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VCOSS Congress
Will the response to the climate
debate turn the heat on low income
households?
Gavin Dufty: Manager Policy and Research Unit St
Vincent de Paul
Why will price go up
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The introduction of a carbon trading scheme by 2012 is
envisaged that this will add and additional $200 per annum to
an average household electricity account.
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And the mandated roll out of interval (smart meters) will be
installed in all households by the 2012. This will not only cost
Victorian households between an additional $353 and $954
million in infrastructure costs but it is believed will also provide
the mechanism for highly complex, dynamic, tariff design
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The expiration of the current price protections in the Victorian
electricity market due to be phased out or replaced at the end
of this calendar year. Minister Batchelor has been quoted as
saying that he would be disappointed if these price rises were
greater than 10%.
How much do price increases effect
demand for electricity?
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Data from 1980-1995 and estimated that the long run
price elasticity of demand for the Australian residential
sector was -0.25. This means a 10% rise in price results
in a 2.5% fall in demand for electricity, an inelastic
response.
Since elasticity estimates are contingent upon the
magnitude of price rises, NIEIR reported that these could
rise to -0.4 if prices changed by 30-40%.
In other words, to elicit a 4% drop in demand for
electricity, price changes in the order of 30-40% would be
required - thus highlighting how extraordinarily small
consumer responses are relative to price changes
Pensioner households and energy
consumption
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When energy consumption patters and
household’s energy expenditure for lower
income groups are considered it is found that
pensioner groups consume energy at a rate
below average household consumption levels.
However conversely, as a proportion of their
weekly expenditure, they expend almost
double the amount compared to the average
household, further highlighting the
disproportional impact price increases have on
this group.
Energy costs and impact on
Consumption
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To contextualize this in terms of the impact proposed
price changes will have, it is estimated the introduction of
a carbon trading scheme will result in a price increase in
the order of $200 per annum for electricity cost for the
average household. Remembering this is an average with
some experiencing higher costs than this while a few will
experience lower cost increases than expected.
As such a proposed estimated price increase of $200
associated with carbon trading will only result in a $40 $50 reduction in demand, still leaving household $150 $160 per annum worse off.
Traditional SECV tariff no fixed
charge
Traditional SECV Tariff
0.19
Consumption ( 0-1020 kWh)
Consumption ( 1021-3000 kWh)
0.17
Consumption ( 3001 + kWh)
Price ($ per kWh)
0.15
0.13
0.11
0.09
0.07
0.05
1
2
Consumption Bands
3
Flat structure no fixed charge
Flat Tariff structure
Consumption ( 0-1020 kWh)
0.2
Consumption ( 1021-3000 kWh)
Price (cents)
Consumption ( 3001 + kWh)
0.15
0.1
0.05
0
1
2
Consumtion Bands
3
Inclining block tariff
Inclining block tariff
0.25
Consumption ( 0-1020 kWh)
Consumption ( 1021-3000 kWh)
Cost ($ Per kWh)
0.2
Consumption ( 3001 + kWh)
0.15
0.1
0.05
0
1
2
Consumption band
3
Declining block tariffs
Declining Block tariff
0.21
Consumption ( 0-1020 kWh)
Consumption ( 1021-3000 kWh)
0.19
Consumption ( 3001 + kWh)
Cost ($ per kWh)
0.17
0.15
0.13
0.11
0.09
0.07
0.05
1
2
Consumption Band
3
Seasonal Tariffs
Seasonal Tariffs
0.2
0.18
0.18
Consumption (Summer)
Cost ($ per kWh)
0.16
Consumption ( Winter)
0.14
0.12
0.12
0.1
0.08
0.06
0.04
0.02
0
0
0
1
2
Consumption time
Off Peak tariffs
Off peak Tariff
0.16
Consumption ( 0-1020 kWh)
0.14
Consumption ( 1021-3000 kWh)
Consumption ( 3001 + kWh)
Cost ($ per kWh)
0.12
Off peak 11pm -7 am
0.1
0.08
0.06
0.04
0.02
1
2
3
Consumtion Bands
4
Time of use Tariffs (TOU)
TOU tariffs
Consumption ( 0-1020 kWh)
0.16
Consumption ( 1021-3000 kWh)
0.14
Consumption ( 3001 + kWh)
Cost ($ per kWh)
0.12
TOU 11pm -7 am and all
weekend
0.1
0.08
0.06
0.04
0.02
0
1
2
3
Consumption Bands
4
Critical Peak Pricing Tariffs
Critical Peak Price
1.6
1.5
Consumption ( 0-1020 kWh)
1.4
Consumption ( 1021-3000 kWh)
cost ($ per kWh)
1.2
Consumption ( 3001 + kWh)
1
TOU 11pm -7 am all weekend
Consumtion Critical Peak Price * 15
0.8
0.6
0.4
0.2
0.15
0.15
0 0
0
0.15
0.07
0
0
1
2
3
Consumtion Band
4
5
Concessions and Tariffs
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Governments directly intervene in ameliorating the impact of
electricity tariffs on households though the use of concessions.
