Tariffs Flashcards
a. Describe the main cost components of a typical electricity retail bill and explain why these may not reflect the true cost of supplying electricity. (4 marks)
A typical electricity bill consists of:
A small fixed component, or “connection charge”
A large volumetric charge, imposed on a $/KWh basis
Occasionally a “demand charge”, which bills based on the period of maximum power draw for the household
However, much of the costs for electricity retailers are derived from network charges, which the above mechanisms do not capture well. A large part of the “true cost” of supplying a household with electricity comes from the power use of that household during network peak periods, which occur only a few times a year, and it is tricky to design a billing structure which reflects this.
b. Briefly describe the typical operation of two different types of Feed-in Tariff (FiT) scheme for renewable electricity. (2 marks)
Gross Feed-in Tariff: Customers are rewarded for the total amount of energy they produce, on a $/KWh basis, say from a rooftop solar array
Net Feed-in Tariff: Customers are rewarded for the net energy they deliver to the grid, i.e. (Energy Produced - Energy Consumed), on a $/KWh basis. Typically this calculation is done for each half-hour period
c. Describe the operation of a Feed in Tariff (FiT). Give two perceived benefits of a FiT for supporting RE deployment.
Feed-in Tariffs reward customers for energy they produce (Gross), or energy they deliver to the grid (Net). The customers (typically) receive a fixed price from the retailer for each unit of energy they deliver to the grid. These structures are considered beneficial as they directly reward the customers’ electricity output, which encourages installment of high-efficiency generation. They are also highly flexible; they can be tailored to suit particular technologies, and easily adjusted over time
d. Discuss the existence of cross subsidies in network tariffs.
Currently, electricity customers are billed on a volumetric basis, while the true cost of connecting them to the grid has more to do with the load they impose on the system on peak times. This makes it easy for customers to reduce their bills, without reducing their peak load - the money they don’t pay will now have to be paid by other customers. The simplest example of this is installing energy efficiency measures; if a customer reduces, say, their lighting load in non-peak times, their retail bill will be lowered, but the network cost of servicing their house will not change. As a result, the reduction in their electricity bill will have to be paid for by other customers, which amounts to a cross-subsidy.
Other examples of cross-subsidies:
PV customers who reduce their bills by importing less energy to the grid, but do not necessarily change the load they impose on the system in peak times
Households with air conditioning, who typically have very slightly increased electricity bills, but greatly increased network demand in peak times - the network cost of servicing these customers is therefore very high
e. What is a ‘value of solar’ tariff? What types of ‘values’ might be included?
A ‘value of solar’ tariff seeks to capture all of the costs and benefits of including solar energy in an electricity grid. A value of solar tariff is ideally rigorously calculated, and seeks to capture many aspects of the value of solar power;
- Less energy required from the wholesale market
- Lower transmission losses
- Lesser investment in transmission and distribution infrastructure
- Environmental benefits
- Grid Security impacts (Distributed generation, creation of islands in a blackout)
- Value associated with having local generation capacity available
f. What is the rationale for the use of ‘cost-reflective’ network tariffs
The goal of cost-reflective network tariffs is to encourage efficient use of the electricity network. Rational consumers, when faced with a pricing structure which reflects the true network costs, will adjust their behaviour to minimise their bills, and in so doing will use the electricity network in an efficient way. Such behaviour would ideally reduce the overall bills for consumers.
g. Describe the following three tariff types and discuss the extent to which each is cost reflective: − time of use pricing − demand charges − critical peak pricing (6 marks)
Time of Use Pricing (ToU): This tariff type charges customers on a simple $/KWh basis. The size of this charge is dependent on the time of day; a typical pricing structure in NSW, for example, might be 29c/KWh in peak times, 21c/KWh in shoulder periods, and 12c/KWh in off-peak times. This is somewhat cost-reflective, as it increases the charges during peak periods. However, setting a blunt peak time period for a few hours a day is not reflective of true network peaks, which will only occur a few times a year.
Demand Charges: This charges customers based upon their moment of maximum demand, measured in KW. To some extent, this is cost-reflective, as it encourages customers to have a less “peaky” demand curve. However, the period of peak customer demand is very rarely the period of peak network demand, so for this reason the tariff does not do an excellent job of reflecting true network costs.
Critical Peak Pricing: This tariff structure dynamically adjusts the cost of electricity, such that it is extremely high during periods of peak network demand. This does a fairly good job of reflecting true network costs, as the price is closely linked to times of high network demand. However, this system is highly complex, as for it to be of value it is necessary to forecast the periods of peak network demand ahead of time, and warn customers. This is very hard to do in practice.
