Breaking down the power bill stack in a transitioning energy market
In simpler times, the costs that made up an electricity bill were as straight forward as the supply chain.
Electricity was generated in the coal-rich valleys, transported along transmission lines and then through poles and wires into our homes and businesses. Just like the Backstreet Boys or the Spice Girls of the same era, each individual has a set role to play and they all follow their choreographed steps to perfection.
The retailer would manage and bill the customer for the costs to generate, transport and measure their electricity usage. Electricity bills today don’t look like they’ve changed much, but the costs and parts of the energy supply chain they represent have. Fast forward ten years and we have an entire “orchestra” supplying electricity while at the same time working franticly to decarbonise the electricity system. The services that make up an electricity bill are also changing. More and more instruments are entering the pit and they’re not all in tune. From evolving roles and responsibilities to new services to keep the lights on that didn’t exist ten years ago, these are all wrapped up in what looks like the same plain old electricity bill.
The traditional electricity system, shown in the below excerpt from the Australian Energy Market Commission’s (AEMC) 2012 Electricity price movements report, is largely a linear supply chain. The retailer packages the costs to generate, transport and measure electricity, and charges the total (including their own costs and margin) to the customer. That’s all included in the tariffs and final bill that a customer pays.
In 2012 there was already emerging complexity in the electricity cost stack. Customers were starting to put solar on rooftops driven by feed-in-tariffs applied by state governments. These costs were mostly recovered by distribution network businesses. Other green scheme costs were managed by retailers and formed a small but growing part of the bill. They were the early signs of increased complexity and dynamism in the physical and financial energy system.
Fast forward ten or so years to today.
The bill looks largely the same – indeed there are detailed rules on the information set out on a bill that have changed little. Yet the simplicity of those few numbers, that seem to rise each time the letter with the window arrives, belies an incredibly complex transition to a net zero electricity system. A transition that is largely out of sight and mind for the customer, while at the same time being underwritten by their paying those very same ordinary looking bills.
The imperative to decarbonise, keep costs down, and keep the lights on, has significantly increased the complexity of the system. A centralised mechanical system is transforming into a decentralised and increasingly digital system of systems.
To build an analogy, consider the electricity system is like an orchestra that each day must play a wonderfully complex symphony. In the old days the conductor of the show – the market operator – would wave her baton and each instrument would respond. Now imagine that the same composition must be played, but now half the audience have brought their own instruments, while some key sections of your old orchestra have packed up and gone home, replaced by a wind section that only half shows up on some days and a brass section that stays in bed on rainy days.
An intricate set of new services has sprung up to wrestle with this new complexity. New roles emerge, like harmonising the audience by coaxing them to play in tune (market aggregation) and shushing them when they get too loud (a dynamic sound limit imposed by the venue). The conductor also must source new services to replace those that went home with parts of the orchestra, like rhythm and pitch (the musical equivalent of electricity system strength and inertia).
Before we stretch the analogy beyond breaking, let’s take a moment to empathise with customers trying to come to grips with the transforming energy landscape. They see an opaque and complex energy system through a polarising political discourse, all with the ongoing lived experience of increasing energy costs – albeit most recently driven by an upheaval in global energy markets.
A smooth (as far as it can be) energy transition requires strong and sustained societal support. Given the experiences of real customers, clearly this will take more sensitivity and honesty in engagement than we have achieved as an industry to date. Customers don’t discriminate between retailers, networks, aggregators, metering providers, system strength service providers, or any other new-fangled part of the evolving energy system. They don’t see that on their bill. They see one energy sector and they want it to deliver clean, affordable and reliable energy. Perhaps there’s a need for a little more harmony in how the energy sector engages and helps customers and communities through a difficult and complex energy, and ultimately societal, transition.