Briefing paper

The electricity market in Australia is undergoing an unprecedented transformation. The traditional model of one-way flows from large remote generators to consumers is changing. The past decade has seen a doubling of electricity prices. A million small customers now have solar PV. More change is coming, as new technologies and new business models unlock new demand for customer generation and energy storage. Electricity consumption from the grid, once thought to have an inevitably upward trajectory, has been going down for more than five years. If grid defection becomes a reality, it could precipitate an untenable situation for network operators, where rising prices push customers to reduce consumption or even disconnect from the grid, which increases prices and further drives down consumption. Those customers who remain grid-connected face higher and higher prices as they pay for legacy infrastructure, built to serve a larger customer base and meet now out-dated demand forecasts.

Reducing network charges for local energy is a proactive approach to keeping networks competitive and managing the transition to an electricity market with high contributions from local energy. Restructuring network charges to recognise the value of local energy and the actual proportion of network utilised reduces the incentive to maximise ‘behind the meter’ generation or actually disconnect from the grid. Provided price signals reward technology and behaviour that flattens load or decreases peaks, local energy will benefit network operators and decrease the need for additional network infrastructure in the long term. Avoiding grid defection provides benefits to electricity consumers (prices remain lower), local generators (networks can provide regulation and back-up services more cheaply than off-grid solutions), and network operators (their customer and revenue base is maintained, and the long term need for augmentation is lower).

Two alternative frameworks are outlined to value local energy. The first framework is the local generation credit. The credit is paid according to how and when a generator exports and is unrelated to whether a local customer is identified. The second framework is the ‘virtual private wire’. The calculation of the credit is only carried out on the portion of electricity exports that are used by local customers. The export is ‘netted off’ at the customer’s site on a time-ofuse basis, and the amount used at the customer’s site forms the basis for the calculations.

Two methodologies are outlined, a ‘volume-based’ method based on the calculation method in the UK, and a ‘mirror tariff’ method that uses the existing network tariff of the generator or their customer(s). Both methodologies take into account avoided network costs and potential network benefit. Both should decrease cross-subsidies between consumers and should assist network operators to future-proof their business model.

The City of Sydney, in collaboration with other interested organisations, is planning to submit a rule change request to the Australian Energy Market Commission (AEMC) on reduced network charges for local energy in the near future. The City of Sydney is seeking views on the frameworks and methods contained in this report, through a consultation process in November 2014.

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