|Electricity Pricing Explained
The facts on the pricing of electricity for Tasmanian households and small businesses
Below is an explanation of how Tasmanian electricity prices are determined.
How are Tasmanian electricity prices determined?
Tasmanian customers may receive their electricity supply under either a regulated standard retail (standing offer) contract or a market retail contract. Aurora Energy (as a Regulated Offer Retailer) is the only retailer required to offer regulated standing offer contracts.
Tasmanian standing offer electricity prices are determined on the basis of a ‘building block’ approach.
Under a building block approach the various costs that make up the total cost of supplying electricity to customers are added together to arrive at a maximum revenue figure, the Notional Maximum Revenue or NMR.
The NMR reflects only those costs the Tasmanian Economic Regulator, a body independent from the Government, considers an efficient electricity retailer would incur in supplying electricity to its regulated customers ie costs that the Economic Regulator considers an efficient operator would not incur are excluded from the NMR calculation.
Once the Economic Regulator has determined the NMR, the retailer is required to submit a pricing proposal for the Economic Regulator’s approval. The pricing proposal outlines the various prices and the proposed split between fixed and usage charges for each tariff. The Economic Regulator reviews the pricing proposal and after, ensuring that it complies with the determination of the NMR, approves the electricity prices (most importantly, when added together, the revenue expected to be derived from each tariff based on the number of customers multiplied by the amount of electricity expected to be consumed must not exceed the NMR).
The Economic Regulator approves the maximum prices that a Regulated Offer Retailer can charge its regulated customers. This ensures that customers on regulated standing offer contracts are paying a price that reflects the efficient costs of supplying electricity.
What is a price determination?
A price determination is a document that outlines the method for determining the maximum prices a Regulated Offer Retailer can charge for the supply of electricity for each year of a regulatory period. Before making a price determination the Tasmanian Economic Regulator is required by legislation to conduct an investigation.
What is a regulatory period?
A regulatory period is the time period during which the Regulator’s price determination applies.
What is a price determination investigation?
A price determination investigation is a process conducted by the Tasmanian Economic Regulator to gather information so that it can determine prices that reflect a regulated entity’s efficient operating costs. Typically, an investigation involves the regulated entity submitting information requested by the Economic Regulator together with the Economic Regulator conducting public consultation as well as its own research and benchmarking and, where necessary, seeking expert advice from independent consultants. The costs of a price determination investigation are met by the entity the investigation relates to.
What is an annual price approval?
Following the completion of a price determination investigation and the Tasmanian Economic Regulator’s making of its price determination, the Regulated Offer Retailer is required to submit an annual pricing proposal setting out the services it intends providing and the prices it intends charging for those services. After confirming that the proposed prices comply with the requirements set out in the price determination and final investigation report, the Economic Regulator approves the prices that are to apply for the coming financial year.
What are standing offer prices?
Standing offer (or regulated) prices are the prices that a Regulated Offer Retailer (currently only Aurora Energy) may charge small customers on mainland Tasmania (including Bruny Island) for services provided under standard retail contracts. Standing offer prices are effectively a fall-back contract available for those customers choosing not to enter into a market retail contract with a retailer.
Who are small customers?
Small electricity customers are defined as all residential customers on mainland Tasmania (including Bruny Island) as well as those small business customers who use less than 150 megawatt hours (MWh) of electricity per year.
Who does what in supplying electricity to my house or business?
Generation – In Tasmania, electricity is supplied mainly by Hydro Tasmania’s hydro-electric power stations. Energy needs are also met through the Tamar Valley gas fired power station, the Woolnorth and Musselroe Bay wind farms and from interstate generators via the Basslink undersea electricity cable.
A retailer buys electricity from generators on behalf of its customers. Legislation and regulations set down how the Tasmanian Economic Regulator is to estimate these wholesale electricity costs.
Transmission and Distribution – TasNetworks is a Tasmanian Government-owned business that owns the large transmission towers and lines that transmit electricity from generators to population centres. TasNetworks is also responsible for the poles and wires that distribute power around mainland Tasmania to towns, cities and rural areas.
The national Australian Energy Regulator sets the prices that customers pay to use this network.
In setting network prices, the AER estimates the costs involved in transporting electricity across the networks. Each year, when the actual costs are known, the transmission and distribution prices are adjusted to take account of these actual costs. These network costs usually change on 1 July each year.
