Australian Energy Regulator - An Overview November 2015 Energy- Tariff... · To achieve this, we have been thinking forward, ... Ergon Energy supplies electricity across more than

An OverviewOur Tariff Structure Statement 2017-20November 2015

Ergon Energy is committed to enabling customers with greater choice and control over how the network can be used while still delivering peace of mind through a safe, dependable electricity service…all for the best possible price.

To achieve this, we have been thinking forward, and talking to customers and stakeholders to change the way we charge for the use of the network for the better.

Why has this reform been necessary? In short, it’s because the way our customers are using the network is changing. And the way we charge has not kept up – it has, in fact, even contributed to electricity prices rising.

We embarked on our reform journey in 2012-13, very much aware we must continue to meet everyone’s needs into the future for the best possible price with fairer, more equitable pricing signals. We wanted to give our customers the opportunity to save, in a way that reduces the cost of supplying energy for everyone.

We now have a much greater appreciation of how we can structure prices so they better reflect what drives our costs as a network provider and we are reforming our pricing signals to better align with these costs.

This means real savings can now be offered when the network is not being used to its full capacity, and that we are better placed to charge appropriate, ‘cost reflective’ rates during peak periods in the summer months. It is at these times that the level of demand is more likely to drive future capital investment.

This document provides an overview of the reform journey to date and the refinements planned for 2016-17 to help us deliver better price outcomes and greater choice and control. It provides an introduction to our Tariff Structure Statement, which covers our tariffs from 2017 out to 2020.

An important thank you 1

Understanding our business 2

Our approach to network tariff reform 4

We have been listening 8

See what’s new for you 10

Have your say 15

Contents

1AN OVERVIEW OUR TARIFF STRUCTURE STATEMENT 2017–20 NOVEMBER 2015

It wasn’t that long ago that we were responding to a rapid increase in the peak demand for electricity driven by strong economic growth, coupled with the take up of air conditioning (and other appliances). In more recent times, we have seen the profile of demand on the network shift, dramatically in some areas, as a result of the economic slowdown, our customers’ focus on energy efficiency and the growing take up of solar energy systems. The latter has been largely due to a fall in the cost of solar, especially relative to electricity prices.

Going forward, we anticipate the falling costs, increasing accessibility and ongoing advancement of alternative energy supply technologies, and other customer-led solutions, will continue to drive the rate of change.

It is our challenge, as an organisation, and I think collectively as an industry, to work through these shifts in the market to unearth the real value for all of our customers.

From Ergon Energy’s perspective, one of the key enablers to delivering this value, and our services for the best possible price, is tariff reform. As such, this has been a strategic focus of ours for a number of years now.

In this space we have the primary responsibility for network tariffs, which ultimately feed into a customer’s retail bill. Our network tariffs contribute to around half of a typical residential electricity bill.

In late 2012, and in response to the significant changes highlighted above, we made a decision to move steadily along a network tariff reform path. While we knew we had to minimise the impact of the reforms on individual customers, we also knew we needed to act as soon as possible to avoid electricity prices rising unnecessarily into the future. It was becoming clear that incorrect pricing signals and inherent cross-subsidies in our legacy tariff structures were contributing to electricity price rises. This is the pricing dynamic that we are now addressing as part of our reform pathway.

Since commencing our journey, the Australian Energy Market Commission has introduced rules requiring all network businesses to move to cost reflective prices. Our reform pathway is very much aligned to these new rules.

Addressing affordability is a core part of our strategy and commitment to our customers. This is seeing us focus on the efficiency of our services, and on enabling an effective market that empowers our customers. Over the next five years our expenditure overall is forecast to be more than a billion dollars less than the last five years – reducing what customers pay for the use of our network.

This provides an ideal environment for network tariff reform. From a market perspective, our proposed tariff reforms also provide opportunity for a longer term focus, allowing us to develop a platform that supports the interaction between the various parties seeking to use our network.

Importantly, I would like to sincerely thank all who have participated actively in our reform program – especially those that have been part of the conversation from the beginning. Your contribution has been vital to developing the best tariff structures possible to take regional Queensland’s electricity supply arrangements into the future.

For others who are just considering this material, I appreciate that it is a complex topic, but I would encourage you to stay involved with the process now underway, as the Australian Energy Regulator reviews our Tariff Structure Statement and seeks further stakeholder feedback.

Thank you for your continuing support.

Ian McLeod

Chief Executive

An important thank you

The electricity industry, in Queensland as well as across the country, is undergoing rapid, unprecedented upheaval with significant changes to the way our customers are using the electricity network.

Addressing electricity affordability is a core part of our strategy and commitment to customers.

2 AN OVERVIEW OUR TARIFF STRUCTURE STATEMENT 2017–20 NOVEMBER 2015

OUR ROLE AND PRICING REGULATION

Ergon Energy plays a role in each of the four elements of the electricity supply chain. We are both a distributor and a retailer, and we play relatively minor roles in generation and transmission.

This document is about how we charge for the distribution side of our business (not retail pricing)1. It is about the approach we have adopted towards network tariff reform, and what is new in the tariff choices we are offering our different customer or user groups.

The revenue we are allowed to charge customers for the use of the network overall is regulated under a ‘cap’ by the Australian Energy Regulator (AER). This cap has now been set for the five-year period to 2020.

