How many Market Participants does it take to screw in a light bulb?

How many Market Participants does it take to screw in a light bulb?

Last week we published an article discussing a report which was recently released by the ACCC about the state of the Australian Energy Market, and what components make up the National Electricity Market to transport electricity to your property.

One of the things which was most apparent following the feedback on the article, even with so many avenues available to us as individuals to obtain information, there remains an almost shocking level of neglect on the part of those in the industry to educate the end-users on what their costs are, what they’re charging, who is charging them, and why they’re charging it. In fact, unless you hold a degree in criminal forensics and have seen every episode of CSI: Miami – as well as, obviously, having unfiltered access to market data and a talented programmer to decipher it all, you probably aren’t going to understand all the involved costs that make up your energy bill.

In light of that, this week we are going to delve into these costs with particular focus on how they affect your residential energy bill. Strap in, ‘cause this is about to get gnarly. I mean, some of this had my head exploding just while I was researching it.

Before we get started, it’s important to understand the different rates which are charged, some of which are fluid and fluctuate depending on market conditions, and some remain static (or at least, a static kind of fluid).

First off, there’s the rates which your network provider charges your retailer for energy usage - the transport and delivery of the electricity you extract from the network to power your home, and this is broken down into 2 charges; the initial charge is applied to the first 10kWh you use each day, while the second charge applies to anything you use after that. There’s not a significant difference between the two, but if you were thinking you might get away with making your bills cheaper by remaining under the 10kWh threshold to get a cheaper rate, we should tell you that we recently analysed the data from a residential energy consumer in Renmark over a week, and their house - with only basic appliances running - consumed 10kWh per day - It’s also worth mentioning that they were on holiday at the time, so there was no one home. I wish you luck, but don’t pin your hopes on it (that being said, if you are using only 10kWh/day, please let us know your secret).

Next, there’s the charges for the sale of the actual electricity you use by the retailer who is supplying your energy. It’s important to note that most residential energy accounts are bundled, which means that instead of you receiving a separate bill from 3 sources - your retailer, the energy market operator and your network provider - your retailer takes on the role of being responsible for your meter and accepts the charges from other relevant market participants accordingly, then passes that cost (with their own margin) on to you, the consumer. Think of it like online shopping, your retailer is the company from which you buy the product and pay the cost of shipping, they then engage the network provider as the freight service to ensure that energy reaches your home, and they are paid by the business shipping the package with the money that you paid when you first purchased the product.

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Sounds simple enough right? Well, as far as analogies go, that’s about where the similarities end, because then we need to start introducing things like Distribution Loss Factor, or ‘DLF’ (stay with me, this gets interesting). As electrons are pushed along the wires lining our lovely Drives, Courts, Highways and Avenues, some of that energy is lost, either by being converted into heat through conductors attached to the network, or through electrical resistance (see: The First Law of Thermodynamics). This loss is dependent on your position on the network, simply; the further the electricity needs to travel from the point of generation to reach you, the higher your loss factor will be. Generally however, it sits around the 10% mark. In the Riverland for example, the Total Loss Factor ratio is around 1.104, which equates to approximately 10.4%. This charge is added to the rate the Network Provider charges your retailer to deliver the energy to your home.

If you think you didn’t read that right, I assure you, you did. Yep, you are getting charged approximately 10% on top of the cost incurred by the network provider to deliver electricity to your home, for the electricity that never actually gets there. To use our online shopping analogy, it’s like purchasing a bike online, and during transit the rear wheel falls off, but you have to pay full price anyway, because the freight company were expecting the wheel to fall off and had therefore factored the cost of the wheel falling off into their price already, then added a 10% markup to make up the shortfall, which you paid when you originally purchased the product.

Moving right along.

On top of the costs of delivering electricity to your home, your network provider also has a daily charge for your home being connected to the network, and depending on the type of meter you have installed at your home (also depending on whether that meter is owned by your network provider), an additional charge to send someone out to read the meter once every 90 days, which is split into a daily charge. I hate to keep going back to this, but the online shopping analogy just seems to be really do its job today; these charges are similar to you paying a subscription fee to a freight company, for… something… I don’t know, maintaining their truck? Maybe you just really like your freight company, because you’re also paying them a daily fee for the delivery driver to come out and check in once every 3 months, regardless if you’re home or not. I’m realising as I’m writing this just how stupid this all sounds, and the worst part is I’m not even making this up, these fees actually exist.

OK, so we’ve determined your retailer is getting charged by your network provider for the delivery of the electricity to your home, the connection to deliver electricity to your home and them sending Bob out every 90 days to verify how much electricity they’ve delivered to your home, as well as whatever electricity they sent to your home which didn’t quite make it. We’ve also determined that your retailer is purchasing these services on your behalf and then charging a margin for their service. But what about the product itself?

Enter AEMO, the Australian Energy Market Operator. AEMO oversee the market and set the price of electricity based on supply and demand, if there is too much demand and not enough supply, the price goes up, if there is too much supply and no demand, the price goes down. This is not an exponential factor though, as there are limits which are set by AEMO as to how high or low the price can go. At the moment, the ceiling price of the market is $14,000/MWh, or $14/kWh – for you solar customers out there, consider that in relation to the 16¢/kWh you currently get from your retailer for the energy you return to the grid, and that equates to a lazy 8,750% increase.

