VCOSS Congress Will the response to the climate debate turn the heat on low income households? Gavin Dufty: Manager Policy and Research Unit St Vincent de Paul

Why will price go up The introduction of a carbon trading scheme by 2012 is envisaged that this will add and additional $200 per annum to an average household electricity account. And the mandated roll out of interval (smart meters) will be installed in all households by the This will not only cost Victorian households between an additional $353 and $954 million in infrastructure costs but it is believed will also provide the mechanism for highly complex, dynamic, tariff design The expiration of the current price protections in the Victorian electricity market due to be phased out or replaced at the end of this calendar year. Minister Batchelor has been quoted as saying that he would be disappointed if these price rises were greater than 10%.

How much do price increases effect demand for electricity? Data from and estimated that the long run price elasticity of demand for the Australian residential sector was This means a 10% rise in price results in a 2.5% fall in demand for electricity, an inelastic response. Since elasticity estimates are contingent upon the magnitude of price rises, NIEIR reported that these could rise to -0.4 if prices changed by 30-40%. In other words, to elicit a 4% drop in demand for electricity, price changes in the order of 30-40% would be required - thus highlighting how extraordinarily small consumer responses are relative to price changes

Pensioner households and energy consumption When energy consumption patters and household’s energy expenditure for lower income groups are considered it is found that pensioner groups consume energy at a rate below average household consumption levels. However conversely, as a proportion of their weekly expenditure, they expend almost double the amount compared to the average household, further highlighting the disproportional impact price increases have on this group.

Energy costs and impact on Consumption To contextualize this in terms of the impact proposed price changes will have, it is estimated the introduction of a carbon trading scheme will result in a price increase in the order of $200 per annum for electricity cost for the average household. Remembering this is an average with some experiencing higher costs than this while a few will experience lower cost increases than expected. As such a proposed estimated price increase of $200 associated with carbon trading will only result in a $40 - $50 reduction in demand, still leaving household $150 - $160 per annum worse off.

Traditional SECV tariff no fixed charge

Flat structure no fixed charge

Inclining block tariff

Declining block tariffs

Seasonal Tariffs

Off Peak tariffs

Time of use Tariffs (TOU)

Critical Peak Pricing Tariffs

Concessions and Tariffs Governments directly intervene in ameliorating the impact of electricity tariffs on households though the use of concessions. For example: The Winter Energy Concession – This is a 17.5% discount of winter bills. This concession is designed to reduce the cost of high winter bills on Health care card holders. The Network Tariff Rebate - This concession acts as a cross subsidy to reduce the higher costs for energy in the non metropolitan area. The Supply charge concession – This concession is to offset the impact of the supply charger on low consumption households. The Off peak concession – This concession is designed to ameliorate costs from significant increases in off peak pricing during the early 2000.

Pricing principles It is proposed that pricing principles be implemented these would cap a specific amount of household electricity consumed daily at a fixed price per kilowatt. This “life line” cap would be set at a level of consumption that would equate to a minimum household usage to provide hot water, space heating, refrigeration and minimum lighting it exclude the pass though of costs associated with carbon trading and excessive profiteering of the electricity industry. Price setting for consumption post the “lifeline” price cap would be left to the individual retailers to determine. This would allow for the industry to price according to the market costs or what the market will bear.

Pricing Principles – fixed charges and other levies The fixed charge should also be capped as proportion of the regulated electricity consumption component, say at a ratio of 80% consumtion-20% fixed charges. For example, if the regulated energy consumption component was set at 14 cents for a total of 1020 KwH per quarter (a total quarterly energy cost of $142.80) then the fixed cost could not be more than $ Pricing principles and other environmental levies If Governments believe that additional charges need to be levied, for example to raise revenue for demand management or other energy conservation programs, these could be applied at a point after the energy retailers applied whatever price they set

Price Principles

Price Principles advantages This would serve a number of policy objectives that are consistent with social justice and environmental equity: Firstly it would provide a “lifeline” price cap. This price cap would serve to partially protect many low income energy consumers from carbon pricing being loaded up in the first block or fixed charge of electricity consumption. This is a potential risk as most carbon is produced from base load generation. Secondly such price principles would not only provide a reward for those households with low electricity usage it would also serve as an incentive for all household to reduce consumption to a particular level, thus supporting and rewarding those households that have sound environmental practices. Thirdly such a proposal would be consistent with and complement calls by some for households to be issued with a carbon emissions budget.

Price principles Fourthly such a proposal while increasing electricity costs for households with large consumption (costs they would be exposed to without the introduction of pricing principles) making retrofit and other alternative energy sources such as solar photo voltaic technologies more cost competitive. Fifthly the pricing principles structure complements the current energy concessions framework proving an incentive to reduce consumption limiting state exposure to concession growth which could occur if industry introduced declining block tariffs or significant increased fixed charges. Sixthly it would allow the Government to deliver its commitment to deregulation of electricity pricing. Finally it would complement the planned interval meter (smart meter) roll out allowing these principles to be implemented as the smart meters are installed in households providing a real and practical use for this technology.

VCOSS Congress 2007 Gavin Dufty Manager of Research and Policy St Vincent de Paul Society (03)