OUR NETWORK

With only 7% of the customers across the National Electricity Market, but covering 44% of the total geographic area, the unique nature of Ergon Energy’s network makes the cost of providing services in our network area high, compared to the average network service provider.

Over two thirds of our customers are located outside Queensland’s urban centres – around 70% of our electricity network is considered rural with large distances between communities. The geographical dispersion of our customers, the size of the area we serve and the radial nature of our network mean that Ergon Energy is an outlier to most network businesses in Australia, if not the world.

Our network has been designed, and continues to evolve, to best meet the needs of our customers. It has both a high proportion of costly sub-transmission assets, compared to our urban counterparts, and one of the largest limited capacity, radial Single Wire Earth Return (SWER) networks in the world.

Our region’s exposure to volatile and harsh climatic conditions also requires a significant emergency response capability.

Understanding our business

Ergon Energy supplies electricity across more than one million square kilometres – across 97% of the state of Queensland – from the expanding coastal population centres to the most remote parts of outback regional Queensland and the Torres Strait.

Our network tariffs cover the costs of building and maintaining the ‘poles and wires’ across this expanse which in turn keeps the ‘lights on’ for our customers and powers the Queensland economy.

GENERATIONA range of energy sources (coal-fired, biomass, gas, hydro and wind) is used by private and government-owned operators to generate Queensland’s electricity.

TRANSMISSION The transmission network consists of lines that carry electricity from the point of generation over long distances and feed it into the distribution network.

DISTRIBUTION Distribution lines then carry electricity directly to Queensland’s homes and businesses.

RETAIL Electricity is purchased through the retailers, who also provide a range of other customer services.

ELECTRICITY SUPPLY CHAIN

TORRES STRAITBamaga

Lockhart River

Pormpuraaw

Aurukun

Kowanyama

Normanton

Cairns

Cooktown

Townsville

Mackay

Coen

Gununa, Mornington Is.

BurketownDoomadgee

Camooweal

Boulia

Bedourie Jundah

WindorahBirdsville

Mapoon

Georgetown

Richmond

Charters Towers

Pinnacle

Moranbah

Rockhampton

ClermontMiddlemount

Emerald

Springsure BiloelaMontoGin Gin Childers

BiggendenMundubbera

WandoanRoma

Quilpie

Blackall

BarcaldineLongreach

Winton

KilkivanMurgonKingaroy

Toowoomba

MillmerranWarwick

Stanthorpe

Chinchilla

St GeorgeCunnamulla

Charleville

Tara Dalby

MouraTheodore

MareebaAtherton

Ravenshoe

Mossman

InnisfailTully

Ingham

Home HillBowen

Proserpine

Sarina

Yeppoon

Blackwater Gladstone

Gayndah

Yarraman

Miriam ValeBundaberg

Hervey Bay

Mt Isa Cloncurry

Julia Creek

Hughenden

Palm Island

Napranum

Maryborough

Brisbane

Key Administration Centre

Distribution Network (regulated by the AER)

Depot/Workshop

Isolated Supply

Barcaldine Power Station

1 Excluding areas supplied from isolated (remote) generation.


Each year the Queensland Competition Authority (QCA) determines regulated retail electricity tariffs, the ‘notified prices’ that Ergon Energy Retail charges customers in regional Queensland.

The impact of our network tariffs on the regulated retail prices varies for each customer group. For the majority of customers, the retail ‘bill’ is subsidised by the Queensland Government in line with the Uniform Tariff Policy. This policy, and the associated Community Service Obligation payment made by the government to Ergon Energy Retail, ensures that Queenslanders generally have access to the same cost of electricity, regardless of where they live.

For residential and small to medium business customers, who use less than 100MWh of electricity a year, the Uniform Tariff Policy generally requires

regulated retail tariffs to reflect network charges in Queensland’s south-east. Our reforms are, however, helping to introduce greater choice for this group.

For businesses using more than 100MWh of electricity a year, Ergon Energy’s network tariffs are typically passed on through the regulated retail prices. However, there are exceptions, including some of our recent reforms.

The impact of Ergon Energy’s network tariffs also depends on whether a customer is on the Queensland Government’s regulated retail tariffs or on a contract with a competitive retailer. For customers on a ‘market contract’, their retailer will determine if or how our rates or tariff structures are passed through.

OUR CUSTOMERS

Ergon Energy provides electricity to around 1.5 million people – through over 730,000 customer connections. Around 725,000 of these use less than 100MWh (megawatt hours) of electricity a year – 86% of these are residential customers and 14% are small to medium businesses.

Our remaining customers are regional Queensland’s largest commercial and industrial operations. We have around 8,600 large business customers, using between 100MWh and 4GWh (gigawatt hours) a year, operating throughout regional Queensland.

The next largest group is the 200-odd customers using over 4GWh of electricity a year – requiring an ‘extra-large’ level of network capacity and in many cases a dedicated connection. Our largest energy users, utilising over 40GWh of electricity a year, are the extra, extra large coal-mining related operations linked to the Bowen, Surat and Galilee basins. Although only a small number of customers, they make up around 30% of the total energy load on our network.

