AusNet Electricity Services Pty Ltd Services...AusNet Services Revised Tariff Structure Statement 2017-20 – Overview Paper 29 APRIL 2016 3 / 37 1 Executive Summary AusNet Services’

AusNet Electricity Services Pty Ltd

Revised Tariff Structure Statement 2017-20 Overview Paper

Submitted: 29 April 2016

AusNet Services

Revised Tariff Structure Statement 2017-20 – Overview Paper

29 APRIL 2016 2 / 37

About AusNet Services

AusNet Services is a major energy network business that owns and operates key regulated electricity transmission and electricity and gas distribution assets located in Victoria, Australia. These assets include:

• A 6,574 kilometre electricity transmission network that services all electricity consumers across Victoria;

• An electricity distribution network delivering electricity to approximately 680,000 customer connection points in an area of more than 80,000 square kilometres of eastern Victoria; and

• A gas distribution network delivering gas to approximately 572,000 customer supply points in an area of more than 60,000 square kilometres in central and western Victoria.

AusNet Services’ purpose is ‘to provide our customers with superior network and energy solutions.’

For more information visit: www.ausnetservices.com.au.

Contact

This document is the responsibility of the Asset Management division, AusNet Services. Please contact the indicated owner of the document below with any inquiries.

Kelvin Gebert AusNet Services Level 31, 2 Southbank Boulevard Melbourne Victoria 3006 Ph: (03) 9695 6000

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1 Executive Summary

AusNet Services’ Tariff Structure Statement (TSS) for the period 2017 to 2020 proposes new network tariff structures for residential, small business and medium business customers. The new tariff structure is sometimes called a cost reflective tariff or cost reflective pricing.

Maximum demand is the main driver of our future network augmentation costs. In 2014, over a quarter of our network’s capacity was used less than one percent of the time. To make our tariffs more cost reflective we are proposing to introduce a demand charge. This new tariff structure for residential customers is consistent with those proposed by the other Victorian distributors.

Importantly, the introduction of a demand charge will not affect how much overall revenue we collect, as this is capped at a level by the Australian Energy Regulator (AER). It will only change the amount individual customers may pay depending on how much electricity they use and when they use it.

The Victorian Government requires that the introduction of new cost reflective tariffs for residential customers and small business customers1 be on an opt-in basis. Accordingly, customers in these groups will choose whether to transfer to the new tariff structure. All medium business customers1 will be assigned to a new cost reflective network tariff.

We plan to implement the demand charge from 2018. For medium business customers its level will gradually increase to be more cost reflective over a 5 year period. This transition will enable customers to adjust to the new charging basis. However, residential and small customers will deliberately choose the new cost reflective tariff and for these customers the full value of the demand charge will apply from the outset. Approximately 31% of residential customers are expected to benefit from opting in to cost reflective tariffs, with an average benefit of approximately $160 per year.

The introduction of cost reflective tariffs is a key step in the transformation of the electricity network and will enable consumers to individually and collectively benefit from new technological development, product innovation and behavioural changes.

The most important potential benefit from the introduction of cost reflective pricing is reduced long term costs for all consumers. Over the longer term all consumers are expected to benefit through lower network investment that arises due to the better alignment of consumer price signals with future network augmentation costs. This price signal provides a stronger incentive for consumers to manage demand and energy usage for the benefit of all consumers.

Potentially there are regions in a network area where energy usage does not correspond to the price signal provided by the broad based cost reflective tariff. The Alpine region in Victoria is a unique case for AusNet Services network, exhibiting a significantly winter peaking demand profile, compared with summer peaking for the rest of the network. Access to the summer peak focused cost reflective tariff would send an inappropriate price signal to these customers, encouraging greater winter usage when this is the period that the local network is most highly utilised. For this regulatory control period we propose that Alpine region customers will remain on their existing tariff structures.

Electricity bills and energy affordability, in particular for vulnerable customers, are one of the key considerations for us, our customers and key stakeholders. We consulted widely during development of the original proposed TSS, in order to understand customer and other stakeholder attitudes and concerns regarding our TSS including how customers are charged for their use of the electricity network. We have conducted further stakeholder consultation in considering our response to the Government’s advised requirements for an opt-in implementation of cost reflective tariffs, and having regard to the mitigation of potential impacts on customers and concern about potential equity and affordability challenges that stakeholders had previously raised. This stakeholder feedback has informed and influenced our proposal.

1 Throughout this document the term ‘small business customers’ refers to non-residential customers using less than 40MWh of electricity per

year, and the term ‘medium business customers’ refers to non-residential customers using between 40 and 160MWh of electricity per year.

Together the two customer segments comprise the customers in the Small I&C Class.

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2 Introduction

This document provides an overview of AusNet Services’ revised TSS proposal for 2017 to 2020. The TSS proposal has been revised and resubmitted to the AER as provided for in the National Electricity Rules (NER).

In particular, the amendments address a new requirement announced by the Victorian Government subsequent to submission of the original TSS proposal, that the introduction of new cost reflective tariffs for residential customers and small business customers is to be on an opt-in basis. Accordingly, customers in these groups will choose whether to transfer to the new tariff structure.

On 22 February 2016 the Australian Energy Regulator issued a draft decision to not approve AusNet Services’ original TSS to give AusNet Services an opportunity to address the opt-in requirement in our revised TSS.

Where relevant this document will describe the material changes made since our original TSS. Given that our original TSS is on the public record and to improve the ease of reading we have removed material that is either no longer relevant or necessary to be repeated. For example, we have removed:

• the discussion of options to mitigate potential adverse impacts of cost reflective tariffs on vulnerable customers. We believe the opt-in decision addresses this issue.

• the detail of the original stakeholder consultation undertaken in the development of our original TSS. We replaced it with the consultation undertaken specifically for this revised TSS.

The TSS sets out the proposed form of AusNet Services’ tariffs, such as whether the tariffs include a fixed charge, whether the tariffs are based on the level of energy consumed, maximum demand, or some other factor, and whether the tariff rates are constant or vary by time of day, or season.

For the first time, AusNet Services is proposing a new type of tariff that better matches the price each customer pays with the costs which that customer imposes as a result of future augmentation requirements of the network. These new types of tariffs are sometimes referred to as ‘cost reflective tariffs’ or ‘cost reflective pricing’.

More specifically we are proposing a new tariff structure for residential and small business customers consuming less than 40MWh per annum and medium business customers consuming between 40MWh – 160MWh per annum. This revised TSS will highlight where our approach and tariff structure differs for these three customer segments.

Figure 2.1 below highlights the proportion of our customers (by customer number) by segment as described above. It highlights that 90% of our customers are residential, approximately 9% are small and medium businesses and less than 1% are large businesses (> 160MWh per year consumption). In the context of tariff reform approximately 98% of our customers will be captured by the new opt-in requirement.

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Figure 2.1: Customer number breakdown by segment

This proposal, which for residential customers is similar to the proposals of the other Victorian electricity distribution networks, is part of a national reform process to make electricity tariffs more cost reflective, which as a result should make future investments in Australia’s electricity networks more efficient, and lower customers’ bills in the longer term.