Retailing – All Tasmanian customers are able to choose their retailer. Every small customer is also assigned a ‘Regulated Offer Retailer’ that is required to make an offer to supply electricity to that customer under its standard retail contract at standing offer prices, which are approved by the Tasmanian Economic Regulator. Aurora Energy is currently the Regulated Offer Retailer for all small customers on mainland Tasmania.
The Economic Regulator determines the maximum amount that you should pay for these retail services which includes billing, account management, call centre costs, a retail margin and the costs of retaining existing customers and attracting new customers. The retail margin compensates a Regulated Offer Retailer for the risks it takes in investing in the business and in providing electricity services to standing offer customers.
Which costs are taken into account in determining the standing offer price?
The standing offer price for electricity takes into account generation costs, transmission and distribution (network) costs and retailing costs together with the costs of participating in the National Energy Market (NEM) and the retailer’s costs of complying with the Australian Government’s Renewable Energy Target (RET) schemes.
Cost components of a typical electricity bill, 2015-16
How much discretion does the Tasmanian Economic Regulator have in setting Tasmanian electricity prices?
Whilst the Tasmanian Economic Regulator approves standing offer prices it does not have discretion to determine the majority of the costs that contribute to those prices.
For one, network charges which comprise nearly 60 per cent of total costs are regulated by the Australian Energy Regulator, an independent national body.
Secondly, the Economic Regulator is required to calculate the Wholesale Electricity Price (generation costs) which comprises around 23 per cent of total costs in accordance with the results produced by a wholesale pricing model that complies with the principles set out in the Wholesale Contract Regulatory Instrument (see the Wholesale Pricing page on this website for further details).
Finally, National Energy Market participation charges, which are set by the Australian Energy Market Operator (AEMO), and Renewable Energy Target costs comprise around five per cent of total costs.
As a result the Economic Regulator has discretion with respect to determining just under 13 per cent of the costs that contribute to the total cost of electricity.
What does the Economic Regulator consider before approving retail service costs and retail margin?
In examining Aurora Energy’s costs of providing services to its standing offer customers, the Tasmanian Economic Regulator ensures that households and small businesses only pay for costs that are associated with supplying them with electricity plus a fair share of Aurora Energy’s overhead costs. This includes an examination of:
- how much, if any, customers should pay towards Aurora Energy’s advertising and marketing costs;
- how Aurora Energy’s operating costs compare to electricity retailers in other states and territories; and
- how much, if any, customers should be contributing to the cost of Aurora Energy’s sponsorships (eg of Aurora Stadium) and other non-essential business services.
Why do we have regulators setting prices?
If regulators did not set the prices for monopoly services (such as those provided by TasNetworks) or for services in markets without adequate competition, consumers could be paying more and/or receive a lower level of service. By setting caps on the amount of revenue that can be earned by the regulated entity, the Australian Energy Regulator and the Tasmanian Economic Regulator seek to protect customers from the risk that these entities may misuse their market power and charge higher prices than they ought to due to the fact that there is inadequate competition to prevent this type of behaviour.
The regulators ensure that you are paying prices that reflect efficient costs for the services and that these services are delivered to an appropriate standard.
The independence of these regulators from Government ensures that their pricing decisions are not inappropriately influenced by vested interests.
What does the typical Tasmanian residential customer pay for electricity?
The amount paid for electricity by a typical Tasmanian residential customer depends on the mix of prices that the customer receives their electricity supply under, their electricity usage and how much of their usage is split between heating, lighting and other uses.
The Tasmanian Economic Regulator produces regular reports comparing prices paid by both residential and business customers in Tasmania and in mainland jurisdictions. Copies are these reports are available on the Economic Regulator’s website under Electricity > Retail pricing > Pricing > Price comparisons.
Are Tasmania’s electricity bills for the average customer higher than those in other states?
Tasmanians generally use more electricity than their interstate counterparts (particularly for heating) due to the relatively cooler climate. Although it should be noted that mainland customers pay more for cooling. Additionally, in other states and territories, a higher proportion of customers have access to gas for cooking and heating which can mean that their electricity bills may be lower. However, these customers receive a gas bill in addition to an electricity bill.
Reports comparing prices paid by both residential and business customers in Tasmania and in mainland jurisdictions are available on the Tasmanian Economic Regulator’s website under Electricity > Retail pricing > Pricing > Price comparisons.
How do I know what tariffs I am on?
The tariff or tariffs (prices) that apply to you are shown on your quarterly electricity bill.
All residential customers are connected to Tariff 31 the light and power tariff. The majority of households are also connected to either Tariff 41 for heating hot water or Tariff 42 for space heating and heating hot water. A small number of customers may also have Tariff 61 or Tariff 62 which provide off-peak heating and are controlled by a time switch located in the meter box.
