Australian households have traditionally faced a simple electricity pricing structure, with basic peak and off peak rates. However, as the costs involved in providing consumers with electricity vary through the day, electricity companies and regulators have pushed for further tiers of rates under ‘time of use’ (ToU) pricing arrangements. They hope this would “encourage customers to reduce or move their consumption to times when the network is less congested.”
In theory, customers would avoid the higher prices and use electricity more consistently through the day, reducing peak loads on networks. By reducing peak loads, less investment in the system is required and “reduced network investment will mean lower prices for customers”.
Unfortunately, despite this theoretical benefit, ToU pricing is unlikely to change consumption patterns and will result in significantly higher electricity costs for households.
The responsiveness of customers’ electricity use to a price change is known in economic theory as the (own) price elasticity of demand. For example, if a 10% increase in the price of peak electricity is found to lead to a 1% reduction in the use of peak power the elasticity is -.1.
Australian electricity companies claim that demand for peak electricity is elastic – ie that consumers make relatively large changes in consumption in response to price changes. They estimate the elasticity at between -0.1 and -0.3 in the short term and from -0.6 to beyond -1, in the long term. In other words, they claim that consumers can almost offset entirely the effect of a peak price increase under ToU by reducing peak demand.
However, analysis of data on the National Electricity Market (NEM) shows that demand for electricity in Australia is likely to be very inelastic, with estimates over a decade of between -.06 and -.137. This suggests consumers have little ability to change consumption and avoid higher prices.
Based on ToU price offers from a major retailer and the electricity consumption of average NSW 1-person and 4-person households, this paper estimates changes to annual electricity bills.