Importantly, the proposal for our new tariff structures does not affect how much revenue AusNet Services collects, rather it is about the distribution of who pays across the customer base. The introduction of cost reflective tariffs is a key step to achieve the electricity network transformation that will enable consumers to individually and collectively benefit from technological development, product innovation and behavioural changes. Section 3 outlines the reasons why cost reflective tariffs are important and an overview of potential benefits.

The types of considerations such as how we determined what is cost reflective and how we achieved the appropriate balance between factors such as economic efficiency, effectiveness and customer impacts are included in Sections 4 and 6. Details of the proposed tariff structure that we believe balances these objectives are provided in Section 5.

Electricity bills and energy affordability, in particular for vulnerable customers, are one of the key issues of concern for us, our customers and our key stakeholders. AusNet Services has consulted widely in order to understand customer attitudes and concerns regarding our proposed changes in this revised TSS. A description of AusNet Services’ engagement activity since submitting our original TSS in October 2016, what we heard from customers and other stakeholder groups, and how our revised proposal has been shaped by that feedback is summarised in Section 7.

The TSS does not propose tariff levels, including aspects such as any transition path (the weighting between tariff components such as the energy rate or the fixed charge). Tariff levels are set through the annual pricing submission process once factors such as the annual revenue allowance are finalised. However, the TSS proposal includes indicative tariffs, which allow customer impacts to be analysed and understood. The indicative tariffs provided as an attachment to this TSS are based on 2016 tariff levels, rolled forward to subsequent years with CPI indexing of 2.5% pa. A summary of indicative tariff levels for 2018, extracted from the TSS attachment, are provided as an attachment to this Overview Paper.

Impacts on individual customer’s electricity bills may vary depending on how much electricity they use and when they use their electricity. A summary of the findings of our analysis of the potential benefits for customers who opt-in to the new tariff structures and the indicative impacts for remaining customers analysis are set out in Section 8.

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90%

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8%

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1%

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1%

Residential (<40MWh)

I&C (<40MWh)

I&C med (>40MWh)

Industial large (>160MWh)

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As outlined in Section 9, the process by which AusNet Services’ tariffs for 2017 to 2020 will be finalised still has some way to run, with this revised TSS due to be approved by the AER in late July 2016, and final tariff levels approved on an annual basis each November from 2016.

AusNet Services is committed to continuing to work with stakeholders to ensure that its future tariffs are set in a manner that best meets the long term interests of its customers.

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3 Why are cost reflective tariffs important?

3.1 The introduction of cost reflective tariffs are a key step for network transformation

In November 2014, the Australian Energy Market Commission (AEMC) introduced a Rule change requiring electricity networks to develop prices that better reflect the cost of providing services to consumers. This section outlines the reasons for introducing cost reflective tariffs, beyond meeting this regulatory requirement, and the potential benefits for consumers.

In a project completed for the Energy Networks Association (ENA), Energeia identified benefits of $17.7 billion across the NEM in savings in avoided future augmentation of capacity over the next 20 years as a result of introducing cost reflective pricing2.

Technological change is driving increased consumer deployment of new technologies, while behavioural change in the last decade saw a shift in the role and use of electricity distribution networks. This trend is expected to accelerate as more consumers deploy new technology and change the way they use electricity and the network.

Figure 3.1: Network transformation – snapshot

Large network augmentation requirements over the last decade (driven by surging use of air conditioners, and earlier, plasma televisions) have contributed to recent surges in our network prices.

2 2014, Energeia, Network Pricing and Enabling Metering Analysis, prepared for the Energy Networks Association.

Historically • Electricity was supplied centrally and transported

to consumers through distribution and

transmission networks.

• Consumers had basic accumulation meters with

limited ability to measure usage at granular time

periods

• Network tariffs were primarily charged on energy

consumption with at times basic differentiation

for peak and off peak usage.

• Peak demand and overall usage were increasing

due to factors such as connection and load

growth (e.g. further deployment of air

conditioners and other energy intensive

appliances).

• Augmentation costs were relatively high to

address growing demand and usage.

• Consumers were generally disengaged and

unaware of their energy usage or energy bills.

• Material cross subsidies existed between

consumers and consumer groups with little

transparency of the extent of the cross subsidy

and limited ability for consumers to address it.

More recently• Increased consumer led deployment of solar PV

and other distributed technologies have changed

the way electricity is supplied and the way

consumers use the electricity network.

• Smart meters have provided an ability to

measure consumption at a more granular period

and therefore introduce better, more cost

reflective pricing structures

• While overall usage has been relatively stable,

energy usage per customer has been decreasing

reflecting a greater focus on energy efficiency but

peak demand has been growing.

• Expected future augmentation costs are lower

however this could change depending on

consumer behaviours and technologies (e.g.

increased penetration of electric vehicles with no

incentive to charge at the right time would

increase augmentation requirements and costs)

• Consumers are more engaged with a greater

focus on energy costs, usage and investments.

• Increased societal focus and incidence of 'energy

poverty' and the implications of high electricity

bills on consumers.

• There is a greater recognition from policy

makers, regulators and the market that the cost

of distributing electricity is not related to usage

but rather peak demand and that the basis for

pricing should change.

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Figure 3.2: Trends in network augmentation and price of network services

The way customers are using distribution networks is changing. Customers are using less energy per household, and more customers are installing solar PV.

Figure 3.3: Trends in energy use, maximum demand and solar penetration

Yet, while demand growth has slowed recently, it has continued to grow faster than energy consumption. Demand growth and augmentation requirements could quickly return to previous levels if customers are not provided continuous incentives to adopt new appliances efficiently.

Historic tariff structures for residential and commercial customers have not reflected the costs of using electricity at peak times. This has distorted investment decisions that individual customers face around new technology and appliances. For example, customers with storage batteries currently receive no additional benefit for using their stored energy during peak times, even though it would help prevent the need for future network investment. Conversely, as electric vehicles become more popular, without tariffs that make it cheaper to charge outside of the peak, significant unnecessary cost increases through network augmentation may be triggered. Thus, current tariffs are hindering rational market responses and potentially limiting innovation.

The introduction of cost reflective tariffs will be an important complement to AusNet Services’ toolkit of existing and planned projects focused on demand management and network transformation. These include, an annual demand management program of $12 million, the Grid Energy Storage System trial, the residential solar and battery storage trial, and planned trials for direct load control and of a community mini grid. In March 2016 we published the results of our residential battery trial which highlighted the potential customer value and network value of residential battery storage systems.

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2006

2007

2008

2009

2010

2011

2012

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2015

2016

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2018

2019

2020

Index(2006 = 100)

Maximum demand(network)

Energy (network)

Energy (per household)

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3.2 Cost reflective pricing will enable consumers to individually and collectively benefit from technological development, product innovation and behavioural changes

Cost reflective pricing is not a new concept for AusNet Services and many of our customers. Tariffs for large commercial and industrial customers have been cost reflective since 2011. The use of these tariff structures has created incentives for customers in this segment to change their electricity usage where it has been feasible and beneficial to do so. Many large customers have responded and benefited financially through reduced electricity costs. This individual benefit has also resulted in reduced augmentation costs and broader benefits for all consumers.

The critical peak pricing that we have applied to all large customers has achieved a peak reduction of 3.7%. We estimate that this has delivered savings of $6 million in terms of deferred capital investment over 10 years.