100MWh a year

Small to medium businesses and residential customers

100MWh4GWh a year

Large commercial, industrial and agricultural operators

4GWh40GWh a year

Ports, hospitals and other very large facilities

40GWh a year

The biggest coal mining and rail operations

STANDARD ASSET CUSTOMERS – SMALL

STANDARD ASSET CUSTOMERS – LARGE

CONNECTION ASSET CUSTOMERS

INDIVIDUALLY CALCULATED CUSTOMERS

Electricity GenerationWholesale Electricity Costs

R = RETAIL

N = NETWORK

21% 45%8%3% 23%

Transmission and DistributionPoles and Wires

Solar BonusFeed-in Tari Scheme

Green SchemesRenewable Energy Target

RetailMetering, Billing and Customer Service

THE RETAIL PRICE OF ELECTRICITY

Percentages based on QCA’s publication of 2015-16 residential electricity prices.

For a typical household, between $2 and $3 a day of the bill goes to network charges. In addition to recovering our distribution costs, network charges include transmission costs from Powerlink and recovery of payments made under the Solar Bonus Scheme.

S L XL XXL


OUR JOURNEY

When we embarked upon our network tariff reform journey three years ago we were acutely aware of the need to address the ongoing affordability of our electricity distribution services. While we were working hard to ensure our network could meet the changing needs of our customers, the way we charged for the use of the network had not kept pace. Our objective was to ensure we could continue to meet everyone’s needs into the future for the best possible price and to deliver fairer, more equitable pricing signals.

With the help of external expertise and customer and stakeholder input, we developed specific reform pathways for each of our customer groups, with the first steps of reform undertaken in July 2014. A number of guiding themes aided our consideration and assessment of the options available to us.

Since then, to best manage any customer impacts and implementation issues, we have been moving gradually along these pathways, with some refinement, toward more efficient pricing structures.

With the introduction of the Tariff Structure Statement, we have established 2016-17 as our foundation year, with all of our major reforms to be in place for the beginning of this pricing year. From there, we plan to keep our tariff structures relatively stable out to 2020 to build a greater understanding of the new tariff options and promoting their benefits.

OUR REFORM JOURNEY HAS PLACED US WELL FOR IMPLEMENTATION

THE OPPORTUNITY TO SAVE

Our reforms have been aimed at giving our customers the opportunity to save, by looking at what drives our costs and aligning our pricing signals appropriately.

We have focused on changes that allow us to offer real savings when the network is not being used to its full capacity (around 90% of the time), and to charge cost reflective rates when, during the summer months, the level of demand across the network is likely to drive future capital investment. We are confident that this will ultimately, in the longer term, take the pressure off prices for everyone.

The other important consideration in our approach has been the need to create value in the network for those seeking to adopt new and emerging energy-related technologies. Our reforms allow these innovations to be accommodated where it makes sense, and deliver real value to those investing in their own solutions, like solar and battery storage combinations, without being cross subsidised by other network users. They also support technologies, like electric vehicles, that could significantly boost the utilisation of the network and reduce the cost of supplying electricity for all.

Our approach to network tariff reform

The tariff themes guiding our reforms and the foundation for tariffs in 2017-20, include:

• reducing our over-reliance on volume (kilowatt hours [kWh]) charges

• implementing time-of-use as a critical dimension of cost reflective tariffs

• aligning demand charges to the incremental network costs associated with the demand or the Long Run Marginal Costs (LRMC)

• rebalancing between demand (aligned with LRMC outcomes) and fixed charges

• using kVA (kilovolt amperes) more widely as the unit of measure in our network tariffs.

2012 2016–17 2020

Developed network tariff strategy reform pathway

Set foundation reforms in place

Build understanding and promote new options in Tariff Structure Statement 2017-20


MANAGING THE CUSTOMER IMPACT

Understanding and managing the individual customer impacts has been a priority in our reform agenda.

Having made many of our reforms already we can now implement our new tariff options in the current regulatory control period in an environment where our charges overall have been brought down.

In addition, we have invested significant effort to understand the short-term and long-term impacts of moving to the different tariff structures available. To minimise customer impacts in the short-term, where necessary we have adjusted rates to manage the level of potential impact on individual customers. For the longer term, our analysis of the different tariff structures has allowed us to target options that best minimise the overall community cost of energy delivered.

We have also introduced our new cost reflective demand-based tariffs as voluntary tariffs, allowing customers to choose to adopt them or remain on their existing tariff.

The pace we have set for our journey has been all about balancing the short-term year on year impact on individual customers and the longer term community cost if the reforms are not implemented. Modelling commissioned as part of our tariff development work has shown that, if we don’t act, customers could be paying an additional one billion dollars over the coming decade to use our network. This is a direct result of the cross subsidies that are being created by our current tariffs through the take up of technology choices that do not contribute significantly to reducing our cost to serve via the network.

This cost of inaction (not changing our tariff structures) could, in fact, be even greater, as our current pricing structures don’t incentivise other smarter ‘technology’ investments that customers could make, which would maximise the use of the network and help us reduce costs overall. In fact, legacy pricing structures create the wrong customer response, and this distorted response means that some customers pay more than what they should be for using the network while other customers are paying less. We have a window of opportunity now to avoid this, for the good of all our network users.

It is important to note that network tariff reform does not change the money we are allowed to collect overall – the reforms are revenue neutral. That is, at least in the short term, Ergon Energy’s total revenue from customer bills neither increases nor decreases as a result of tariff changes.

