The structure of the prices consumers pay for electricity (i.e., “retail prices”) has become the subject of considerable debate.

Electricity distribution networks are transitioning customers to ‘cost-reflective’ network usage tariffs when the customer receives a smart meter. These tariffs aim to signal that network costs are driven by increased energy use during peak periods.

Network tariffs differ to retail prices, which are the prices meant to be ‘seen’ by the consumer. While retailers can decide which types of retail prices and structures they offer, some have been passing on these changing network tariff structures to customers without their consent.

This report investigates the justification for assigning all residential and small business customers to ‘cost-reflective’ network tariffs, even if the retailer does not pass it on. We find that:

• Peak demand events, which drive the need to increase the size of the network, generally occur during very hot or very cold days, because consumers use more energy to heat or cool their homes.
• Disincentivising energy consumption during peak demand days is likely to be ineffective and potentially unwise, due to the health and equity implications of cost-conscious consumers rationing their energy use to stay comfortable during heat waves or cold spells.
• Even if peak demand were to increase, many distribution networks have considerable spare capacity to accommodate increased peak demand.
• Augmentation risks arising from growing peak demand will occur in certain locations of the network. There are likely more effective solutions to address these risks than sending a uniform price signal to all households and small businesses.

Network costs are determined by changes in peak demand, as well as the current size of the network infrastructure. Analysis from the AER shows many networks have a considerable amount of spare capacity – and current capacity is likely to accommodate forecast peak demand growth in many locations for the foreseeable future.