The diagram below summarises the key reasons for the introduction of cost reflective tariffs for the rest of our customer base. Introducing cost reflective tariffs, via choice in the case of residential and small business customers, will potentially enable them to make similarly informed decisions on electricity usage and investments in new technologies that better relate to the actual cost of delivery.

This will result in increased empowerment, improved transparency and reduced costs, which will ultimately lead to a more efficient transition to a transformed electricity supply chain. However, if these reforms are to succeed where success would be measured when a high percentage of customers opt-in to the new tariff structures, they must be introduced with a broad education campaign and strong support from the industry and government. An important consideration needs to be appropriate safeguards for vulnerable customers. We appreciate that the opt-in requirement is likely to be the main short term safeguard for vulnerable customers.

Figure 3.4: Customer Benefits

Empowerment• Customers can

make more informed choices

• Better investment and usage decisions by customers

• Improved

engagement of customers

Improved Equity• Reduced cross

subsidies between

customers• Better reflection

of actual cost of delivery of electricity

Reduced Costs• Potential for

individual customers to

save• Savings for all

customers through more efficient network

investment• Aligns customers

price signals with network investment

requirements

Customer Benefits

Customer education and safeguards for vulnerable customers

Increased deployment of new technologies and the introduction of new products and services

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Support for new technologies and product innovation

Cost reflective tariffs have the potential to support new technologies and product innovation to deliver combined consumer and network benefits, primarily by reducing network augmentation.

Energy retailers and other service providers will play a critical role in ensuring cost reflective tariffs are structured in a way that incentivises take up and the development of products and services that can respond to cost reflective price signal, and drive more efficient use of the electricity network.

Following are some examples of the new technologies and innovations that could be better enabled by cost reflective tariffs, which will provide combined consumer and network benefits:

• Storage – cost reflective tariffs will provide increased incentives to use stored electricity at times of peak demand and, therefore, improve the economics of investment in this technology.

• Electric vehicles – ensuring tariffs better reflect the cost of distributing electricity is key to an efficient uptake of electric vehicles. Firstly, it will provide increased incentives through cost savings to consumers that charge vehicles at off-peak times. For example, charging vehicles overnight or during times of lower demand, as opposed to charging immediately after commuting home, which is most likely during peak demand times. These incentives will also help avoid augmentation costs that maybe incurred if electric vehicles (in particular those with rapid charging capabilities) were charged during peak times. Significant uptake of electric vehicles without cost reflective tariffs has the potential to drive augmentations in the distribution system to unprecedented levels, raising the cost to everyone. For example, based on the new Tesla electric vehicle data, the daily average commute of about 30km per day requires about 5-7kWh of charging with a 10kW charger. This is equivalent to approximately 4 split air-conditioning units, which would make it significantly larger than any other household appliance, and equivalent to about a 50% increase in average household energy use. The charger would deliver enough energy for the daily commute in less than an hour. However, if a number of these devices were to operate simultaneously in a suburban street, the current distribution network could not deliver the energy required without significant augmentation.

• Solar PV - whilst solar PV primarily benefits consumers through reduced energy usage, the introduction of cost reflective tariffs may incentivise alternative installation arrangements of solar PV. For example, varying the orientation of solar panels may maximise energy production during peak periods, as opposed to maximising energy production across the day. It may also assist some consumers with different roof orientations to capture additional value from their investment.

• Consumer information portals and tools – there is likely to be an increased demand for better, more granular and more timely consumer information. This could be delivered through mechanisms such as online portals, mobile phone applications, in home energy orbs or in home displays.

• Home energy management systems – beyond just information provision described above cost reflective tariffs will further enable the development of systems and new technologies to assist consumers to actively or in an automated fashion better manage their energy usage. This goes beyond just energy efficiency into areas such as demand management and load shifting. These could be in the form of smarter mobile phone based applications, direct load control or smart integrated storage / solar PV systems.

• Facilitation of localised energy sharing amongst consumers – the development and take up of cost reflective tariffs may also benefit consumers seeking to share the capital costs and benefits of storage and / or localised distributed electricity with their neighbours. This may be also provide a benefit through the better management of localised peak

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demand and potentially reduced peak demand charges. There are recent examples and some interest from local communities or precincts investigating these types of initiatives.

Empowerment of consumers

Empowerment of consumers is a key expected benefit from the introduction of cost reflective tariffs. The AEMC recognised this in their ‘Power of Choice’ review as well as the rule change requiring the introduction of cost reflective tariffs. The AEMC’s desire was to ‘put consumers in the driving seat’.

New tariff structures should assist in achieving this desire and provide benefits to consumers through empowerment via:

• Encouragement to make better and more informed choices – increased take up of cost reflective tariffs combined with complementary reforms as envisaged in the Power of Choice review should increase consumer flexibility and their ability to respond to new products and price signals. In part, this is also facilitated by the roll out of smart meters and increased penetration of internet enabled devices, mobile phone applications and greater consumer information.

• Better investment decisions – the alignment of consumer price signals through cost reflective tariffs and the cost of future augmentation will assist consumers in making better investment decisions, to reduce future as well a current energy costs. This supports customers whose investment decisions on new appliances and technologies such as solar PV and batteries will be affected by the payoffs over a period of many years. This should reduce the risk of materially changed investment outcomes from unexpected network price changes, as demand charges present a stable basis for charging.

• Improved engagement - the empowerment of consumers will also lead to better engagement and decision making with respect to their specific energy supply decisions and broader energy usage requirements. If consumers see benefit and empowerment from these reforms it will increase engagement, which will in turn provide additional benefits to all consumers.

Improved transparency amongst consumers

The current tariff structure embeds a cross subsidy between individual consumers as well as between groups of consumers. For example consumers with a flatter load profile are cross subsidising consumers with a peakier load profile.

The below chart illustrates an example of the cross subsidies that exist under the current tariff structures. It shows two customers’ half-hourly energy consumption over a few days during the heatwave in January 2014. These two customers consumed identical energy over the whole of 2014 (~ 4.5MWh each) and had an identical ‘underlying’ energy usage as evidenced by the very left of the chart on 14 January 2014 when the two lines are virtually overlapping.

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Figure 3.5: Customers cooling solutions place differing loads on network

The figure shows that as the heatwave progressed the two customers usage patterns diverged. This was because they used different cooling solutions. The red customer has multiple air conditioners all running at the same times. The blue customer has a single smaller air conditioner that is running continuously.

In this example, the customer in blue is placing a substantially higher burden on the network at peak times (they require greater network capacity to support them), but under current tariffs it is likely that the two customers are incurring very similar network charges.

The introduction of cost reflective pricing should assist in firstly, allowing customers, retailers and other service providers to better identify the extent of the cross subsidies that exist, but also in potentially assisting to reduce the cross subsidy and ensure that customers’ electricity costs are more aligned to the cost of their use of the network. In the example above, the green customer may be able to save money from opting in to the new tariff structure. In this situation their network charge will decrease and therefore the cross subsidy between customers will reduce.

Reduced costs (for all consumers)

The most important potential but longer term benefit from the introduction of cost reflective pricing is reduced costs for all consumers.