NE

TW

OR

K P

RIC

E

GR

OW

TH

2015

0%

45%40%

30%25%

35%

20%15%10%5%

2018

2017

2016

2021

2020

2019

2022

2023

2024

2025

Current Tarri� Maximum demand CPI Growth

The wide-scale solar uptake under current tariffs, as well as the under investment in solutions that support peak demand management, is seeing us lose revenue without the corresponding reduction in network augmentation costs. This could lead to customers paying an additional one billion dollars more than they otherwise would over the coming decade if more efficient tariffs were implemented.

THE POTENTIAL COST OF INACTION

Over the next five years our expenditure overall is forecast to be more than a billion dollars less than the last five years, reducing what customers pay for the use of our network.

BIL

LIO

N $

NO

MIN

AL

2014

-15

Distribution

2015

-16

2016

-17

2017

-18

2018

-19

2019

-20

0

0.5

1.0

1.5

2.0

2500

TransmissionSolar Bonus Scheme

FO

UN

DA

TIO

N Y

EA

R

Tari� Structure Statement

The money Ergon Energy collects for the use of the network (under our revenue cap) has fallen, in line with our efficiency drive and a range of other factors, including improved financing costs. This has provided an ideal environment to manage the implementation of our tariff reform agenda.

BRINGING WHAT WE CHARGE DOWN


ASSISTING IN THE TRANSITION TO DEMAND-BASED TARIFFS

We appreciate that our customers need information, education and advice to give them the confidence to take up the new tariff choices that are being made available. We do not expect this to happen overnight. Our experience is that some customers have difficulty in understanding their retail bill now, let alone some of the complicated arrangements that have created a disconnect between the network charges we apply and the final rates they see on their retail bill.

To assist in the transition to the new demand-based tariffs we are offering, we are planning to enlist customers from different representative segments to participate in a pilot in late 2016. The pilot will aim to help everyone – ourselves, our customers’ retailers, consumer representatives, and most importantly customers themselves – to better understand the opportunities in the tariffs. It will provide insights into the experience of customers on the tariff, and generate real data on the price outcomes for different customers. It will also help us test how to communicate how the tariff works in simple understandable terms, and provide a platform to encourage their adoption with practical case studies to illustrate the many ways individual customers could benefit.

In order for our customers to access demand-based tariffs, metering upgrades are likely to be required. To support this Ergon Energy is continuing to work with policy-makers, regulators and suppliers of advanced electronic meters to find a cost-effective implementation path.

WHAT ARE COST REFLECTIVE PRICES?

‘Cost reflective’ tariffs are simply charges that are better aligned with the underlying cost of supplying electricity. This means charging appropriately when the level of demand across the network is likely to drive future capital investment – Ergon Energy builds new infrastructure largely in response to demand during the summer months.

This is seeing us align the demand-related components of our charges to the incremental costs or the additional future network costs associated with demand in the summer peak window – what is called our Long Run Marginal Costs (LRMC).

In recent times we have reviewed our LRMC in line with changes to the National Electricity Rules by the Australian Energy Market Commission (AEMC).

Our cost reflective tariff options, like our general tariffs, have different rates across our three pricing zones – East, West and Mount Isa. This reflects the different costs of supplying these areas.

However, because the Uniform Tariff Policy ensures that Queenslanders generally have access to the same cost of electricity, regardless of where they live, the regulated retail tariffs are largely reflective of the network costs in south-east Queensland.


In areas of the network supplying predominantly business customers, analysis shows that peak demand consistently occurs during summer weekdays, from 10.00 am to 8.00pm. On the other hand, for the parts of our network supplying predominantly households, peak demand is later in the day, from 3.00pm to 9.30pm each summer day.

Results obviously differ across our network area but our analysis reveals common trends. For residential areas of the network there is minimal difference between the days of the week. The load profile or shape for our residential areas has changed over recent years, in some areas dramatically, with the increased use of air conditioning and the take up of solar energy systems.

It should be noted that in the peak demand windows (shown in grey) the actual demand at the local network level is not as smooth as these graphs suggest – it fluctuates up and down depending on the load that comes on and off line.

Time of day

Summer weekday

Summer weekend

Non-summer weekday

Non-summer weekend

3.00pm 9.30pm

kW

De

man

d

Peak demand window for sections of the network supplying business customers

INDICATIVE BUSINESS CUSTOMER LOAD SHAPE

INDICATIVE RESIDENTIAL CUSTOMER LOAD SHAPE

WHEN AND WHERE DEMAND PEAKS ON OUR NETWORK

Summer weekday

Summer weekend

Non-summer weekday

Non-summer weekend

Time of day 10.00am 8.00pm

kW

De

man

d

Peak demand window for sections of the network supplying business customers


OUR ENGAGEMENT APPROACH

When we first began to consider our longer-term network tariff strategy, we recognised the potential for impacting our customers and other stakeholders, and acknowledged the important contribution that their insights could make towards the development of our reform pathway.

In recent times, in particular, the peak bodies and other advocacy groups who represent our customers have gained a greater capacity to represent their constituents around the detail in our proposals. With this in mind we endeavoured to make the matters under consideration across our reform agenda as transparent as possible and the information we had accessible to those segments potentially impacted.

