Network deferral is a significant driver of the overall demand-side benefits.
CRA has calculated the potential extent of network deferral on the basis of valuing each kVA of demand reduction (at between $130 to $165 per kVA, depending on the jurisdiction). CRA has then applied a 25 per cent reduction to this quantum to reflect its view of the uncertainty surrounding the extent of network deferral that may actually be expected to accrue.
98 See for instance ESC, Installing Meters for Electricity Customers – Costs and Benefits – Position Paper, November
2002, p 85 and ESCOSA, Assessment of Demand Management and Metering Strategy Options, August 2004, p.25.
99 The 10 per cent take-up rate is in relation to the overall population and translates into a higher take-up rate amongst
only those customers that are eligible for DLC (i.e., those customers with an air-conditioner), which depends on the assumed penetration of air-conditioners in each jurisdiction in a given year. For example for Queensland a 10 per cent take-up rate for the entire population is equivalent to a 12.5 per cent take-up rate amongst those with airconditioners whilst in Victoria it is equivalent to 14 per cent (assuming airconditioning penetration rates in 2016 in both cases).
Network deferral uncertainty arises as a result of the localised nature of network constraints. For the smart meter rollout scenarios there is also uncertainty in relation to the mechanism by which network constraints become reflected in tariff signals, given that the structure of retail tariffs faced by customers is determined by retailers. This uncertainty is discussed further in Box 6.3.
CRA has also assumed that the value of a kVA of deferral is not realised until after a lag following the year it is first achieved. This reflects CRA’s view that the additional quantum of peak demand reduction is not large enough in any year to be utilised. In addition, for CPP and TOU tariffs distributors would need to observe the peak demand reduction achieved over a number of years in order to have sufficient comfort that it was ‘firm’ and would therefore allow network deferral. CRA’s assumption is for demand reductions to become useful following a three year lag. This further decreases the percentage of implied kVA reduction. Taken together, these assumptions imply that 67 per cent of the total implied kVA reduction translates into a deferral of network augmentation. 100CRA has applied this assumption to both demand reductions from CPP and TOU tariffs and demand reductions from DLC. In the case of DLC, the reduction in demand is controllable by the distributor, and does not rely on customer response as is the case with CPP. However, CRA notes that to achieve a deferral of network capacity augmentation, demand response (whether through DLC or CPP and TOU tariffs) needs to achieve a threshold level equal to at least one year’s load growth on the part of the system to be augmented. While every kVa of demand reduced by DLC can be
considered firm because it can be dispatched by the distributor, it may still require some time to achieve the penetration level required to effect the deferral. Demand response from TOU tariffs and CPP, by contrast, is not firm. While the distributor may be able to send the price signal, it cannot guarantee the demand response will follow - that depends on customers’ decisions. The distributor may come to regard the response to its price signals as firm (most likely on the basis of a proportion of the overall connected load that receives the signal) after observing the effect of customers’ decisions over time. Therefore, in addition to meeting the threshold required for any particular deferral, price signals will need some time to
demonstrate their repeatability in order for distributors to count on them with regard to network capacity planning. CRA has used a three-year delay of the demand response
schedule to combine and simplify the impact of these considerations in assessing the network benefit of demand response from DLC and TOU tariffs and CPP.
Box 6.3: Pass-through of Network Signals in Retail Tariffs
In all jurisdictions customers below 160MWh currently receive a single bill from their retailer
covering both retail charges and network charges. The distribution business charges the retailer, which then passes costs onto the end-use customer. However, in passing through network charges the retailer need not preserve the structure of charges levied by the distributor. In many cases retailers choose to bundle network tariffs with the retail component of the tariff, with the result that customers do not see the actual network tariffs they face.
There is therefore an issue as to how distributors’ network pricing signals, and in particular the ability for distributors to call CPP events, are practically reflected in retail tariffs.
The results presented in KPMG’s Phase 1 retailer impact report indicated that the majority of retailers would be unlikely to pass-through network pricing signals to end-use customers, due to concerns regarding the complexity of tariffs.101 Further discussions during Phase 2 of the analysis confirmed this view, but also highlighted that the more widespread the changes in distribution tariff structure the greater the risk to retailers from not passing through the price signals, and the more likely retailers would be to try to pass through network tariff structures.
In relation to CPP events, it may be possible for a distributor to pay a retailer to allow it to ‘call’ CPP events when required for network reasons. The distributor would fund this payment from the value to it of the network deferral achieved. However, in agreeing to this arrangement the retailer would need to consider its lost value from losing the ability to call a CPP event to avoid peak pool prices, given that it cannot be certain that the time at which a distributor would want to call a CPP event for network management reasons would coincide with peak wholesale energy prices. Retailers would only rationally give up their right to call a CPP event where they received compensation from distributors that at least matched the foregone value to retailers.
It has been suggested to us that a potential alternative to realise the benefits in relation to network augmentation would be to mandate via the NER that distribution network tariffs must have a TOU and/or CPP structure. However, the mandating of tariffs is likely to have unintended consequences, as distributors need not set ‘sensible’ tariff levels within the required structure where they did not wish to. This would also run counter to what has been a general move towards placing more responsibility on businesses for their own tariff structures, rather than forensic regulation.
To the extent that network signals are not passed through to final retail tariffs this would reduce the benefits associated with network deferral calculated for a smart meter rollout. This should be borne in mind in reviewing the results of the analysis presented in this report.