In 2014 and 2015, over a quarter of the network’s capacity was used less than one percent of the time.

In the long term all consumers are expected to benefit through more efficient network investment that arises due to the better alignment of consumer price signals with future network augmentation costs. This benefit is critically dependent on the level of take up of cost reflective tariffs. If take up is low then this benefit will be minimal. If take up is large this price signal provides a stronger incentive for a bigger group of consumers to manage peak demand and energy usage thereby avoiding future augmentation costs for the benefit of all consumers.

• As previously discussed, Energeia identified benefits of $17.7 billion across the NEM in savings in avoided future augmentation over the next twenty years. This translated into an annual saving of $250 per annum on average energy bills. Over the same period, growth in distributed energy resources capacity averaged 11 per cent annually.

In addition, individual consumers who have opted in to a cost reflective tariff and respond with appropriate investments or behavioural change could further benefit from reduced costs in the following ways:

• There are savings or financial benefits for some consumers opting in purely through the unwinding of cross subsidies.

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• There are also potential savings for some consumers in their future electricity costs based on specific behavioural changes. For example, those consumers who load shift or better utilise the network through spreading usage more evenly across the day could save with little or no investment.

• Consumers can also save through making appropriate investment decisions in some of the new technologies, products or services previously discussed.

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4 What is cost reflective?

The previous section has set out the benefits of introducing tariffs that are more cost reflective. This section explains: what the costs of AusNet Services’ network are; why existing tariffs do not reflect those costs; and what types of tariff structures are needed to improve cost reflectivity.

4.1 Drivers of distribution network costs

Maximum demand

The major network cost affected by customer behaviour is the amount of investment in capacity required to meet the maximum demand period. The distribution network needs to be built so that it can continue to function at the period when most customers want to use the most energy, such as hot summer evenings. If there is not enough network capacity (e.g. in the transformers and powerlines), parts of the network will fail to operate and customers will experience black outs.

System maximum demand, which is the highest amount of energy that is consumed in total from the network over a 30 minute interval, determines the capacity built and, therefore, the cost of network. In Victoria, these peaks are generally times of extreme air-conditioning load on very hot summer weekdays. AusNet Services’ network normally peaks between 3:00pm and 6:30pm in summer.

A useful analogy to understand peak demand and costs is the Melbourne Cricket Ground (MCG). The stadium was built to be large enough to handle the demand for seats for the AFL finals series (the peak period). Therefore, the overall capital costs are likely to be largely determined by the need to seat 100,000 people safely, not by the average number of people who use the stadium throughout the year. For example, when a grand final replay has to be held and a further 100,000 spectators attend, there are no additional capital costs to build further capacity. Conversely, when only 20,000 people attend a home and away match the costs of having already built the capacity to seat 100,000 are not reduced.

The figure below is based on our actual consumption for 2015 and illustrates that, for AusNet Services’ distribution network in aggregate, the network is only operating at the highest capacities for a small portion of the year. Only 1% of days required more than 75% of maximum capacity. Thus, a quarter of the network exists only to service 3 days of the year.

Figure 4.1: Network load by duration, 2015

Individual customers’ demand can contribute to the maximum demand for their section of the network and for the network as a whole.

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0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

% o

f m

axi

mu

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etw

ork

loa

d

% of Days

75% of load for 1% of days

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Other cost drivers

Although maximum demand is the major cost driver that is influenced by customer behaviour, there are other costs that must be recovered. Only a small proportion of AusNet Services’ costs are driven by its demand and energy forecasts, hence these ‘other costs’ are significant.

What determines the costs of AusNet Services’ electricity distribution network?

• many costs are relatively fixed – assets have already been built and will last a long period of time;

• costs of maintaining assets are largely fixed – the costs do not vary with the amount of energy being consumed from the network outside of the peak period.

o e.g. if electric coffee machines became more popular, so that customers were using more electricity in the mornings, this would not increase the costs of operating the network, so long as the morning demand on the network did not overtake the maximum demand which currently occurs in the evening. This is because the assets required to meet the morning peak are already in place.

• changes in obligations (such as around bushfire safety) can drive increases (or decreases) in expenditure.

4.2 How tariffs are cost reflective

Existing tariffs are based on a combination of fixed charges and energy charges (rates that apply to the amount of electricity that is consumed). As discussed above, a major driver of costs is maximum demand and not energy usage, however, as illustrated in the following example, energy use is not a good indicator of a customer’s demand. The figure below shows the maximum demand for a sample of customers each of whom use around 4.3MWh per year. It can be seen that there is significant variation in how much these customers contribute to network costs. Based on a sample of 1,000 customers, the range of peak demand was 0.8kW at the low end to 13kW at the high end.

Figure 4.2: Maximum demand (kW) range for 1,000 customers using ~4.3MWh p.a.

To understand the variation in demand, it is helpful to think about what these customers might look like. For example, two customers may use different types of cooling as shown in the example is Section 3. Another example might be differences due to working hours or lifestyle, such as a shift worker who is not home during the period when maximum demand occurs.

As maximum demand is the main driver of costs, AusNet Services is proposing to introduce a demand charge into our tariff structures. This means that in the above sample, the customers with

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the highest demand will pay the highest network tariffs, while the customers with low demand, who place very little cost on the network, will have lower network tariffs.

To further ensure cost reflectivity, the proposed demand tariffs will recover more costs at peak times when everyone wants to use the network (i.e. the network’s ‘grand final’), rather than at off peak times when there is lots of spare capacity.

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5 What is our proposal?

This section outlines our proposed tariff structure for residential and small to medium business customers and highlights changes made to meet the opt-in requirement (Section 5.1) and also further detail where our tariff structure or approach differs by customer segment (Section 5.2). The tariff structure for large industrial customers will remain unchanged.

The relative amount of revenue collected from each tariff class will not change under this proposal.

As highlighted in the diagram below, the proposed high level tariff structures for the residential, small business and medium business customers introduces a demand charge alongside an energy and fixed charge components.

Figure 5.1: Proposed changes to high level tariff structure

The new structure ensures that there is no different pricing or treatment of customers based on any technology related investments they may have made such as batteries or solar panels. The proposed structure is designed to achieve an outcome where customers with lower demand in the maximum demand period, pay less than customers with the same energy consumption and higher demand.

5.1 Proposed high level changes to meet the opt-in requirement

To meet the opt-in requirement we propose the following changes to our original TSS:

• We will retain our current residential and small business tariff structures (that do not include the demand charge) including the time of use energy tariff structure.

• All residential and small business customers will remain on one of the pre-existing tariff structures unless we receive notice in writing from the customer’s retailer to assign the customer to a new cost reflective tariff, i.e. until they opt-in.

• A retailer of a residential or small business customer who previously opted into a cost reflective tariff can provide written notice until 31 December 2020 that the customer has requested to opt-out of their cost reflective tariff and revert to their original tariff structure. This is to meet the requirement of the additional reversion period. If we receive such a notice we will assign the customer to the tariff structure (or nearest equivalent) they were on prior to their decision to opt-in to a cost reflective tariff3.

• The proposed tariffs with a demand charge for residential and small business customers will be fully cost reflective from implementation, i.e. they will have a full demand charge from 1 January 20184.