Then throughout the process we actively sought feedback so that stakeholder concerns could be considered in our decisions – we published their responses online.

The primary stakeholder groups we engaged included consumer representatives, very large customers, retailers, regional stakeholders and interested customers, and regional Queensland’s solar installers/electrical contractors. These groups provided representation across our key customer segments (across our residential and small to very large business customers) and across our diverse service area. Our stakeholder mapping also recognised other external stakeholders like regulatory bodies and government, most notably the QCA.

Since commencing our network tariff strategy engagement process in 2013 Ergon Energy has released six key consultation papers with supporting documentation, held five dedicated consumer representative sessions and a series of open webinars. Following suggestions from stakeholders, we also developed a short video to assist consumers to understand the drivers for the reforms. This material has all been made available online. Our pricing team has also made every effort to respond to requests for further information as required.

ENGAGEMENT HAS PLAYED A KEY ROLE IN OUR JOURNEY

Stakeholder engagement along the network tariff reform journey has both helped develop the initial strategy, implement key reforms in 2014 and 2015 and refine the pathway as we moved forward, and most recently assisted with the preparation of our Tariff Structure Statement.

We have been listening

Ergon Energy would like to acknowledge the time and resources invested by a diverse range of customers and other stakeholders while participating in our engagement program for the development of our network tariff strategy. Their contribution has helped guide both the reforms progressed to date and those now detailed in our Tariff Structure Statement.

700+ customers and other stakeholders were invited to open webinars on the reforms.Over 80 formal submissions were received throughout the process – guiding our thinking.

2012–13 2014–152013–14 2015–16 2016–20

Explored network tariff options and consulted on reform pathway

Developed reforms for 2014–15 and further refined reform pathway

Initial reforms implemented, consulted on reforms for 2015–16 and again refined pathway

Implemented reforms, and consultation to refine pathway for Tariff Structure Statement

Ongoing consultation in line with Tariff Structure Statement


OUR KEY CUSTOMER INSIGHTS

Customer insights have been instrumental in forming our views on the appropriate path forward, and the tariff structures detailed in our Tariff Structure Statement.

We have been able to achieve better outcomes as a result of the contributions made by our stakeholders. A detailed listing of customer submissions and our response is provided in Appendix A of our Tariff Structure Statement.

• There is significant concern around the rise in electricity prices in recent years. This has created a tension, as network prices are a significant component of the bill, between a recognition of the need to remove the cross subsidies in tariffs that exist as early as possible and the need for more time to ensure customers are able to respond to the changes. This has led to general support for the voluntary nature of the new tariff options now being made available and the staged introduction of other reforms.

• There is a desire for a greater understanding around the customer impacts/opportunities in the new voluntary demand-based tariffs. This is seen as key to being able to educate customers appropriately and, ultimately, for them to be confident in choosing to adopt the new tariffs. It will also be important to ensuring there are adequate protections for customers.

• While there is some concern around the ability of some customers to respond to the price signals, there is a growing understanding of how the path we have been progressing along can support the best price outcome for all, over the longer term.

Over 80% of attendees in our biggest open webinar were looking for us to act, but gradually, to remove the cross subsidies that will grow under existing charging arrangements.

THE CHANNELS USED IN OUR ENGAGEMENT

• Web pages www.ergon.com.au/futurenetworktariffs

• Qualitative interviews

• Stakeholder sessions

• Our Customer Council and other Ergon Energy-led industry forums (such as agriculture)

• Open webinars

• Published consultation papers

• Talking Energy www.ergon.com.au/talkingenergy


For our small to medium business and residential customers, who use less than 100MWh of electricity each year, we have a range of network tariffs.

Inclining Block Tariffs The primary tariffs that customers in this group automatically default to are Inclining Block Tariffs (business and residential). While not reflected directly in the regulated retail tariffs that Ergon Energy Retail offers customers, Ergon Energy Network will continue to use these tariffs throughout the 2017 to 2020 period.

This tariff has a three step inclining block structure, with the rate increasing with each step up in a customer’s consumption level above a certain threshold. This tariff was introduced in 2014 as a transitional step to better reflecting network costs (compared to flat energy based tariffs) without requiring metering changes at the premises.

Time-of-use tariffs Moving forward, to be more cost reflective, the tariffs for this group of customers need to have a bigger focus on the amount of electricity used at specific times of the day, during the busiest or peak times for the network, rather than how much energy is used over the billing period.

The first step in this direction was made in July 2014 with the introduction of voluntary energy-based, seasonal time-of-use network tariff structures. To help move further along this journey, we then, in July 2015, gave customers the opportunity to access new voluntary tariffs that reward customers for using demand outside of peak times.

See what’s new for you

For each group we have a separate guide to help our customers understand our network tariffs. This section provides an overview of the detail in each guide.

2010

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2011

-12

2012

-13

2013

-14

2014

-15

2015

-16

2016

-17

2017

-18

2018

-19

2019

-20

Indicative retail bill for a customer on Notified Prices

Generation and other retail costs

Transmission, Solar Bonus Scheme and metering charges

Distribution charges

$1,000

$2,000

0

IN

DIC

ATI

VE

BIL

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IN

DIC

ATI

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BIL

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Network charges were brought down in 2015-16 and are expected to remain stable out to 2020

PLAYING OUR ROLE IN STABILISING PRICES AS A DISTRIBUTOR

This graph shows the network charges, passed on to a household’s retailer through the Inclining Block Tariff, dropping in 2015-16 and then remaining stable overall for the last four years of the regulatory control period out to 2020.