These events are where retailers in particular can really find themselves exposed to considerable costs; as retailers need to essentially purchase their electricity from the National Electricity Market (NEM) so they can on-sell it to their consumers, and they don’t get the right to say ‘Sorry guys, the price is a bit high so no electricity today’, because, well, people need electricity. In a single trading interval on the market when there is high demand and low supply, a $14,000 event can eat into a retailer’s profit margin with relative ease. That being said; the price you get charged is averaged out over the course of your billing period, so even with several of these events taking place over a month, your retailer is fairly well protected. Even so, retailers will factor the ‘worst case scenario’ into their margins to reduce their exposure to these events, this is a great cushion for when these events happen, but outside of that (which is, most of the time), it really only serves to bolster their bottom-line.

Since we at the Yates Electrical Service offices have been monitoring the market, wholesale electricity prices have stayed within the 8¢/kWh to 24¢/kWh range when reported as a monthly average, even with extreme events factored in. Taking into account all other distribution charges associated with a bill, a 24¢/kWh wholesale cost for electricity for a month would result in a retailer buying their electricity for approximately 38¢/kWh on average for the month, while an 8¢/kWh wholesale cost for electricity for a month would result more in a 24¢/kWh average over a month that your retailer would pay for electricity with all costs included, before they then on-sell that electricity to you.

As an example of the above, during January of this year, which was a particularly turbulent month with fairly high wholesale prices, a retailer exporting to a customer predominantly using electricity during peak times at a rate of 40¢/kWh, would have found themselves getting close to selling their electricity at cost price; while only 2 months later where the average wholesale price of electricity was approximately 9¢/kWh, that same customer would have been yielding the retailer an almost 200% markup on the wholesale cost the retailer paid, but, it’s ok, because they’re giving you a 10% discount if you pay on time, so what are you getting so worked up about?

That’s about it when it comes to the retailer though, realistically for the most part they are trying to set a price which makes them money while protecting them from market fluctuations.

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Now onto the Australian Energy Market Operator and the National Electricity Market, the magical place where generators sell their product, and retailers buy it, and gentailers do… both. Seems legit.

AEMO do also have a fee involved as far as operational costs go, because these things aren’t free you know? Overall though, their fees are a fairly insignificant cost when compared to other components of your bill, interestingly though they also apply a loss factor to their fee, which again results in the end-consumer paying for electricity which is never actually delivered. They also facilitate other fees on behalf of the government, such as the Large Renewable Energy Target (LRET), which is charged by AEMO to assist Australia in reaching our Large Scale Renewable Energy Targets, as well as the Small Renewable Energy Scheme (SRES), also charged by AEMO to fund rebates provided to residential solar installation owners – this subject has been a bone of contention in the news recently with many arguing that if the government wishes to continue offering the rebate, the government should factor it into their budget - not AEMO’s, where it currently exists as a charge that many would argue is more of a penalty to those who can’t afford – or can’t install solar on their homes.

All in all though, when it comes to the current rebate set up, if you were to export 1kWh into the grid from your rooftop solar installation, the 16¢/kWh (current rebate as at the time of writing) would just marginally cover the charges incurred by the network operator from the next 1kWh you used from the grid. Bargain.

I haven’t talked about controlled load on here, but that’s basically a separate component of your meter specifically for your electric hot water system. If you don’t use electric hot water, you shouldn’t be seeing any charges on it. If you are, might be time for a phone call?

So that’s it, clear as mud. Any questions?

For those of you who prefer numbers, please see the break-down below. This is based on market and price figures current during March, 2018, on a hypothetical household based in Renmark, South Australia, using 1000kWh for the 31 day billing period at a rate of 40¢/kWh with a standard residential meter:

Billing Period: March 1st, 2018 – March 31st, 2018

AEMO’s Costs:
Average Spot Price of Electricity from the NEM: 9.472¢/kWh (+GST)
Total Spot Price of Electricity from the NEM: $94.72 (+GST)
Total Large Renewable Energy Target: $0.14 (0.014416¢/kWh)
Total Small Renewable Energy Scheme: $0.39 (0.0392¢/kWh)
AEMO Ancillary (AEMO’s Operational Costs): $0.55 (.0552¢/kWh)
Pool Rate (After Losses): $0.04 (.0042¢/kWh)

Network Operator’s Costs:
First 10kWh Consumption: $39.53 (12.75¢/kWh x 10kWh x 31 days)
First 10kWh with Total Loss Factor: $43.64 ($39.53 x 1.104)
Remaining Consumption: $96.88 (14.04¢/kWh x 690kWh)
Remaining Consumption with Total Loss Factor: $106.95 ($96.88 x 1.104)
Supply Rate: $12.41 (40.06¢/day x 31 days)
Meter Reading (Standard Residential Meter): $21.63 (69.79¢/day x 31 days)
Meter Reading (Type 1 – 4 Meter): $60.21 ($1.95/day x 31 days)

The retailer makes up the remaining cost, so in this case, for 1,000kWh billed at 40¢/kWh = $400.00, minus the Network Operator’s and AEMO’s costs, the retailer makes $119.53.

So let’s look at the percentages of this particular scenario:

AEMO’s Total Costs: $95.84 = 23.96%
Network Operator’s Total Costs: $184.63 = 46.16%
Retailer’s Total Costs: $119.53 = 29.88%
So, dear reader, I present to you your final cost, and we’ve even included a 10% discount if you pay on time!

$360.00

Thank you for shopping with Yates Electrical Services - where there’s no hidden fees.

We promise.

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About the Author

Patrick is the Marketing and Communications Manager at Yates Electrical Services. When he's not designing stuff and writing stories, he performs as an acoustic soloist and spends time with his beautiful little family.

Patrick also likes long walks on the beach, sewing, and photoshopping himself to look like one of the Avengers. Booyah!