In the original TSS a transition approach which phased in the demand component over a number of years was proposed. The transition period is no longer needed as customers are protected through the opt-in requirement. Also any transition with a reduced demand charge will similarly reduce the potential benefit for those customers who choose to opt-in and limit overall potential take up of the new tariff structures and the long term value of this reform.

3 This additional reversion only applies to customers on a new cost reflective structure it does not apply to customers who have opted into the

time of use energy tariff.

4 As discussed in our original TSS to allow time to implement and test our billing system the maximum demand component charge will

commence on 1 January 2018. Current charging basis will apply for 2017.

Energy Charge

Fixed Charge

+Energy Charge

Fixed Charge

+DemandCharge

+

Current Tariff Structure Proposed Tariff Structure

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5.2 Further details and key differences by customer segment

• This section outlines further details on our proposal and where our proposal differs between residential, small business and medium business customers.

• We also outline our proposed approach to a very specific and unique customer segment in the alpine region5. Unlike the rest of our network that has a maximum demand in the summer months, customers in this region have a very clear winter peak that warrants a specific approach.

Cost reflective tariff structure – further detailThe diagram below provides further detail on the key elements of the new tariff structure for residential, small business and medium business customers including the features of the demand charge. The diagram highlights that the definition and structural parameters of the demand component do not vary by customer segment. This is consistent with our approach in our original TSS.

Figure 5.2: Proposed new tariff structure – further detail

AusNet Services has a large number of existing tariffs such as for off-peak hot water. As noted in the diagram above many of these will be retained and one key reason is that they are already cost reflective. Specific details of what we are proposing for each tariff are included in the full TSS document.

Residential customers – further details and specific differences

There are no further details or specific differences for this segment.

Small business customers – further details and specific differences

There are no further details or specific differences for this segment.

5 The alpine region is defined as the following suburbs: Mount Hotham, Dinner Plain, Falls Creek and Mount Buller

+

Proposed new tariff structure – Further Detail

+FIXED

= $/year

In combination with energy component recovers residual costs.

= $/kWh x Actual kWh

ENERGY

Based on actual metered consumption within the period.

Dedicated Circuit and two rate controlled circuit tariffs will be retained for residential and small business customers.

= $/kW x monthlymaximum demand

DEMAND

Rate varies by season:Dec – Mar (higher rate)Lower $/kW rate applies in other months

Maximum demand period: 3pm – 9pm work days onlyMaximum demand: max demand measured in month

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29 APRIL 2016 19 / 37

Medium business customers – further details and specific differences

• Given that the opt-in requirement does not apply to customers consuming >40 MWh per annum all our medium business customers will be assigned to a cost reflective tariff from 1 January 2017 with a 5 year transition period with the first year having a zero weighting to the demand charge component.

• This is consistent with our approach in our original TSS and is designed to mitigate potential transition issue such as material price variations or volatility.

• As highlighted in Figure 5.2 many of these customers are either on a two-part tariff or a dedicated circuit tariff. These tariff structures will be retained with the addition of the phased in demand component.

• In addition, to provide flexibility and increased customer choice medium business customers may at their discretion and with written retailer notice provided to us opt-in for a fully cost reflective tariff with a single rate energy tariff rate and a full demand component from 1 January 2018.

Alpine region customers – further details and specific differences

As discussed above, unlike the rest of our network, customers in the alpine region exhibit a clear winter peak as evidenced in Figure 5.3.

Figure 5.3: Comparison load profile alpine region feeder versus non alpine region feeder

A tariff with a demand component with a higher price in the summer seasons (December to March) and a lower price in the rest of the year is not cost reflective for these customers and would send a perverse price signal.

The result of which would be that these customers would almost certainly all opt-in to the new cost reflective tariff structure and be incentivised to use more electricity in the winter months thereby potentially increasing the need for additional augmentation in this region. This is contrary to the intent of the reform and the purpose of cost reflective tariffs.

Accordingly, for all residential, small business and medium business customers in this region we propose that the cost reflective tariff is not available and that they remain on their current tariff structures.

For these customers their current tariff structures are more cost reflective than a demand based tariff with a higher summer demand charge.

0%

20%

40%

60%

80%

100%

120%

Nov-14 Dec-14 Feb-15 Apr-15 May-15 Jul-15 Sep-15 Oct-15 Dec-15 Jan-16

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Non Alpine Region Feeder

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29 APRIL 2016 20 / 37

Our discussions with stakeholders including retailers confirmed that this approach can be implemented and was also preferred (at least in the short term) to developing a winter peak demand charge tariff specifically for these customers.

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6 What else needs to be considered?

Tariff reform is targeted at making prices more cost reflective. However, in implementing change, there are other important considerations beyond simply whether cost reflectivity is being achieved. These are the practical issues of reform.

This section outlines the key matters considered in developing new tariff structures, such as economic efficiency, effectiveness and customer impacts, and describes AusNet Services’ approach to balancing these considerations.

6.1 Factors for consideration

AusNet Services’ approached the development of our new tariffs with the following considerations in mind:

• Cost reflectivity – what is cost reflective for our network including any implications for specific regions such as the alpine region;

• Customer impact6 – who will opt-in? How much will customers’ bills change by? Will customers who are on cost reflective tariffs be able to respond? What is the impact on all other customers who have not opted in?

• Implementation issues – can networks and retailers implement the new tariffs and at what cost? Will the new tariffs be well communicated to customers? Will they be able to be understood?

• Stakeholder views – what do customers, government, retailers and other stakeholders think of proposed changes?

• Coordination and consistency – what are other Victorian distribution businesses doing7?

• Rules compliance – does the proposal meet requirements of the National Electricity Rules?

• Expected take up8 – what is the expected level of residential and small business customer take up?

6.2 Approach to setting new tariff structures

Taking the factors for consideration described above, we have used these to inform and adopt three broad guiding principles in our proposed approach to applying cost reflective pricing:

1. Aim for consistency across Victorian distributors for residential customers9;

2. Balance efficiency with effectiveness in transitioning to new tariffs for medium commercial and industrial customers10 and balancing efficiency and effectiveness in tariff parameter decisions for cost reflective tariffs more broadly;

3. Meaningfully consult with customer and stakeholder groups to ensure our final proposed tariff structures and transition arrangements (where relevant) take into account not only

6 As previously discussed we appreciate that the opt-in requirement assists in mitigating potential adverse customer impacts for all residential

customers and customers consuming less than 40MWh per annum.

7 This is particularly important for the residential customer segment, but less so for small business and medium business customers.

8 The expected level of take up is a key consideration as customers who opt-in are likely to be those customers who will have a lower

distribution bill. The higher the level of take up the greater the level of revenue that will need to be recovered from all other customers. This is

discussed in further detail in Section 8

9 Noting however the treatment of the alpine region customers is unique to AusNet Services.

10 The opt-in requirement means there is no transition period required for residential and small business customers.

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29 APRIL 2016 22 / 37

desired economic outcomes, but also our understanding of social and public policy outcomes.

A key message that came through in the early stages of consultation around developing new tariff structures was the need for consistency across Victoria particularly for residential customers, so that when the new tariff structures are introduced as an option for customers to consider, the changes can be clearly communicated and understood. Customers are used to being charged principally based on their total electricity consumption. Therefore, the concept of demand charges will need to be explained, and this will be easier if there is consistency across Victoria.