Each indicative price stack shows in nominal dollars the different charges that are allocated to an average electricity bill for a residential customer on a market retail contract. Note this indicative price path does not exactly replicate our revenue path due to assumptions in our pricing model for this tariff class.

Please note: the majority of residential customers in regional Queensland benefit from the regulated retail tariffs, which are determined by the Queensland Competition Authority. This means the actual retail bill is subsidised in line with the Queensland Government’s Uniform Tariff Policy. The historical INDICATIVE BILL in the graph shows the retail bill for a typical customer using 4,091kWh a year on these notified prices. For further information on how regulated retail tariffs are determined go to www.dews.qld.gov.au/energy-water-home/electricity/prices.

S 100MWh a year



These demand-based tariffs are our preferred options for the future. Since being introduced we have been listening to stakeholders, and working hard to refine these tariffs. This has seen us simplify the way the tariffs are calculated for 2016-17. The charges in the tariffs will now be calculated in the same way for the summer and non-summer months.

It will now be calculated throughout the year using an average of the demand a customer places on the network for the month in the relevant daily demand window. Our reforms are also continuing to gradually increase the cost reflectivity of the summer charge.

Let’s look at the components of the tariffs and how the charges are calculated.

Monthly demand charges, for both summer and non-summer, are based on an average of the demand the customer places on the network in the daily demand window.

This daily demand window is different across business and residential areas of the network. This charge is significantly lower once we move out of the three summer months (peak demand charge) to the non-summer months (off-peak demand charge).

The lower rates set in this tariff for the off-peak demand charge and also the any time energy charge means real savings for customers 90% of the time, when the network is not being used to its full capacity. There is also the benefit of no distribution fixed charge throughout the summer months.

UNDERSTANDING THE NEW VOLUNTARY DEMAND-BASED TARIFFS

Demand charges drop in the non-summer months

Summer peak demand charge ($/kW/mth)

Non-summer off-peak demand charge ($/kW/mth)Minimum 3kW demand charge

Any time energy ($/kWh)Total energy used each month

There are three charging components: a peak demand charge in the summer months; an off-peak demand charge in the non-summer months; and an any time energy (volume) charge throughout the year.

Charge only for daily demand windowBusiness: 10.00am-8.00pm weekdaysResidential: 3.00pm-9.30pm each dayTo calculate the monthly charge we use the highest four average demands recorded in these daily windows

Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov


WHAT COULD THIS LOOK LIKE AS A RETAIL OFFER?

The way our reforms could ultimately be offered to a customer, by their retailer, is where the ‘choice and control’ we have been seeking to offer as a network business becomes a reality. If you think of network tariffs as just one of the elements that an electricity retailer packages up for its customers – a ‘wholesale’ charge – then you can see a world of future possibilities that could come from our reforms.

Tools for real savings The new choices now available in the regulated retail tariffs, Tariffs 14 and 24, already reflect the structure of our seasonal, demand-based time-of-use network tariffs.

The opportunity now is for retailers to look to value-add and offer these types of tariffs with some simple tools to help small to medium businesses and households understand how they could save by considering how much electricity they use during the busiest, or peak times of day for our ‘poles and wires’ – tools like web portals or in-house monitors, or a simple app that tracks a customer’s usage. These could act a bit like the screen in your car that shows your average fuel use, or the text many of us get when we have used 50% of our mobile phone plan.

A monthly planMoving forward, our cost reflective network tariffs could even underpin a retail offering with a set ‘monthly rate’. This simple monthly ‘plan’ could be offered based on a pre-set level of demand and energy usage (a

bit like when you pick an internet ‘plan’ based on what you want to do with it… upload the odd photo or stream movies). Extra charges would only apply if the level of agreed demand or energy usage is exceeded, similar to most mobile phone plans if you are familiar with these already.

To make this offer work for customers (and energy retailers who would need to manage all of the costs that make up the bill under the flat rate) the offer could be coupled with a technology solution, like a home energy management system or another ‘set and forget’ type of technology, that helps customers to manage their electricity use within their selected ‘cap’.

Technology-energy bundle In the future our new network tariff options could go even further and support new, innovative value propositions in the marketplace for those wanting to invest or take up the energy-related technologies that

are now emerging. This could see a range of new technology-energy bundles offered by different retailers, such as solar and energy storage lease

packages, electric ‘car and charge’ combos, or deals on different demand management services that allow customers to save.

Our new tariffs allow these innovations to be supported in a way that is equitable – delivering real value to those investing in ‘energy’ solutions without other network users subsidising the solution. This is all about providing our customers with more ‘choice and control’ and greater ‘peace of mind’ around their electricity supply solutions and what they pay for them.

Controlled load tariffsReforms are also being made to our secondary controlled load tariffs. These are ideal for connecting to hot water systems and other load that can be switched off at different times during the day to help us manage the load on the network without too much inconvenience to the customer.

