In December 2014, the AEMC introduced changes to the National Electricity Rules to require distributors to make their tariffs more cost reflective. These Rules require each distributor to provide retailers, aggregators and other third party providers with clear signals for the cost of their consumers’ use of the distribution network. Retailers are the focus of network tariffs as they are the interface with consumers and package them with other costs (e.g. wholesale energy) in their service offerings.
Initially network tariff reform was primarily focused on signalling the cost of consumption during peak periods as historically it has been when many people use the network at the same time that drives network investment. Tariff reform encourages more efficient use of networks to reduce the need for additional network investment and reduce the amount of network infrastructure that needs to be maintained in the long run. This leads to lower network costs for all customers. More recently, an important new focus for tariff reform is sending price signals to efficiently integrate distributed energy resources (DER) such as solar PV, batteries and electric vehicles into the grid.
The Rules require distributors to propose strategies to progress network tariff reform each regulatory period to the AER for approval in a tariff structure statement (TSS). Distributors have to consider the network’s circumstances, the expected impact on consumers within their network, and their ability to respond, when outlining the strategy for each regulatory period. We also expect distributors to outline how they will approach trialling more complex, innovative trials in their TSS and explain how the learning from previous trials was used to inform their strategy.
The AER has been assessing TSS proposals since late 2015. The first round of TSS reforms took effect for all distributors in the National Electricity Market in 2017. Each year since, we have been reviewing annual pricing proposals to ensure distribution networks’ actions match their approved plans. We have also been supporting conversations with distributors, consumer groups, and other key stakeholders on the purpose of these reforms and the longer term vision for network tariff reform.
Tariff Structure Statements (TSS) are the primary means by which distributors signal how they will progress network tariff reform during each five year regulatory period.
Following the rule changes, distributors were required to produce initial TSS proposals outlining how they proposed to recover their regulated revenue from 2017 until the end of their (then) current regulatory period for the AER’s approval. These were published under the Pricing Proposals & Tariffs section of our website. Since then, distributors have been required to submit their TSS proposals for our assessment and approval as part of their distribution determination regulatory proposal every five years. These proposals are published and assessed with the other components of their regulatory proposal, under the Determinations & Access Arrangements section of our website.
To balance efficiency considerations and the customer impact principles, the AER is using an iterative approach to TSS assessments, with measured but consistent progress across multiple five year regulatory periods. The pace of progress is informed by customer preferences and expected customer impacts, as well as the smart meter roll out. This means that the desired approach to tariff reform evolves as new technologies emerge, consumer and retailer understanding develops, and new service models arise.
For example, the change from opt-in to opt-out assignment policies between the first and second round of TSS will increase the pace of this reform. The following line graph shows the percentage of residential customers expected to be assigned to, and have their retailer charged, cost reflective network tariffs in each distribution network during the second round of TSS. The graph shows a steady increase in assignment for all networks over their five year regulatory periods reaching between 30% and 50% of customers on cost reflective network tariffs. The exception is Energex which will only reach 22%, however this data reflects Energex’s initial TSS proposal. We will update the Queensland distributors’ data to reflect their recent revised TSS proposals when this data is available. As discussed above, the residential customers will not face these tariffs directly, instead their retailers will package the network tariffs with other costs into their retail price offer.
In communicating our position on distributors’ proposed TSS for the second round, the AER has developed four appendices outlining the principles and analysis which informed our position. For example, see the draft decision for SA Power Networks’ 2020-25 TSS and the draft decision for Endeavour Energy’s 2019-24 TSS.
- Appendix A discusses the AER’s research on retail and network characteristics that determine the context in which the distributor is operating.
- Appendix B outlines the AER’s views on network tariff design and assignment policy.
- Appendix C discusses the AER’s view on estimating long run marginal cost to signal congestion during peak periods.
- Appendix D provides the AER’s assessment of whether the distributor’s assignment policy complies with the requirements under the Rules.
Once a TSS is approved, distributors are required to submit an annual pricing proposal for that year providing the actual tariff levels for tariff parameters and identifying variations in tariff levels from the indicative rates submitted with its TSS. The tariff structures in an annual pricing proposal must match the tariff structures approved in the distributor’s TSS.
Distribution network tariffs are focused at the retailer and the final impact on retail customers is determined by how the retailer packages network tariffs into their retail offer.
To help inform our understanding of how retailers are currently responding to more cost reflective network tariffs, AER staff undertook a series of interviews with large retailers, new entrants, and other service providers. A summary of this engagement is provided below.
AER staff were also interested in opportunities presented by the emerging 'prices for devices' retail product where a retailer (or third party) manages the customers' smart devices to respond to price signals and charges a simple, discounted retail structure. So we commissioned a report from Baringa on this topic. The report and a summary of staff views are provided below.
Ultimately the success of tariff reform will be determined by how well networks and retailers work together. To support innovation in this area the Rules allow for trials to be undertaken as sub-threshold tariffs (NER cl. 6.18.1C). Below is some guidance from AER staff on how these trials could be approached.
If you would like further information on network tariff reform and related work please email AERInquiry@aer.gov.au