Simpler and consistent customer communications will also assist in providing the best information for customers to make an informed choice to opt-in to the new tariff structures. This will mitigate risk, assist in increasing customer take up and increase the likelihood of a more successful reform outcome.

Throughout 2015 and again in early 2016 following the government policy announcement, AusNet Services worked with other Distribution Businesses (DBs) to reach a common tariff structure for residential that was cost reflective for the Victorian network as a whole. This was described in Section 5 above.

The table below summarises how our proposal meets each guiding principle.

Table 6.1: Attributes of proposed tariff structure shaped by guiding principles

Guiding principle High-level summary

Consistency • Common residential tariff structure – Demand, Energy, Fixed

• Introduced off-season demand charge

• Common definition and calculation of peak demand

• No locational pricing (noting the alpine customers exception)

• No separate solar tariff

Balance • Planning a fully cost reflective demand charge for residential and small business customers from 1 January 2018.

• Planning a 5 year phase in of the demand charge11 for medium industrial and commercial customers, but customer views remain a key consideration

• Introduced an off-peak season maximum demand period

• Retention of off-peak energy rates including dedicated circuits

• Have adjusted 2016 tariffs to enable a smoother transition for customers who opt in. This is through increasing the fixed charge making them more cost reflective.

Consultation • Adjusted weightings between peak and off-peak demand components of tariff structure to maximise benefits, manage equity issues, mitigate customer impacts and smooth volatility

• Confirmed with stakeholders that a fully cost reflective demand charge from January 2018 for residential and small business customers was appropriate.

The balance achieved with the tariff proposal as described in the previous section, represents a series of compromises. This is particularly the case with regard to reflecting customer and

11

Demand component must be ‘0’ until 2018 due to metering constraints

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stakeholder feedback. On many aspects of tariff reform, we heard disagreement from stakeholders over the preferred approach. For example, some argued the tariff should send a stronger demand signal, aimed at a narrower maximum demand window. Others were concerned this would impact some customers and limit take up.

7 What we heard from stakeholders and how it informed our proposal

This section provides a brief overview of our approach to customer engagement, the key messages we have heard from our stakeholders and how these messages have informed our proposal12.

Customer engagement is not only critical to successfully implement tariff reform but also a key component of our broader corporate strategy. We are continuing to develop our customer strategy and specific capabilities / functions within our business to better manage customer engagement. Customer engagement will continue through this entire implementation process and beyond.

Our approach to engagement since the opt-in announcement has been designed not only to inform customers of our updated analysis and proposed changes given the Government announcement but more importantly to gather feedback, assist in getting the balance right with key trade-offs and ultimately shape our thinking. This assists in developing a more considered proposal, minimising surprises and obtaining stakeholder buy in.

Our engagement process has involved a mixture of one-on-one or bilateral meetings and workshops. Throughout this process we have engaged with retailers, other distributors, customer advocates / representatives, Victorian Government representatives and AER representatives.

7.1 Key messages since the Government’s opt-in announcement

Our engagement process since the opt-in announcement identified the following broad areas of feedback:

• Proposed changes to respond to the opt-in requirement – including our desire for minimal changes from our original proposal, the use of a fully cost reflective demand charge from 1 January 2018 for customers who opt-in and also our new proposal for alpine region customers.

• Customer impacts – a key area of focus for all stakeholders was the potential impact (benefits) for customers who opt-in, estimating take up and the resultant impacts for remaining customers. This analysis and feedback has been critical in shaping our thoughts and tariff proposals.

• Transition arrangements – related to distinguishing the approach for medium industrial and commercial customers to whom opt-in does not apply.

• Customer engagement process to assist implementation – we sought feedback on approaches to engaging with consumers to assist in the success of the reform.

The table below provides a summary of the key messages and examples of how we have incorporated those messages into our approach and proposed tariff structure.

12

As previously discussed we have removed the key messages and detail of our consultation for our original TSS submission. That feedback

is still highly relevant and has been used in shaping and influencing our revised submission. For simplicity however this section only

discusses the consultation and key messages for any consultation undertaken subsequent to the submission of our original TSS.

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Table 7.1: Messages from stakeholder engagement and AusNet Services’ response

Area Key messages Examples of what we have done

Changes to respond to opt-in

• There was general consensus with our approach for making minimal changes.

• There was still a strong desire for consistency and simplicity in tariff design, language and terminology between distributors.

• Most stakeholders appreciated the benefits and rationale for using a fully cost reflective demand charge from January 201813 for customers who opt-in.

• Stakeholders understood the need to use a specific approach for customers in the alpine region and retailers were generally comfortable that their processes and systems could handle this approach.

• We have kept any changes to a minimum including retaining our time of use energy tariff and off peak / dedicated circuit tariffs where relevant.

• We have retained the previously agreed common new residential tariff structure across distributors including a common definition of peak demand which applies only business days.

• The demand charge for customers who opt-in will be fully cost reflective from 1 January 2018. This will provide a stronger signal and maximise the potential benefit available for those customers who opt-in.

• To maximise cost reflectivity and address potential perverse outcomes we have proposed to retain the current tariff structures for alpine region customers. This was preferred to developing a winter peaking demand charge based tariff.

13

Stakeholders also understood the need for AusNet Services to implement a demand charge one year later than other distributors and did

not see this as a material issue.

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29 APRIL 2016 25 / 37


Customer impacts

• There was general acknowledgement that the opt-in requirement addresses prior concerns expressed over adverse impacts for vulnerable customers and potential bill volatility.

• Most appreciated that the introduction of the opt-in requirement will provide opportunities for some customers to benefit from changing tariff structures.

• All stakeholders acknowledged the difficulty in estimating take up of the new tariff structures with any degree of precision, although it was broadly considered that this would be low. There was also acknowledgement that take up is heavily influenced by the marketing activities and product development strategies of retailers.

• Some stakeholders provided views on approaches to estimating take up of the new tariff structures but did not provide any specific estimates or assumptions.

• Stakeholders understood that there are potential impacts for customers who do not opt-in to the new tariff structures.

• We have undertaken and shared analysis to understand the impacts (benefits) for customers who opt-in to the new tariff structures.

• We have developed a simple, pragmatic and transparent approach to estimating take up that provides a reasonable basis for calculating our indicative tariffs. Our estimate of take up will be refined over time as we gather new information in particular actual level of take up post 2017.

• Given the uncertainty in estimating take up the TSS illustrates the impact on the tariffs and costs for customers who do not opt-in for simple scenarios where we vary the levels of opt-in related take up. Recognising the trade-offs involved in tariff design and to achieve an appropriate balance we have adjusted the weightings in our tariff components. e.g. the level of peak season demand charge vs. off-peak season demand charge.

• For medium business customers we have retained key features of customers’ current tariff structures and added a phased-in demand component. The demand component for 2017 is set at ‘0’. The proposals have regard to potential customer impacts whilst facilitating customer understanding of the new pricing arrangements.

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Transition Issues

• Recognised that the opt-in decision removed the need for transition for residential and small business customers.

• Appreciated that for medium industrial and commercial customers there was still a need for a transition.