We currently have two of these secondary tariffs. Our Volume Night Controlled tariff, which supports the Notified Retail Tariff 31 Night rate (super economy), and our Volume Controlled tariff, which supports the Notified Retail Tariff 33 Controlled supply (economy). The first provides the greatest savings with supply made available for at least 8 hours a day, for the second this is extended to 18 hours a day. Our reforms are rebalancing the rates for these tariffs to better reflect our improved understanding of the cost associated with additional demand on the network during peak periods.

Our Tariff Structure Statement also proposes a third tariff here, the Demand Controlled tariff, which will be available in conjunction with the residential seasonal time-of-use demand tariff. This tariff has been designed to work in the future with the new PeakSmart products on the market. The technology in these products, which includes a large proportion of the air conditioning units now being sold by appliance retailers, allows the energy used by these appliances to be partially reduced during periods of peak demand, without significantly changing the way they perform. The rate for this tariff will reflect the network benefit associated with the reduced demand, and like the other tariffs where we physically control the load, reward customers appropriately.

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In short, it’s because the way our customers are using the network is changing, and the way we charge has not kept up – in fact, this has contributed to electricity prices rising.

Ergon Energy builds new infrastructure largely to keep up with demand during peak times in our ‘summer months’ – during the day for business customers and from mid-afternoon into the evening for residential customers.

We want to be able to say ‘we get you’ and give our customers the opportunity to save. By looking at what drives our costs and by aligning our pricing signals, we‘re now able to off er real savings when the network is not being used to its full capacity. We really only need to charge extra when the level of demand across the network is likely to drive costly capital investment.

Recent modelling has shown that without our tariff reform customers in regional Queensland could be

paying up to a billion dollars more than they need to in the coming decade. This is a direct result of the cross subsidies that are being created by our current tariff s through the take up of technologies that do not contribute signifi cantly to reducing our cost to serve via the network. This cost of inaction could, in fact, be even greater, as our current pricing structures also don’t incentivise other smarter ‘technology’ investments that customers could make, which would maximise the use of the network and help us reduce costs overall.

Understanding Network Tariff s A guide for small to medium businesses and residential customers that use less than 100MWh of electricity a yearNovember 2015

WHY DO WE NEED NETWORK TARIFF REFORM?


100MWh a year

Small to medium businesses and residential customers

WHAT MAKES UP THE RETAIL PRICE OF ELECTRICITY?

Network tariff sDistribution and transmission charges for the use of the network

Other costsGeneration, government renewable energy schemes and retailing services

Electricity bill The majority of customers are charged through tariff s determined by the Queensland Competition Authority

Ergon Energy is changing the way it charges for the use of its distribution network to help ensure it can continue to meet everyone’s needs into the future for the best possible price.

We embarked on our network tariff reform journey over two years ago very much aware of the need to deliver fairer and more equitable pricing signals. This process is ongoing, with the full details provided in our Tariff Structure Statement 2017-18 to 2019-20.

FOR MORE INFO ABOUT THESE TARIFFS GO TO THE ONLINE GUIDE


These are our commercial, industrial and rural industry customers who use between 100MWh and 4GWh of electricity a year – they are located throughout the distribution network. Our tariffs for this group include our general demand tariffs, for small, medium, large or high voltage, and a new seasonal time-of-use demand tariff.

The new seasonal time-of-use demand tariff, introduced for this group in July 2015, has been well received and taken up by customers. This option has come about from our work to better understand our cost drivers and make our tariffs more cost reflective. Unlike the other demand tariffs available for this group, this tariff recognises the peak demand window that occurs in the summer months.

For this group we have also reviewed the introduction of kVA tariffs. While we consider that benefits warrant extending the changes already made for our largest customers over the last two years, this will not be progressed for SAC Large customers before 2020. We will engage on this again at a later stage as we begin to develop our position on tariffs for beyond 2020.v

These customers typically consume between 4GWh and 40GWh a year – they are regional Queensland’s extra-large industrial mining, fabrication and farming operations, sugar mills, large shopping centres, hospitals, universities, correctional centres, defence force bases and large pumping stations.

While reforms for this group have lagged the other groups, they are now on a similar reform pathway as our largest customers. The first step, in July 2015, was to standardise the tariffs available with a connection unit charge based on the assets dedicated to them.

The other move was to use kVA (kilovolt amperes) as the basic unit for charging demand and capacity charges. The next step here, in 2016-17, is the introduction of an excess reactive power or kVAr (kilovolt amperes reactive) charge. This encourages customers to improve their sites’ power factor and reduce the network capacity they require.

Last year we also introduced a seasonal, time-of-use demand tariff for this group. To progress with this tariff, after further analysis, modifications are being made in a number of areas in 2016-17. In summary, the summer peak demand charge is no longer based on the greater of the authorised demand and monthly maximum demand during the peak period, and the capacity charge is no longer charged on the greater of a monthly floor and the monthly maximum demand during the non-summer months.

These changes will make it more attractive for customers and provide a greater incentive for them to respond to the pricing signal in the summer peak demand window.

L100MWh4GWh a year


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For some time now we have been talking about a major shift in the way our customers use our electricity network.

We’ve worked hard to ensure our network can meet the changing needs of our customers, but the way we price electricity has not kept pace with these changes, and this has partially contributed to electricity prices rising. We want to ensure we can continue to meet everyone’s needs into the future, for the best possible price. But this can’t happen without embracing some change.

