How you pay for your neighbour’s air-con

By Sara Phillips                                                                                                           ABC Environment, 16 Jan 2014

How you pay for your neighbour’s air-con

While you’re sweating it out, you’re paying for your neighbour’s air-conditioning to be running. How? It’s because the electricity market in Australia needs changing.


Are you one of the lucky ones with air conditioning? As we swelter through this heatwave, those that can are switching on the AC and keeping cool. Those that can’t are lying semi-naked in front of fans with a wet cloth on their heads.

In the past 20 years, Australians have embraced air conditioning. In 1994, a quarter of households had it. These days more than half do.

While it’s bliss to sprawl in front of the cold air, there is a serious downside to chilling out. The Productivity Commission last year said that air conditioners are largely responsible for putting the electricity network under strain and that strain costs us dearly.

On hot days, like today, we all turn on the air-con at the same time, creating a situation that the electricity companies call ‘peak demand’.

The Productivity Commission said “[I]n New South Wales, peak demand events occurring for less than 40 hours per year (or less than one per cent of the time) account for around 25 per cent of retail electricity bills.”

In other words, the pressure to meet peak demand has made the electricity companies over-invest in extra power stations that we rarely use. But we still wear the cost of building them on our electricity bills.

“For example,” the PC’s Electricity Network Regulatory Frameworks report continues, “a household running a two kilowatt (electrical input) reverse cycle air conditioner, and using it during peak times, receives an implicit subsidy equivalent of around $350 per year from other consumers who don’t do this.”

In effect, your sweaty neighbours without air-con are helping to pay for your comfort.

The solution, says the PC, is something called ‘demand management’. It’s about finding ways to reduce overall demand for electricity, but particularly during peak times so that huge sums of money are not invested in new power plants that are hardly ever switched on.

It’s basically the electricity equivalent of water restrictions during a drought so a new dam doesn’t need to be built.

CSIRO published a post yesterday about some demand management ideas that have been given a run. It includes an idea they call ‘cost reflective pricing’, which is also known as ‘time of use pricing’ or ‘flexible pricing’. In essence, your electricity company charges you more for electricity at peak times of demand, thereby encouraging you to save your energy-intensive activities for a cheaper time of day.

Some energy retailers in Australia offer such a service, but it tends to be something that customers need to ring up and request, rather than being automatic.

I spoke with Gilles Walgenwitz, a consultant with energy efficiency firm Energetics about some other ideas too. He nominated ‘voluntary curtailment’ in which customers (usually commercial customers) enter into an agreement with their energy company to shut down a piece of equipment on request when peak demand hits.

There’s also ‘direct load control’ where energy companies are given the power by customers to switch off power to various appliances during periods of peak demand.

All of these ideas have been piloted in Australia. All of them have been shown to work. However implementing them has been slower in coming. This is primarily because of the way energy companies make their money.

Energy companies either make money by charging customers for electricity or by building new infrastructure. The more electricity you use, the more likely it is that electricity companies will receive income from either of these sources.

They have very little incentive to help you save electricity.

Coupled with the popularity of solar panels, electricity companies’ business models are looking unprepared for life in the 21st century.

The Productivity Commission was called in to try to suggest some ways that the energy companies of Australia could organise themselves to be better prepared for the changing market conditions.

The government at the time enthusiastically embraced the PC’s recommendations, but said that a lot of them were already under consideration by Standing Council on Energy and Resources, the committee made up of Australian state energy ministers.

At the latest SCER meeting, in December 2013, the ministers announced that “While continuing to recognise the value of demand side reform, ministers agreed to request the Australian Energy Market Operator to defer lodgement of the rule change proposal and requested officials to undertake further work on DRM, including a cost benefit study, and report back to ministers at their first meeting in 2014.” Which is government-ese for watch this space.

In the meantime the government launched a new look at energy policy via its white paper on energy. The paper is due in September.

As the PC report itself drily noted: “[T]he National Electricity Market has too often proved to be a graveyard for reform proposals, which then remain as inert words in dead documents.”

The risk is that if the latest proposals to reform the energy market get tangled in bureaucracy the elderly, the young and the infirm will be at risk as the electricity grid struggles to cope. And the rest of us will cop higher electricity bills.


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