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The social contract of electricity service

May 14, 2018 | Electricity | 0 comments

In an address to a group of British engineers in 1892, Hopkinson articulated many of what we would now identify as contemporary problems faced by electricity regulators. Hopkinson explored the issue of fixed versus variable tariffs, the problems of network cost recovery, the costs and benefits of high voltage distribution, the potential of distributed battery storage, and the reconciliation of the competing demands of consumers. The scope of electricity was expanding and it was understood that these issues needed urgent resolution. At this stage, electricity provision was provided by competing private firms.

In time, the benefits of electrification became so manifest that governments around the world stepped in to ensure universal service delivery. State ownership underwrote the large investments and permitted ‘smearing’ of costs across consumer classes to ensure universal affordable access –  (often) city subsidised rural; commercial subsidised households; small households subsidised large. It was widely understood that cross-subsidization was fundamental to universal service delivery. The economic deadweight losses due to a lack of economic efficiency were outweighed by the ‘network effects’ of universal affordable delivery. Electricity was part of the story of twentieth century economic development, and affordable access was part of the social contract. Public ownership essentially masked the problems of the misalignment of electricity tariffs with the cost of service. In most countries, the public ownership model persisted for 60 to 80 years.

But since the 1990s, several developments have undermined the traditional model in developed countries –

1. the corporatization and privatization of state owned utilities
2. the growth in peakier loads, such as air conditioners and pool pumps
3. a relative decline in constant-load, energy intensive manufacturing
4. a shift away from domestic overnight loads, particularly electric hot water and space heating
5. growth in distributed power, especially rooftop solar
6. the need to decarbonise electricity

Essentially the problem is this. Most of the costs of service delivery are the fixed costs of building, financing and operating the generation and network assets. But the fixed costs appear mostly as a variable (kWh) charge for consumers. In a pure free market system, consumers may be expected to finance the fixed cost of service delivery. For households, this would amount to thousands of dollars. But instead, utilities finance the infrastructure and recover costs with electricity consumption rather than network access.

In most international jurisdictions, the ‘daily’ or ‘fixed’ charge represents only a small proportion of the actual fixed cost of serving that customer. Some jurisdictions include a form of demand charge to more directly align the actual fixed cost with fixed customer costs. In France for example, consumers choose a maximum demand level, and the fixed charge depends on the demand level chosen. For example, a 9 kW connection costs about twice that of a 3 kW connection.

The prevailing social contract has been that consumers who consume the most electricity pay the most. The aligns with the normal concept of fairness. But the model that developed in the early part of the 20th century no longer holds. Wealth and changing consumer preferences have disrupted the traditional model. For example, a beach holiday house that is occupied for a month during summer, and uses the air conditioning, may only pay $200 annually even though the fixed cost of servicing that house might require revenues of more than $1,000 annually. Cross subsidies such as this are endemic in the variable tariff model. Furthermore, the privatised model has led to extraordinary profits for electricity retailers in Victoria, yet it is not clear what ‘value adding’ is being provided.

The challenge of decarbonisation adds another layer of complexity to a model that is already strained. In Australia, smart meter infrastructure was supposed to support tariff reform and facilitate ‘smart appliances’ but, to date, has had no meaningful impact. In principle, distributed energy should provide network support; but discussion of ‘grid defection’ has worsened, rather than supported a socially equitable pathway of decarbonisation. Optimised EV vehicle charging should support networks; but the obvious synergy between night time charging and baseload is being unwound as the generation suite shifts away from ‘inflexible baseload’.

The point of introducing Hopkinson’s address is that the challenges of providing an electricity service were never fully resolved, and that the era of public ownership simply masked the challenges. A return to private models is re-opening the questions.

I think the lessons are that –

1. optimised solutions are usually less than optimal
2. complexity has a cost
3. electricity is a public good
4. socially equitable solutions are probably going to be economically inefficient
5. universal, affordable and lower-emission electricity has broader benefits that are not easily quantified

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