By looking at what drives our costs and aligning this to our pricing signals, we‘re now able to off er the option for customers to access tariff s that provide real savings when the network is not being used to its full capacity. Off setting these reductions are higher charges when the level of demand for electricity across the network is likely to drive costly capital investment.

As well as seeking tariff structures that off er value to customers and Ergon Energy, there is a regulatory

requirement to implement more cost-refl ective tariff s. For our large commercial, industrial and agricultural customers that use more than 100MWh (megawatt hours) of electricity a year – known as Standard Asset Customers – Large (SAC-Large) customers – this is seeing us continue the reforms that commenced in 2014.

These requirements are detailed in our Tariff Structure Statement, published in November 2015, which covers our tariff s from 2017 out to 2020. This document provides accessible and comprehensive information on our network tariff s and how they are expected to change in the future.

Understanding Network Tariff A guide for large commercial, industrial and agricultural operators that use more than 100MWh of electricity a yearNovember 2015





100MWh �� 4GWh a year

Large commerical, industrial and agriculture operators


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As well as seeking tariff structures that off er value to customers and Ergon Energy, there is a regulatory requirement to implement more cost-refl ective tariff s.

For our Connected Asset Customers (CAC), who use between 4GWh and 40GWh (gigawatt hours) of electricity per year, this is seeing us continue along the tariff reform pathway proposed in 2014.

These requirements are detailed in our Tariff Structure Statement, published in November 2015, which covers our tariff s from 2017 out to 2020. This document provides accessible and comprehensive information on our network tariff s and how they are expected to change in the future.

Understanding Network Tariff sA guide for large mining and rail operations that use more than 40GWh of electricity a yearNovember 2015




CONNECTION ASSET CUSTOMERS?

4GWh40GWh a year

• Ports, hospitals and other very large facilities


XL 4GWh40GWh a year

CONNECTION ASSET CUSTOMERS

Customer group Demand charges in kVA Excess kVAr charge

Individually Calculated Customers Introduced in 2014 Introduced in 2015

Connection Asset Customers Introduced in 2015 To be introduced in 2016

Standard Asset Customers – Large To be reviewed at a later date for post-2020


Our largest customers are the state’s major coal mining customers, as well as customers involved in other types of mining, transport (rail) and pumping. These customers use more than 40GWh of electricity each year.

The rates for these customers are calculated on an individual basis to reflect the specific site’s load requirement.

In 2014, Ergon Energy introduced kVA charging for this user group. We then introduced, in 2015, an additional charge against the excess reactive power or kVAr drawn from the network that exceeds the quantity that the customer would draw operating at their authorised demand with a compliant power factor.

Due to the demand on the network that comes from these customers, their premises’ power factor is especially important, as a distribution system must be designed to supply the actual power required. A low power factor means the actual power delivered will be unnecessarily high.

As the reforms to date have brought these tariffs in line with the principles of cost reflective pricing, we have not identified further reforms for 2016-17. We do, however, see an opportunity in the future to improve the alignment between the signal a customer receives for exceeding their authorised demand and the LRMC. This will require further customer engagement to determine the appropriate timing for any changes.

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As well as seeking tariff structures that off er value to customers and Ergon Energy, there is a regulatory requirement to implement more cost-refl ective tariff s.

For our largest customers, our Individually Calculated Customers that use more than 40GWh (gigawatt hours) of electricity a year – the large coal mines, rail operations and large pumping facilities – this is seeing us continue along the tariff reform pathway that we commenced in 2014.

These requirements are detailed in our Tariff Structure Statement, published in November 2015, which covers our tariff s from 2017 out to 2020. This document provides accessible and comprehensive information on our network tariff s and how they are expected to change in the future

Understanding Network Tariff s A guide for very large mining and rail operations that use more than 40GWh of electricity a yearNovember 2015





4GWh 40GWh a year • The biggest coal mining and rail operations


XXL40GWh a year



Have your say

This overview is an introduction to Ergon Energy’s Tariff Structure Statement. This full statement explains in detail Ergon Energy’s methodology for determining tariff structures and allocating network costs over the period to 2020.

Our network tariff reform strategy has been informed by an extensive engagement program. We trust we have shown we are listening, and provided you with a better understanding of how our network tariffs are structured and charged.

In November 2014, the AEMC introduced rules requiring network businesses to set prices that reflect the efficient cost of providing network services to individual consumers, as well as new processes and timeframes for setting network prices. This overview, the guides for each user group and the Tariff Structure Statement are intended to enable an assessment as to whether we have met our obligations under the National Electricity Rules.

The AER will be holding a public forum in the coming months and inviting submissions on our reform path. After considering our documentation, along with stakeholder submissions, the AER will publish a draft decision on our tariff proposals (scheduled for July 2016) for stakeholder comment. They will then make a final decision before the end of January 2017, which will apply to tariffs from July 2017.

You can provide feedback on our reforms directly to us by emailing [email protected]

Or you can submit your feedback to the AER. For details on how to do this go to: www.aer.gov.au

For further information go to: www.ergon.com.au/futurenetworktariffs

Ergon Energy Corporation Limited ABN 50 087 646 062

ergon.com.au

Documents

Australian Energy Regulator - An Overview November 2015 Energy- Tariff... · To achieve this, we have been thinking forward, ... Ergon Energy supplies electricity across more than