricity supply, and your distribution network needs to be paid to maintain this infrastructure regardless of how much energy you consume.
Retailers are responsible for collecting consumer payments for the entire energy economy, including the network component, so they will structure their plans to include this fixed daily connection charge.
The fixed charge will be separately identified on your bill, and is often called the ‘daily supply charge’ or ‘service to property’ charge.
This charge is usually displayed as a daily rate on your bill, with the number of days in the bill cycle, the ‘cents per day’, and the final fixed charge amount.
Variable charges
Variable charges relate to the quantity of energy you consume, and are commonly referred to as a ‘usage’ or ‘consumption’ charges.
The amount you pay for each unit of gas or electricity you consume will usually be listed in your bill as cents per kilowatt hour (c/kWh) for electricity use and cents per megajoule (c/MJ) for gas.
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In Western Australia, gas bills will display usage charges measured in cents per 'unit' rather than cents per MJ. Each gas 'unit' is equivalent to 3.6 MJ.
There are four main classes of tariff under which your variable charges will be measured and billed. Your meter type and configuration governs which tariff types can be used for your property.
Single Rate tariff
Time of Use tariff
Controlled Load tariff
Demand tariff
Single Rate tariffs
Single rate tariffs are the most common tariff type in Australia. Under this tariff type, the price per kWh does not change according to the time of usage.
The simplest tariff of all is the flat single rate tariff where you'll be charged the same rate per kWh of usage no matter when you consumed the energy, and no matter how much you consumed over the billing period.
Some so-called 'single rate' tariffs are actually 'stepped rate' or 'block rate' tariffs, which means you'll pay a different price per kWh once you've crossed a certain threshold of total consumption for the billing period.
The key thing that defines single rate is that the rate does not vary by time of use.
As the name suggests, a 'Time of Use' tariff features different pricing for your consumption depending on time of day and day of the week. Some Time of Use tariffs may also include seasonal price changes.
Time of Use tariffs require a smart meter, which records both the kWh consumed, and the time of the consumption. Households that are still on the older 'accumulation' meters that record usage only cannot access a Time of Use energy plan.
The main intent of a Time of Use tariff is to better align with the wholesale costs of electricity - generally, electricity is more expensive during peak times, and less expensive during off-peak times.
Time of Use tariffs typically have up to three defined time bands: Peak, Off-peak, and Shoulder, with different pricing per kWh for each time band.
It's common that off-peak time bands include weekends and public holidays.
Time of Use tariffs can also be called 'Flexible' tariffs.
Controlled Load tariffs are a special case of Time of Use, which does not rely on having a time-capable meter.
A Controlled Load is a separately metered supply of energy that is available only at certain times of the day, usually at 'off-peak' times when electricity is cheapest.
Traditionally, its been common for electricity appliances like hot water systems to use a Controlled Load energy supply so they can heat up overnight using cheap electricity.
Demand tariffs
Demand tariffs are the newest and most complicated tariff type, where as well as defining variable rates for total time of use consumption over a billing period, there will also be a separate rate based on the intensity of that usage.
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For example, a household might consume 480 kWh over over a 10 day period, by steadily using 1 kWh per 30-minute pricing period, every day. A second household might also consume 480 kWh over the same 10 day period by using that 480 kWh in a single concentrated burst, then not use any power at all for the rest of the period.
Both households have used 480 kWh, but the first one has posed a low level of load on the network, by spreading out the usage evenly over time, while the second one has created a peak load by using the same amount of energy all at once.
Electricity distribution networks must be built to handle the highest expected peak load, but they are under utilised for the vast majority of the time. Trimming down the expected maximum peak load, by spreading out consumption and avoiding 'peaky' usage translates into significant savings network-wide, that ultimately are shared by all energy consumers. And conversely, driving up peak loads means that the overall network capacity must be enlarged, which makes it more expensive for everyone.
Demand tariffs introduce an additional rate charged on the peak usage level recorded in any 30 minute period, but applied over an entire billing cycle.
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Using the instantaneous 480 kWh consumption example above, under a demand tariff that incudes a demand charge of 10c per kWh would result in household 2 seeing an additional demand charge of 480 x 10c = $48 additional demand charge on the bill for the peak demand event they created. Household 1 would see a demand charge of only $0.10 since their peak usage across the entire period did not rise above 1 kWh in any of the 30 minute pricing periods for the billing cycle.
Demand tariffs are sometimes described as 'cost reflective' because they introduce additional cost to users that drive peak loads, which are a key driver of network build and maintenance costs.
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Richard Foxworthy
