Understanding Regulated Energy Cost increases and how they apply to different sites

01 May 2009Archived News Energetics in the News

From 1 July, there will be some significant increases in energy costs, especially in NSW and WA. Given that reports in the media often generalise when they discuss movements in energy costs, and mainly refer to domestic and small energy users, it can be unclear and confusing for larger energy users. 

 

This article is intended to help larger energy users understand the differences between domestic, commercial or industrial scale energy costs. It is also important to understand what is considered a small site or large site, and which sites are on tariff.There are five types of sites:

  • Large sites on a negotiated contract
  • Small sites on a negotiated contract
  • Franchise tariff sites (regulated pricing, not on a commercial contract)
  • Unmetered sites (e.g. streetlights, bus shelter)
  • On-sold sites where the landlord pays an electricity invoice and then apportions the electricity to their tenants.

What makes a site Small or Large?

The states in the National Electricity Market (NEM) – NSW, Vic, Qld, SA and Tas have been deregulated and electricity users have the ability to seek contractual arrangements. Unfortunately, deregulation has occurred at different times and different rules apply in each state.

Some states insist on contracts for all sites and others have a safety net option of a regulated franchise tariff. WA has a different set of rules again and has not yet moved to Full Retail Contestability (i.e. not all sites are contestable and can go on to a contract).

The Table below indicates the status of each of the states.

State

As indicated by the table, the classification of a site as “Large” or “Small” is determined according to threshold levels of mega Watt hours per annum on a site.

Large Sites

Features of a Large site include:

  • Any site over threshold in the table above.
  • Victoria is the only state that does not allow the inclusion of sites below the threshold into a large sites’ agreement. (e.g. if you have 6 accounts over and 2 just below, you cannot roll them into the same agreement – you need 2 different agreements).
  • Contracts are ‘unbundled’ which means that the retailer, network and market charges are separately itemised.
  • The network tariff costs are considered a pass through (ie the retailer passes through exactly what they have been charged by the network owner) and the rate applied may be one of a number of published tariffs.
  • Network tariffs are not typically reviewed by either the retailer or network owner for appropriateness.
  • Network rates are driven by a revenue price path approved by the regulator who determines the amount of infrastructure spend that is needed and the amount of revenue that the network can therefore collect.

Small Sites

Features of a Small site include:

  • Contracts that are developed against “market rules”. These market rules are determined by the regulator and provide the framework for the Terms and Conditions that apply to a contract.
  • These market rules are designed to protect small users.
  • Contracts are generally bundled.
  • Can be in the form of a discount off the published tariff.
  • Cost escalation may be against CPI movements or underlying cost changes.
  • Cost is driven by the electricity retailer.

Franchise

This is the default arrangement, approved by a regulator, and relates to the ‘franchise’ area of a retailer – i.e. if a site is in a retailer’s designated geographical area, they are the supplier and will apply their approved tariffs or can offer a contract (although they cannot insist on a contract).

A summary of the features:

  • Bundled rate which is published.
  • If sites are below the threshold, they can normally return to a tariff arrangement but this varies between states.
  • Regulated in all states except Victoria.
  • SA and Tas have forced all contestable sites onto contracts by encouraging the franchise retailer to apply excessive default tariffs.
  • Driven by integrated business costs. The default retailer is also the network provider.

Upcoming increases 1 July

So what are the expected increases from 1 July? The table below indicates the expected increases in Network pricing (mainly to apply to Large sites) and Franchise tariff increases.

Network

Franchise tariff increases generally apply to domestic users and therefore can be delayed for political reasons. This can then lead to very large increases when the cost of managing the network – or keeping up with the electricity commodity market - have to be passed on. This is the situation in WA where the retailer requested a 20% increase to follow another 20% increase as of 1 April this year. This was not approved but can be foreseen to possibly occur in next year’s tariff pricing.

The Bottom line for Large users.....

There are significant increases in network costs from 1 July, especially in NSW. Each of the network operators publish a number of tariffs that may apply to your sites. Currently neither your retailer nor the network provider is responsible for ensuring that you are on the most cost effective tariff.

Energetics has many experienced consultants who can analyse the relevant network tariff options – or even the franchise options - and provide you with an analysis of your sites. We find genuine savings for our clients from this process – from 15% -80% of monthly electricity spend!

Join the conversation