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. The key driver of losses is the distance the electricity travels and the voltage level. Losses are typically higher in the low voltage distribution networks than the high voltage transmission networks.

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.

Further reading

Details of ancillary service costs are published each week by the market operator. This information can be found on the AEMO website. Network losses are calculated each year using complex energy flow models.

Industry Case Study – Timing procurement decisions

Understanding the market drivers helps you judge if the energy price listed on your bill is fair and reasonable, and will help you improve the price you can negotiate. Many companies track developments in energy markets by monitoring absolute price levels and the degree of price volatility in the wholesale market over time. They aim to make their procurement decisions at a time when they believe electricity is trading cheaper than what it is likely to trade at in the future.

However, you do not need to become an energy market specialist to achieve this outcome. You can engage an intermediary to monitor prices for you when you are negotiating retail contracts.

Price volatility is also an indicator of the value of providing demand-side response capacity. How to practically take advantage of price volatility is discussed in greater detail in the section on managing demand.

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: a charge based on the maximum load an end user places on the system (typically measured in kW or kVA); The concept of maximum demand is illustrated in the hypothetical demand profile of a large energy user shown in the diagram below. While demand varies throughout the day and year, the Demand Charge is determined (typically) from the maximum recorded demand in the previous year. The demand charge component on the user’s electricity bill will be a constant amount for each billing period provided the recorded demand in that period is less than or equal to the maximum demand. If actual demand is higher than the agreed maximum, a penalty would usually be applied for that billing period and the higher actual demand would apply for the subsequent billing year.
  • energy charges: a charge based on the amount of energy consumed, sometimes separated into different rates for time of day, day of week or time of year; and
  • daily or annual charges: a charge that is fixed irrespective of demand or consumption.
  • connection charges: Network charges may also include an initial connection charge to connect to the network. This should be a ‘one-off’ charge that is incurred only when you change connections arrangements. But, like all other details on your energy bills, it should be checked and confirmed as appropriate if it occurs.

One aspect that 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.

Hypothetical demand profile of a large electricity user

Hypothetical demand profile of a large electricity user

End users may also consider bypassing the services of distribution network providers by connecting directly to a transmission network, particularly if it is more cost effective or provides them with more flexibility or better reliability. Large end users can also create supply infrastructure to provide for all, or part, of their own energy needs. They can also supply energy to related business entities, although they may require a generation, distribution, or retail licence or exemption depending on which facilities they are using. However, bypassing the distribution network involves certain risks. The most obvious is the technical risk associated with the end users assets failing. There may also be some financial risk if they provide connections to other companies and supply is interrupted.

Gas Network Service Charges

Most major Australian gas distribution pipelines are subject to full regulation. Therefore, network charges paid by end users are set through access arrangements prepared 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’.

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.

Market carriage – 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. For example, in the Victorian gas market, end users who exceed their Authorised Maximum Daily Quantity (AMDQ) can face significant financial penalties. If additional gas must be injected into the gas network to compensate for greater than forecasted demand, end users who exceed their AMDQ much pay for this additional gas – usually at a rate significantly above their standard rate. End users can mitigate this exposure by purchasing additional capacity through the AMDQ Auction operated by AEMO.

However, the auctioning mechanism is a not guaranteed way for end users to acquire spare capacity at an acceptable price. The auction depends on the amount of spare capacity available and the prices bid by competing end users in the auction.

Metering and billing costs

Retailers usually pass through their costs for metering and billing. For most customers, metering services are procured by the retailer from the 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.

Industry Case Study – Amcor – Reducing metering costs

Amcor achieved benefits from reconfiguring the metering installations at its new head office building. This building was pre-fitted with an embedded network, with different parts of the building independently metered for electricity. Embedded networks suit buildings where different levels are tenanted or owned and occupied by separate businesses, allowing the separate businesses to engage their own energy retailer.

Amcor worked with its retailer to consolidate billings which resulted in the reduction of the company’s energy costs by about $1200 per month.

Environmental obligations

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. Aspects of the Renewable Energy Target and other environmental schemes are summarised below.

Large Scale Renewable Energy Target (LRET)Office of Renewable Energy Regulator (ORER)Set each year reflecting mandated amount of renewable electricity as a percentage of total electricity suppliedRetailers can acquire certificates from the entities that supply them with renewable electricity or in the market
Small Scale Renewable Energy Scheme (SRES)Office of Renewable Energy Regulator (ORER)Set each year reflected mandating amount of renewable electricity as a percentage of total electricity suppliedRetailers can acquire certificates from owners of eligible solar hot water heaters, heat pumps, small-scale solar panels, wind and small scale hydro systems
Victorian Energy Efficiency Target Scheme (VEET)Essential Services Commission of Victoria (ESC of Victoria)Set each year reflecting mandated greenhouse gas reduction rates and retailers’ total electricity and gas acquisitionRetailers can acquire certificates from entities who implement energy efficiency measures on behalf of residential end users
NSW Greenhouse Gas Abatement Scheme (GGAS)Independent Pricing and Regulatory Tribunal of NSW (IPART)Set each year based on statewide greenhouse gas reduction targets, and the size of the share of the electricity market of parties who buy or sell electricity in NSWCertificates are created through emission reduction projects, such as low emission generation, reducing consumption, reducing emissions and carbon sequestration
Queensland Gas Scheme (QGS)Department of Employment, Economic Development and Innovation (DEEDI)Requires retailers to purchase 15% of electricity from gas-fired generationRetailers can acquire certificates from gas-fired generators

End users are also eligible to generate certificates under some schemes through prescribed activities. These certificates can then be sold on the market or sold to retailers in exchange for reduced energy charges.

More information on this topic is provided in the Retail Procurement Options section.