For example:

The Winter Energy Concession – This is a 17.5% discount of
winter bills. This concession is designed to reduce the cost of
high winter bills on Health care card holders.
The Network Tariff Rebate - This concession acts as a cross
subsidy to reduce the higher costs for energy in the non
metropolitan area.
The Supply charge concession – This concession is to offset
the impact of the supply charger on low consumption
households.
The Off peak concession – This concession is designed to
ameliorate costs from significant increases in off peak pricing
during the early 2000.
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Pricing principles
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It is proposed that pricing principles be implemented
these would cap a specific amount of household
electricity consumed daily at a fixed price per kilowatt.
This “life line” cap would be set at a level of consumption
that would equate to a minimum household usage to
provide hot water, space heating, refrigeration and
minimum lighting it exclude the pass though of costs
associated with carbon trading and excessive profiteering
of the electricity industry.
Price setting for consumption post the “lifeline” price cap
would be left to the individual retailers to determine. This
would allow for the industry to price according to the
market costs or what the market will bear.
Pricing Principles – fixed charges
and other levies
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The fixed charge should also be capped as proportion of the
regulated electricity consumption component, say at a ratio of
80% consumtion-20% fixed charges.
For example, if the regulated energy consumption component
was set at 14 cents for a total of 1020 KwH per quarter (a total
quarterly energy cost of $142.80) then the fixed cost could not
be more than $28.56.
Pricing principles and other environmental levies
If Governments believe that additional charges need to be
levied, for example to raise revenue for demand management
or other energy conservation programs, these could be applied
at a point after the energy retailers applied whatever price they
set
Price Principles
Proposed Pricing Principles
0.25
market price plus Other levies
indicative only ( 3001 + kWh)
market price indicative only (
1021-3000 kWh)
Cost ($ Per kWh)
0.2
0.06
Saftey net price ( 0-1020 kWh)
0.15
0.06
0.06
0.12
0.12
0.12
Price (saftey net)
Price (market)
Price (market + levies)
0.1
0.05
0
Consumption Bands
Price Principles advantages
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This would serve a number of policy objectives that are
consistent with social justice and environmental equity:
Firstly it would provide a “lifeline” price cap. This price cap
would serve to partially protect many low income energy
consumers from carbon pricing being loaded up in the first
block or fixed charge of electricity consumption. This is a
potential risk as most carbon is produced from base load
generation.
Secondly such price principles would not only provide a reward
for those households with low electricity usage it would also
serve as an incentive for all household to reduce consumption
to a particular level, thus supporting and rewarding those
households that have sound environmental practices.
Thirdly such a proposal would be consistent with and
complement calls by some for households to be issued with a
carbon emissions budget.
Price principles
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Fourthly such a proposal while increasing electricity costs for
households with large consumption (costs they would be
exposed to without the introduction of pricing principles) making
retrofit and other alternative energy sources such as solar
photo voltaic technologies more cost competitive.
Fifthly the pricing principles structure complements the current
energy concessions framework proving an incentive to reduce
consumption limiting state exposure to concession growth
which could occur if industry introduced declining block tariffs or
significant increased fixed charges.
Sixthly it would allow the Government to deliver its commitment
to deregulation of electricity pricing.
Finally it would complement the planned interval meter (smart
meter) roll out allowing these principles to be implemented as
the smart meters are installed in households providing a real
and practical use for this technology.
VCOSS Congress 2007
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Gavin Dufty
Manager of Research and Policy
St Vincent de Paul Society
(03) 9895 5816
[email protected]