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Choosing the power price you pay: voluntary time-of-use tariffs

Who’ll switch on to time-of-use tariffs now we have the choice? 55Laney69/Flickr

Choosing the power price you pay: voluntary time-of-use tariffs

Who’ll switch on to time-of-use tariffs now we have the choice? 55Laney69/Flickr

In Victoria, households now have the option to take up time of use tariffs - if they do, they’ll pay more for electricity during peak times, and less off-peak. Taking up the tariffs will be voluntary and households who find they are unsuitable will be able to revert back to flat tariffs. But who will really benefit?

Heavy peak use of electricity - particularly of air-conditioners in summers - is a major factor in power companies building new infrastructure. They want to make sure electricity is available at the busiest times, even if those are rare. And building new infrastructure is a major factor in pushing up power prices.

Time of use tariffs encourage consumers to use less electricity at peak times and to shift some of their peak time usage to off-peak periods. This should help to reduce costs in the electricity system.

Letting consumers choose time of use tariffs or other forms of flexible pricing (such as paying high prices for short periods on very hot days) – rather than making everyone pay for electricity in this way - sounds very good for consumers.

But if one assumes rational consumer behaviour, only those likely to benefit will sign up. Consumers who think they can reduce or shift demand can sign up and do so, reducing peak demand overall. But customers with little peak demand now can also take advantage by signing up, then doing nothing: their power bills will also drop. In both cases the consumer will benefit, but the second consumer will do nothing to reduce peak demand. (Although of course, one may consider it right to reward them for being off-peak in the first place.)

A more important concern is people with large peaky demand (such as those in large properties who use a lot of air-conditioning). For them, it makes sense to stay on flat tariffs to avoid time of use charges. This could also be a particular problem with if we see a lot of uptake of electric vehicles. We might expect the most popular charging time to be when people get home from work between 5-6pm – right in the middle of the peak period.

What will happen to the prices charged to households who remain on flat tariffs? If the customers remaining on them tend to have more peaky demand, the tariffs should rise and people who stay on them might find themselves paying more.

If time of use tariffs were enforced for everyone, those with peaky use would definitely have an incentive to reduce or shift to off-peak times. But this would create winners and losers.

Those who lose would include people who find it difficult to shift their demand to off-peak times – and some of these may be vulnerable or on low incomes. In parts of California and in the past in Victoria, the customer backlash against these impacts led to cost-reflective pricing being halted.

There are many reasons why a voluntary approach is a good idea. Both customers and retailers need to learn more about the impacts of flexible pricing.

Retailers may also want to test out a range of offers to see which suit different customers. This could include critical peak tariffs, where customers pay high prices for very short periods of very high use.

Or they might want to offer customers incentives to sign up to have some electricity use controlled automatically. People with electric cars could sign up to have them charged automatically at some time overnight (off-peak) for a lower rate.

Changes to retailers’ underlying incentives may make flexible pricing more typical in the future.

Wholesale (power generation) costs vary by time of day (being higher when there is more demand), but with flat tariffs these variations are not passed through to customers. Smart meters mean retailers will be able to match wholesale costs to particular households’ demand profiles.

For example, customers might be offered low prices at times of high wind-power output to encourage them to use appliances at those times (there is a trial in the UK of a “wind twinning” tariff where customers are told the day before when wind output will be high). Prices would have to vary more dynamically in response to wholesale price changes, rather than static time of use tariffs (where prices remain the same in each time band every day).

Network charges to some industrial customers already vary by time of day to reflect the costs of building networks to service peak demand. If this was extended to household customers, retailers may have more incentive to offer time of use tariffs to more customers. The Australian Energy Markets Commission (AEMC) has proposed that network charges should be time-varying in the future, particularly for larger users.

Flexible pricing may become more widespread in the future, but it is likely that retailers will develop different approaches rather cautiously in the short term to test customer reactions and the impacts on costs.