Your retail energy bill includes a range of costs for supplying energy. Knowing whether you are getting a good deal requires an understanding of the various charges you are paying. This will also strengthen your position to negotiate a better deal.
Cost of buying energy on the wholesale market
Retailers purchase energy in wholesale markets and sell it on to end users at fixed prices. In doing this, they take on risks. This is because retailers cannot know exactly how much energy end users will need or what the wholesale market price will be when this energy is needed.
While retailers can manage these risks, they charge end users a premium for this service. This means that the price of the energy component on your bill can be above or below the average wholesale price. This premium is sometimes called the Customer Load Variation Charge, and its cost to you depends on your demand profile. Typically, all else being equal, retailers will charge end users more if they have a more volatile or less predictable demand profile.
In addition to adding a margin to cover this ‘risk management’ service, your retailer will also pass on costs relating to the provision of ancillary services. These are services purchased by the market operator to control frequency and maintain system voltage during sudden and unexpected changes in supply or demand. The market operator recovers the costs for these services from retailers, who pass them on to end users. The total value of ancillary service charges should be relatively small; in the range of 1% to 3% of the total cost of energy on your bill.
Retailers also bear the costs of any losses arising through transmission and distribution networks. This is because the volume of their purchases is measured as it enters the transmission system at generator connection points, but they only receive payment for the electricity that is delivered to the end users’ meters. Retailers recover the cost of these losses from their customers.
Your energy bill will show the appropriate loss factor and the additional cost you bear. The total value of the loss charges should be relatively small and in the range of 1% and 5% of the energy cost on your bill. End users with sites located far from major centres of electricity generation and/or connected to long distribution system lines may however bear costs of 10% or more.
Network service charges
Network costs are set through a regulatory process and charged to energy retailers who pass on the costs to end users. There may be scope for reducing these costs by managing your peak demand, but there are risks if you exceed your agreed peak demand.
Electricity network service charges
Retailers generally pay network services charges and then pass them on to end users. These charges can represent about 10% to 20% of total costs for large energy users, and about 40–50% for residential consumers.
Network services charges consist of Transmissions Use of System and Distribution Use of System charges. They are usually aggregated on your energy bills as Network Use of System charges, but you can negotiate with your retailer to have the components presented separately. Other specific network services charges may apply to some customers.
Network charges are typically a combination of demand charges (based on the maximum load an end user places on the system), energy consumption charges (sometimes separated into different time of day periods) and connection charges (a one-off fee when you join a network).
One aspect of network charges end users can influence is the level of peak demand. This is a major driver for investment in network capacity, and hence a major determinant of total network costs. Managing your peak demand, and ensuring that your actual usage remains below a level agreed to with your retailer/distributor, can result in a significant reduction in your total cost of delivered energy.
Gas Network Service Charges
Most major Australian gas distribution pipelines are subject to full by pipeline operators that must comply with provisions of the National Gas Rules and be approved by the relevant regulator.
There are two models for pipeline charges in Australia: ‘market carriage’ and ‘contract carriage’.
Most pipelines (except the Sale to Melbourne system in Victoria) are covered by the contract carriage model. Gas shippers (who are typically energy retailers or large gas users) and pipeline owners secure pipeline capacity through bilateral contracts. Differences between contracted and actual capacity are dealt with under the terms and conditions of the contract.
In the market carriage system adopted for the Victorian gas network, large end users secure rights to pipeline capacity and these rights are tradable. If an end user has surplus capacity, this surplus can be sold, or alternatively end users with insufficient capacity can purchase their additional capacity requirements through a daily capacity ‘auction’ operated by AEMO.
As is the case with electricity, gas demand affects network charges and penalties paid by gas end users. However, while maximum annual electricity demand determines electricity demand charges, gas end users must monitor daily gas demand.
Metering and billing costs
Retailers usually pass on their costs for metering and billing. For most customers, metering services are procured by the retailer from a Local Network Service Provider.
Alternately, large energy users can engage an independent, registered Meter Service Provider to read their meters and provide the metering data to retailers for billing. Using a Meter Service Provider is particularly useful if the end user wants to get more information, and value, from the metering data than is provided by retailers. Creating a direct relationship with a Meter Service Provider:
- Gives the user more actual or perceived control of the metering information
- Can provide significantly more data than is required by the retailer for billing purposes
- Avoids users having to re-negotiate data requirements if they change retailers
A number of federal and state obligations have been implemented to pursue climate change and renewable energy objectives. Most of these schemes require retailers to surrender compliance certificates in proportion to the amount of energy they sell. These certificates are created through the activity the scheme is seeking to stimulate. The certificates are available either from the entity that created them or in a secondary market. Retailers who do not surrender sufficient certificates face penalties for the shortfall.
Retailers pass the cost of complying with these schemes to end users. It is important to take account of these charges when comparing different offers from retailers and negotiating with them.