The ways we generate, distribute and use electricity are changing and energy tariffs have become an increasing focus in the Australian landscape, particularly at a time when the cost of living is already high. Network tariff reform is designed to encourage more efficient use of energy networks, and each customer will suit a different tariff type.
An energy tariff is the way and the amount a consumer is charged for their energy usage. Different energy tariffs charge different amounts for usage, with some tariffs offering a static rate and others offering dynamic rates that may vary based on a variety of factors. In Australia, the different types of energy tariffs commonly used by energy companies are single rate, controlled load, demand and time of use. Each of these tariffs has its own benefits and drawbacks – no single tariff is necessarily better or suitable for every customer.
Energy distributors charge network tariffs to retailers, who then pass these costs on to their customers. The final price charged to electricity consumers is determined by how the retailer responds to the price signals in the network tariff and how the retailer chooses to repackage the network tariff in its retail offer. Retailers may package network tariffs into their retail offer exactly as it occurs in the network tariff price signals, or they may choose to offer customers combinations of retail tariffs and storage or other demand management options that result in different tariffs.
The National Electricity Rules mandate distributors to gradually align their tariffs with the actual expenses associated with serving their consumers, known as cost reflection. This may involve transitioning from flat-rate tariffs to ones that vary based on peak and off-peak usage times, known as time-of-use tariffs.
Energy tariffs serve as a means for distributors to recoup revenue and fund the construction, operation, and upkeep of the infrastructure needed for electricity transmission. The Australian Energy Regulator oversees these tariffs on an annual basis to ensure consumers are not overcharged and that electricity services remain secure and dependable.
Network tariff reform
According to the Australian Energy Regulator (AER), network tariff reform is designed to encourage more efficient use of networks, which in turn helps to reduce the need for additional investment and/or the amount of network infrastructure that needs to be maintained. Customers ultimately pay for these upgrades, so a tariff reform that focuses on more efficient use of the network is designed to lead to lower network costs for all energy customers.
Energy distributors are required to submit a tariff structure statement (TSS) to the AER for approval in each regulatory period. The TSS sets out the distributor’s proposed strategies to progress network tariff reform. The AER then assesses these proposals, looking at a number of factors including network circumstances, such as location or number of energy customers, the expected impact on customers, and customer understanding.
The AER said that “the pace of progress is informed by a number of factors, including the roll out of smart meters which make it possible to record when energy is used at different times of the day. Smart meters can help to detect usage patterns and thus inform best practice for tariff reform. It also means tariff reform strategies can evolve as stakeholder understanding develops and new technologies and service models emerge.”
Time of use tariffs
Time of use tariffs mean that the amount you are charged for your energy usage varies depending on when you use it. Time of use tariffs generally involve off-peak, peak and shoulder times, each with a different charge for electricity use. Off-peak times are the cheapest, and this rate tends to be offered during the day and on weekends. Peak times generally refer to mornings and evenings, Monday to Friday. Shoulder times are the times in between peak and off-peak times, and are generally charged at a rate between the peak and off-peak rates.
The purpose behind time of use tariffs is to incentivise energy users away from peak times. Traditionally, this method has been used to try and reduce the possibility of overload on the grid during peak times, ensuring that a steady supply of electricity is available even during high demand periods. As we introduce more and more solar energy to the grid, time of use tariffs are becoming more important to grid stabilisation.
It’s important for all customers to consider their usage patterns when selecting an energy plan, as choosing a plan that doesn’t best suit your usage pattern can result in unexpectedly high electricity bills. Understanding consumer usage can be difficult, but as smart meters and DER are further integrated into Australia’s energy grid, the best and fairest tariff for any customer is easier to discern. But as we integrate renewables further into our energy grid, there is another factor to consider: how do energy tariffs integrate renewable generation?
Incentivising renewables
Solar energy is fast becoming a staple of Australia’s energy grid. The Clean Energy Council’s (CEC) latest Rooftop Solar and Storage Report found that rooftop solar now accounts for 11.2 per cent of Australia’s total electricity supply, making it the second largest source of renewable energy generation in Australia behind wind. Australia’s states and territories are hitting new milestones for solar energy uptake, with rooftop photovoltaic installations surpassing a total of 20GW in 2023. New South Wales broke the record for the highest annual installed capacity of any state ever recorded, with 970MW of new rooftop solar systems installed in 2023. The total number of rooftop solar installations in Queensland also surpassed the one million mark, the first Australian state to achieve this milestone.
While this is fantastic news from a renewable energy perspective, the big and relatively sudden increase in solar energy in the grid does present some challenges. Naturally, solar energy relies on the sun to produce energy – which is great for use during the day, but what happens when the sun goes down? Battery storage has a role to play, but until Australia’s energy grid has enough battery power to withdraw and release all the energy generated by solar, it means some energy is likely to go to waste.
This is where TOU tariffs shine. Incentivising energy customers to use more energy during the day with cheaper energy costs has the additional benefit of better utilising solar that is generated during these times. As a consumer, taking advantage of lower energy rates during the day not only saves money – it also contributes to the use of renewables by utilising the abundant solar that is generated during this time.
In Western Australia, similar tariff structures have been introduced for other types of renewables and distributed energy resources (DER). As part of its Electric Vehicle (EV) Strategy, the Western Australia government has introduced smart chargers can that be used for charging EVs at home quickly and at convenient times. A smart charger gives the consumer the power to decide when to charge, such as maximising EV charging at times when the demand for electricity is low – saving on electricity costs for customers on a time of use tariff. State-owned energy company, Synergy, has developed time of use energy tariffs designed to incentivise EV owners to recharge their EVs overnight or in the middle of the day, to better align with renewable energy output and network availability.
Feed-in tariffs
Feed-in tariffs are the other side of the coin – these are the tariffs that are paid to people who send energy back into the grid. A residence or business that generates energy may choose to send excess electricity back into the grid, and receive a payment for doing so. Feed-in tariffs vary, however, like regular energy tariffs, many retailers and gentailers offer the option of time-varying feed-in tariffs, meaning that solar discharged back into the grid during peak periods is paid at a higher rate than electricity discharged during off-peak times.
Just as consumers are incentivised to use energy outside of peak times, consumers discharging energy back into the grid are incentivised to do so during peak periods, to better support grid stability and ensure renewable energy is integrated into the energy grid.
Consumers have a huge role to play in transitioning Australia’s electricity grid to 100 per cent renewable energy, and, with the uptake in rooftop solar and other DER only increasing, the energy sector has to adapt the way it distributed and bills electricit to support and encourage this uptake.