For business customers, the type of business you are operating determines which tariff/s you are on. For example a farm may be connected to Tariff 22, the general business tariff. However, if the farm also operates irrigation pumps, it may also be connected to a special irrigation tariff. Dairy farms may also have a special hot water connection. Businesses that operate certain types of machinery may be connected under what are called “demand tariffs”.
If you have any doubts about which tariff is right for your circumstances you should talk to your retailer.
What are my options as a small customer?
Residential customers have the option of buying electricity from Aurora Energy as a standing offer customer (at regulated prices) or through Aurora Energy’s Pay as You Go (APAYG), as an unregulated product.
Residential customers also have the choice of staying with Aurora Energy and negotiating a market retail contract or negotiating a market retail contract with another authorised retailer.
If you enter into a market retail contract with Aurora Energy, you have the option of changing back to a standard retail contract with Aurora Energy, at regulated prices. It is important to note that, while you can terminate a market contract early, the retailer may charge you a fee for doing so.
Small business customers that consume less than 150 MWh per year can buy electricity from Aurora Energy either as a standing offer customer or through a market retail contract, or negotiating a market retail contract with another authorised retailer.
What is Aurora Pay As You Go?
Aurora Pay As You Go (APAYG) is a prepayment system which Aurora Energy offers as an alternative to its standing offer prices. APAYG prices are structured differently to standing offer prices with different prices available at different times of the day, and prices vary between summer and winter, weekdays and weekends. APAYG customers can shift their electricity usage in order to take advantage of cheaper rates.
Would I be better off on APAYG or a regulated standard offer contract?
It is difficult to compare the costs of APAYG and standing offer prices as the bills for regulated customers are calculated on electricity usage over a quarter and APAYG charges vary depending on the time of day, day of the week and the season.
The Tasmanian Economic Regulator prepares an annual report that compares APAYG and standing offer prices. Copies of these reports are available on the Economic Regulator’s website under Electricity > Retail pricing > Pricing > Price comparisons.
As a concession card holder, what discounts are available to me?
APAYG and standing offer customers who have a Pensioner Concession Card issued by Centrelink or the Department of Veterans Affairs, a Health Care Card issued by Centrelink, an Immigration Card or a Tasmanian Concessions Card (also known as a Community Detention Card) issued by the Department of Premier and Cabinet (DPAC) may apply for a electricity discount.
The Annual Electricity Concession provides a daily discount to eligible customers calculated on a cents per day rate. Additionally, APAYG concession customers don’t pay any fixed charges and receive concessions in the form of lower winter rates.
All electricity retailers operating in the Tasmanian market must provide electricity concessions to eligible customers including the Life Support Discount, Heating Allowance, Medical Cooling Rebate and other essential discounts as stipulated by the Government.
Further information on electricity concessions, including eligibility requirements, is available from www.concessions.tas.gov.au.
As a standing offer customer am I paying for Aurora Energy’s costs of providing staff discounts?
No, the Tasmanian Economic Regulator does not allow Aurora Energy to charge standing offer customers for costs such as this ie these types of costs are not considered to be costs an efficient operator would incur.
As a standing offer customer, will I have to pay more so that Aurora Energy is able to pay dividends?
No, the Tasmanian Economic Regulator’s role is to ensure that you are paying a price that reflects Aurora Energy’s efficient costs of providing retail services to you. Dividends play no part in the costs to supply you with electricity as they are paid out of net profits (ie revenue less expenses). While the Economic Regulator does approve an allowance for the retail cost to serve and for a retail margin, the amount available for dividend payments is a function of the returns achieved across the whole business and is a matter for Aurora Energy’s Board and shareholders.
Who is responsible for street lighting prices?
TasNetworks operates and maintains most street lights across Tasmania, predominantly on behalf of councils and the Department of State Growth. This includes TasNetworks-owned public lighting and private lighting in public spaces (ie lighting in public spaces maintained by TasNetworks at a customer’s expense).
The AER sets the distribution component of the price which comprises the network charges and the operational, maintenance and capital costs of public lighting assets. The retail component is based on the wholesale energy cost component estimated by the Tasmanian Economic Regulator as part of its standing offer price determination.
TasNetworks Public Lighting Services Application and Price Guide is available from TasNetworks’ Distribution fees and tariffs webpage whilst Aurora Energy’s website contains details of retail public lighting prices: www.auroraenergy.com.au.
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