• We have removed the 5 year transition for residential and small business customers.

• To smooth the impacts for medium business customers, we are proposing a straight line transition over 5 years with a zero demand charge in 2017.

• For simplicity and effective implementation we are proposing all tariffs will incorporate a demand component.

• There will also be the option for medium business customers to opt-in to the demand structure available to residential and small customers, with the full demand component

Customer engagement

• General view that customer engagement will be important for successful implementation and that it requires broad stakeholder participation.

• There was understanding that the process would need to differ for customers consuming more than 40MWh per annum which has a mandatory approach.

• Educating and communicating concepts of new tariff structures to customers will be challenging but not impossible.

• Industry collaboration with Government is key to successful customer communication and education.

• We will continue to work with industry and government in a collaborative approach to education and customer communication. Our focus groups from our original TSS

consultations provided some useful empirical data and insights that can help shape future education campaigns.

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29 APRIL 2016 27 / 37

8 How will our customers be affected?

This section sets out the expected customer impact of AusNet Services’ proposed changes to its tariff structures. For simplicity our analysis is necessarily developed on the assumption that a retailer fully ‘passes through’ the network price change. In practice this decision is up to each individual retailer.

This section includes an analysis of:

• Potential benefits available to residential and small business consumers from opting in to the new tariff structures. This is based on indicative changes in the forecast 2018 customer bills between fully cost reflective tariffs and non-cost reflective tariffs. Our results are based on analysing the impacts on a sample of 100,000 residential and approximately 12,000 small business customers.

• Indicative impacts for medium industrial and commercial customers from the mandatory change in tariff structures. This is based on indicative changes in the forecast 2018 customer bill (using a 20% weighting of the demand charge) compared with a 2018 bill under the previously applying tariff structure. Our results are based on analysing the impacts on a sample of approximately 1,500 medium industrial and commercial customers.

• A basic approach to estimate take up of cost reflective tariffs by residential customers.

• The bill impact for residential and small business customers who do not opt-in based on simple scenarios with varying levels of take up (or opt-in) of cost reflective tariffs.

• The potential for (further) customer savings for those customers who opt-in to cost reflective tariffs through behavioural responses such as changing their energy consumption or usage patterns.

8.1 Indicative customer impacts – assuming no behavioural response from customers

The analysis presented in this section assumes no change in customer behaviour such as changes in energy consumption, load shifting or investing in new energy technologies such as solar PV or battery storage.

Indicative residential customer impacts

The figure below shows the distribution the potential benefit in 2018 for residential customers that choose to opt-in to cost reflective tariffs. It is built on the premise that only customers who are expected to benefit from opting in will do so and therefore the chart only shows positive impacts, i.e. benefits.

As previously mentioned it is based on analysis of a representative sample of 100,000 residential customers and compares the difference in network bill by customer between the indicative cost reflective tariff in 2018 and the previously applying 2018 tariff.

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29 APRIL 2016 28 / 37

Figure 8.1: Distribution of potential benefit for residential customers opting in to cost reflective tariffs

Our analysis highlights that approximately 31% of residential customers are expected to benefit from opting in to cost reflective tariffs (this is equivalent to the area under the curve above) and the average level of benefit is approximately $160 per annum. Approximately 8% of residential customers could be expected to save in excess of $200 per annum from opting in with some potentially benefitting by $500 per annum.

The analysis above shows impacts on an annual basis, on an individual bill basis the introduction of a demand charge can potentially increase summer network bills and lower winter bills. The impact has been mitigated in the tariff design through the inclusion of a low level, off-season demand charge, which reduces the bill volatility across the year. Retaining a demand component year round also facilitates on-going customer recognition of demand as the key driver of network costs.

Indicative small business customer impacts

A smaller percentage of small business customers, approximately 15%, are expected to benefit from opting in to cost reflective tariffs. Analysis of a representative sample of approximately 12,000 small business customers has been undertaken, comparing the difference in network bill by customer between the indicative cost reflective tariff in 2018 and the previously applying 2018 tariff.

The average level of benefit is approximately $95 per annum. Approximately 7% of small business customers could be expected to save in excess of $100 per annum from opting in.

The distribution of potential benefits is shown in Figure 8.2 below.

0%

5%

10%

15%

20%

25%

30%

35%

$0 $100 $200 $300 $400 $500

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Figure 8.2: Distribution of potential benefit for small business customers opting in to cost reflective tariffs

Indicative medium commercial and industrial customer impacts

Medium sized commercial and industrial customers, i.e. those consuming more than 40MWh per year, will be re-assigned to a tariff structure that adds a maximum demand component to the existing tariff structure they are assigned to. There are approximately 9,100 customers in this category.

Customers in this category typically have a high utilisation factor. Because of this, the majority of customers are not negatively impacted by the introduction of the maximum demand component. Analysis of a representative sample of approximately 1,500 customers, comparing the difference in network bill by customer between the indicative cost reflective tariff in 2018 and the previously applying 2018 tariff, indicates that bills will be lower for more than 80% of medium sized customers.

8.2 Estimating take up of residential customers opting in to tariff reform

To understand the impacts of tariff reform on residential and small business customers who do not opt-in requires an estimate of potential take up of cost reflective tariffs.

There is clearly difficulty in estimating take up of the new tariff structures with any degree of precision. We believe however that take up is likely to be low. Stakeholders we consulted with shared this view and other evidence such as the level of take up of time of use tariffs and a report by the CSIRO on the likely response by Australian consumers to cost reflective electricity pricing14 also confirm this view:

• The take up of time of use tariffs by residential customers since commencement in 2014 to date has been less than 1%15.

• The CSIRO report (page 8) states “our calculations suggest that the initial voluntary uptake of cost-reflective pricing is unlikely to exceed 5-10% of households”.

14

Stenner, K., Frederiks, E., Hobman, E. V., and Meikle, S. (2015) Australian Consumers’ Likely Response to Cost-Reflective Electricity

Pricing. CSIRO, Australia.

15 The price signals in these flexible tariffs are diminished as the tariff does not include a peak season weighting. Some retailers have argued

that rebalancing of tariffs by distributors made the benefits for customers uncertain coupled with limited promotion by retailers has led to limited

take up reversion to traditional tariffs by customers.

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29 APRIL 2016 30 / 37

Stakeholders and the CSIRO research also acknowledge that take up is heavily influenced by the marketing activities and product development strategies of retailers. The introduction of unfamiliar concepts, such as the maximum demand component, would likely also impact optional uptake.

8.3 Indicative customer impacts for customers not opting in to cost reflective tariffs

Customers who opt-in are expected to benefit financially through lower tariffs, the result is a shortfall in network revenue that is recovered from customers who have not opted in.

Given the uncertainty in estimating take up of cost reflective tariffs we illustrate the impact for customers who do not opt-in using simple scenarios where we vary the levels of opt-in related take up.

The figures below show the potential impact on residential customers for four levels of take up. The lowest level, 2% broadly aligns with our estimate of take up, at this level the impacts on customers who do not opt-in is approximately $10 per annum. We similarly estimate the impact on customers for simple multiples of this level of take up, at 4%, 8% and 16%. A 16% take up is equivalent to approximately 50% of customers who can benefit from tariff reform opting in, noting that our analysis in section 8.1 highlighted that approximately 31% of customers can benefit from opting in. At this level of take up, which is considered to be highly unlikely to be achieved, the impact on customers who do not opt in is just under $50 per annum.

