To get cheaper electricity, charge a lot more during peak periods

While the Newman Government’s review into electricity prices announced yesterday is welcome, I suspect any savings it will identify through reduced duplication will be minor compared with the savings that are possible through discouraging electricity use during peak times through time-of-use pricing. I’m sure the review team, which includes top regulatory economist Matt Rennie, is aware of this, but I’m unsure if the Minister has been advised of this and knows what the Government has got itself in for. The Courier-Mail reports (Three-man Newman Government razor gang tasked with slashing power costs for Queenslanders):

Energy Minister Mark McArdle said the panel was the next stage of the Government’s plan to cut power bills, after freezing the standard domestic tariff. Its job would be to “drill down into the price drivers of electricity and identify long-term sustainable reforms to deliver ongoing savings”.

“Everything from executive numbers down to numbers of wires and power poles will be looked at to improve delivery and tackle rising consumer costs,” Mr McArdle said.

“Corporate structures, staffing, everything that drives prices will come under the microscope of the independent watchdog.”

But the big driver of rising electricity prices is the peak demand that occurs between 5-7pm when Queenslanders come home from work, switch on the plasma TV, cook dinner and turn on the air-conditioner on hot summer days. Meeting rising peak demand means the energy distributors Energex and Ergon need to invest a lot in maintaining and upgrading the electricity network and these costs are passed on to consumers.

Hence any long-term plan to limit electricity price rises needs to consider time-of-use pricing in a serious way (i.e. charging a lot more for electricity use around 6pm), so people are encouraged to use less power during peak periods and to shift their usage to non-peak periods. Unfortunately, Queensland’s limited trial of time-of-use pricing (scheduled to begin this year) received a setback with the Government’s electricity tariff freeze earlier in the year, as reported in the Courier-Mail in April (Power price cap cuts off new-age meters).

I hope the review team comes back with some strong recommendations relating to time-of-use pricing that encourage the Government to adopt this important (though potentially politically challenging) reform.

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