Figure 8.3: Indicative impact on non opt-in residential customers by level of take up of residential cost reflective tariffs

0

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Figure 8.4: Indicative impact on non opt-in small business customers by level of take up of residential cost reflective tariffs

The potential impacts shown account only for the level of uptake of cost reflective tariffs. There are a number of factors that ease pressure on prices in this regulatory control period compared to the previous period, ending 2015. These include reductions in metering charges and jurisdictional scheme amounts for the transitional feed-in tariffs. Our analysis indicates that, by 2020, close to 100% of small customers (excluding some outliers) will have a lower network charge overall than in 2015.

8.4 Indicative residential opt-in customer impacts – potential benefits of behavioural change

This section considers how behaviour for those residential customer’s that have opted in can affect their networks bills under the proposed tariff structures and the potential further benefits (cost reductions) available through reducing their maximum demand for the summer period.

It is important to note that, even with opting in to cost reflective tariffs, customers can still reduce their energy bills by focusing on energy efficiency and that a move to cost reflective pricing does not remove this incentive. Rather, it provides an additional avenue for customers to save.

For customers to benefit through reducing their maximum demand they must have visibility (potentially in near real time) of their maximum demand. This means that customers must be aware of the impact that using multiple appliances at any one time may have on their demand.

The figure below depicts the impact of ‘appliance stacking’ for a hypothetical customer.

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Figure 8.5: Example of potential customer response

The potential benefit obtained by a customer is determined by the level of reduction in maximum demand multiplied by the maximum demand charge.

In the above example, the customer’s maximum demand before any behavioural change is approximately 7.5kW. By moving the washing machine and dishwasher to outside of the maximum demand period, and switching off the air-conditioner whilst cooking, this customer could cut their maximum demand by ~3.5kW. Using the 2018 indicative summer demand charge this (permanent) change in behaviour would result in a ~$125/year saving. Shifting only the dishwasher and washing machine, and letting the air-conditioner run during cooking time, would save a customer ~$90/year.

Demand (kW)

8

7 Washing machine

(1kW)

6 Dishwasher (2.5kW)

5

Hot plate

4 (1kW)

Air conditioner (3.5kW) Air conditioner (3.5kW)

3

2

1

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6pm 7pm 8pm 9pm 10pm

Maximum demand period Non-maximum demand period

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9 Next steps

The process for finalising the TSS and our tariffs for 2017 to 2020 still has some way to run, with final structures due to be approved by the AER late July 2016 and then final tariff levels and a transition path approved on an annual basis each November from 2016.

As previously mentioned, a key question to be considered in our annual pricing proposal is the level of take up for those customers choosing to opt-in. Whilst impossible to precisely forecast take up, it will be important for us to consider refining our residential estimate and developing a specific small business estimate. We will still be seeking to have a simple, reasonable and unbiased methodology. It will also be important to monitor actual take up over time and to adjust future years take up forecasts and tariff levels based on the most up to date and accurate information.

We will also continue to consult with key stakeholders on further matters of detail as we progress towards implementation. We are committed to continuing to work with stakeholders to ensure that our future tariffs are set in a manner that best meets the long term interests of our customers.

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ATTACHMENT: 2018 Indicative Network Tariffs (NUOS)

The following tables set out the structure and indicative component levels for the main tariffs applicable in the period 2017 – 2020, which are described in the TSS Revised Proposal and the Overview Paper. The indicative tariff levels are provided as an attachment to the Overview Paper for information only, and are not part of the Overview Paper or TSS.

The indicative tariffs are applicable for 2018, the first year that a demand charge will appear in AusNet Services prices. Tariff levels for 2016 form the starting point for modelling, and an annual CPI adjustment of 2.5% is applied. The indicative tariff levels assume an uptake of new cost reflective tariffs by 2% in 2018. The indicative pricing schedule in the main Tariff Structure Statement revised proposal discusses a number of factors that may cause actual tariff levels to vary from these indicative levels, including the final revenue determination for the 2016 – 2020 regulatory control period.

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Residential Tariff components

Tariff Description Assignment Note Peak Demand Energy Fixed Fee

Customer

Number

($/kW/month) (c/kWh) ($/year)

Peak Off

peak Anytime Peak Shoulder

Off

peak

NEE11 Single rate default 1

10.1 /

12.8 105 475,000

NEE20 Two rate default 2 19.2 4.4 105 53,000

NGT26 Flexible TOU opt-in 3

14.2 11.0 4.4 105 1,000

NASN11 TOU seasonal demand opt-in 2018 4,5 8.97 2.25 7.6

105

Notes:

1 Anytime Rate 1 / rate 2: Rate 1 applies for first 1020kWh per quarter, rate 2 applies for balance

2 Peak: applies 7am – 11pm AEST, Mon-Fri

3 Vic Gov flexible tariff: Peak applies 3-9pm Mon-Fri, Shoulder applies 7am-3pm & 9-10pm Mon-Fri, 7am-10pm weekends, off-peak all other times. Times are AEST except when summer time is in force in which case they are ADST

4 Tariff first available 2018

5 Maximum Demand applies 3-9pm ADST, Mon-Fri, excludes public holidays, Peak Season applies Dec-Mar, Off-peak all other months

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Small Business Tariff components

Tariff Description Assignment Note Peak Demand Energy Fixed Fee Customer

($/kW/month) (c/kWh) ($/year) Number

Peak Off peak Anytime Peak Shoulder

Off

peak

NEE12 Single rate default 1

13.7 / 16.6

105 27,500

NEE21 Two rate default 2 17.8 4.4 105 35,000

NASN12 TOU seasonal

demand opt-in 2018 4,5 8.97 2.24 13.2

105

Notes:

1 Anytime Rate 1 / rate 2: Rate 1 applies for first 1020kWh per quarter, rate 2 applies for balance

2 Peak: applies 7am – 11pm AEST, Mon-Fri

4 Tariff first available 2018


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Medium Business Tariff components

Tariff Description Assignment Note Peak Demand Energy Fixed Fee Customer

($/kW/month) (c/kWh) ($/year) Number

Peak Off peak Anytime Peak Shoulder

Off

peak

NASN12 TOU seasonal

demand opt-in 2018 4,5,8 8.97 2.24 13.2 105

NASN19 TOU seasonal

demand, single rate Re-assign 5,6,7 1.80 0.45 15.3 105

NASN21 TOU seasonal

demand, two rate Re-assign 5,6,7 1.80 0.45 17.2 4.4 105

Notes:


6 Peak Demand component phased in, 0% of full value 2017, 20% 2018, 40% 2019, 60% 2020. Rebalanced via annual energy rate reduction

7 Closed to new customers. Existing customers assigned according to alignment with their current network tariff structure assignment

8 New customers will be assigned to this tariff

Documents

AusNet Electricity Services Pty Ltd Services...AusNet Services Revised Tariff Structure Statement 2017-20 – Overview Paper 29 APRIL 2016 3 / 37 1 Executive Summary AusNet Services’