Getting tariff signals and CER incentives right. 

Just before the Christmas break, the AEMC published its widely anticipated Pricing Review draft report. The draft report hands down six recommendations; three focused on providing less engaged customers with the best energy retail offer, one to improve the Energy Made Easy website, and two focused on changing how networks design network tariffs. 

The AEMC’s draft pricing review argues it’s time to rethink tariff design, focusing on fair recovery of sunk network costs through the transition. It proposes shifting more residual, unavoidable costs into a stable access charge, leaving the variable part of the bill to send efficient long‑run marginal cost signals that guide when and how customers use electricity. The goal isn’t to choose between fixed charges and consumer energy resources (CER), but to design both elements to work together for efficient cost recovery, equitable cost sharing, and clear CER incentives. 

There is significant debate on what equitable cost recovery is. Is it charging customers based on how much energy they draw from the grid through volumetric charging or is it equitable sharing of network infrastructure costs including those related to the management of CER? With CER resources only increasing, is it fair for consumers with access to CER to pass on the costs related to its management to customers without the ability to drastically reduce their energy consumption through the deployment of these resources?  

The question isn’t whether higher fixed charges are perfect, no tariff structure will satisfy everyone. The question is whether they’re the least problematic way to make the economics of the energy transition work fairly for all customers, while preserving the incentives for continuing rapid CER uptake across the NEM.  

Addressing the fixed charges versus CER tension 

Recommendation 5 is for network tariffs to target ‘efficiency’ and explicitly contemplates tariffs that are ‘predominantly fixed, but with a dynamic element designed to reward consumers for avoiding grid consumption’. The recommendation suggests the variable charge would be set at zero most of the time, utilised as an incentive to change demand on the network and decrease overall investment costs. 

Consumer and media reaction has reflected a fair amount of concern with this shift and a fear that higher fixed charges will blunt incentives for household investment in rooftop solar, batteries or change behaviour for load flexibility. This reaction misses a crucial distinction. 

The underlying driver to increase the fixed charge in network tariffs is to allow networks to recover residual costs proportionately from all customers. With high variable charges, customers with rooftop solar PV and batteries can significantly reduce their electricity bills and hence their share of the cost to deliver energy to their premises. Meanwhile, networks face increasing costs to manage two-way energy flows as more distributed energy resources connect to the grid. The result is that while all customers are driving network capital expenditure, customers with CER are paying a smaller and smaller portion of the bill, with non CER owning customers picking up the balance by virtue of the regulated return mechanisms that provide for networks to recover the costs of their investments.  

This isn’t an abstract efficiency concern, it’s a fairness issue. While volumetric charging could further incentivise some customers to invest in CER, some customers do not have access to these resources, so is it fair for them to be lumped with a higher cost? These are likely to be customers in rental properties, apartment buildings or low-income households.  As CER adoption accelerates, this cross-subsidy grows larger. 

Recovering more residual costs in fixed charges improves both efficiency and equity, especially between CER and non-CER customers, and reduces retailer exposure to volumetric impacts from higher CER uptake. Proportionately higher fixed cost recovery over time does not mean giving up on strong signals for CER adoption. 

Recovering costs through a greater proportion of fixed charges would clarify where CER incentives properly belong: in smart, dynamic, and retail-facing tariff components, not in residual cost recovery mechanisms. The variable component is still key to incentivise behaviour during the transition to net zero. But the transition toward higher fixed charges must be gradual, ensuring the most vulnerable customers are protected and the possible impact in terms of energy bills is understood. 

The economic logic of recovering more costs through fixed charges 

The economic case for shifting more residual costs to fixed charges rests on well-established regulatory principles. Residual costs are sunk and do not vary with customer usage. When residual costs are recovered through volumetric charges, several inefficiencies emerge. Customers make decisions about CER investment based on avoiding costs that aren’t actually caused by their usage. Networks face revenue volatility as consumption patterns shift. And the allocation of costs becomes increasingly arbitrary as the relationship between usage and cost causation weakens. 

The part of the tariff that reflects the cost of supplying an additional unit of electricity at a given time is the long run marginal cost (LRMC), which ENA believes should be the guide for usage charges. 

There is a need for clear separation between an access charge and a usage component.  

This separation gives retailers the right tools to package strong, targeted CER incentives, whether EV tariffs, solar-plus-battery plans, or orchestration deals, without distortion from how residual costs are recovered. Dynamic tariffs can focus on “shape and shift” behaviours, rewarding customers who respond to system needs to lower overall network costs for everyone. 

While shifting more costs into fixed charges is economically sound, it’s equally important to preserve meaningful variable price signals that drive efficient customer behaviour and investment in CER. International experience offers valuable lessons on how the balance can be lost if reforms go too far. 

California’s experience highlights the risk of overflattening tariff signals, where very high fixed charges and weak variable prices could dull customer responsiveness and discourage investment in flexible, priceresponsive technologies like batteries and smart EV chargers. The lesson for Australia is to ensure that as more costs shift to fixed charges, the remaining variable component retains enough time and price variation to reward flexibility and support efficient CER participation. 

Network pricing direction  

Recommendation 6 complements the tariff structure changes by proposing that networks design tariffs for its end customer: the retailer. This shift allows retailers to become more competitive and innovative with customer-facing tariffs and reflects the reality that retailers are the  customers for network services. 

This approach pushes retailers to be more sophisticated with tariff design, translating network signals into products that customers can understand and respond to. It lets competitive markets do what they do best and acknowledges that household customers are primarily the retailer’s domain. 

In recent years, a key element of every revenue reset has been the in-depth engagement DNSPs conduct with customers to understand preferences and shape underlying expenditure proposals. Under Recommendation 6, the nature of this engagement will evolve. Networks will need to engage more deeply with retailers as their direct customers, but the role of direct customer engagement by networks will remain important. 

How networks can best engage with retailers, and what role remains for direct customer engagement, requires further thought and development as the industry implements these reforms. 

Next steps  

The recommendations outlined by the AEMC provide a guiding direction for reform. The next step should be to develop worked examples of access-plus-dynamic tariff structures, i.e. tangible tariff designs that illustrate how fixed and variable components work together across different customer types and network contexts. 

This prototyping work could help networks, retailers, and regulators test assumptions, identify implementation challenges, and demonstrate to customers how reformed tariffs would operate. Only through practical examples, and engagement across the industry on those examples, can the industry move from the recommendations provided in the AEMC’s review, to tariffs that deliver efficient cost recovery, equitable outcomes, and strong CER incentives. 

Resources 

Richard Tooth Tooth-LRMC-for-Pricing-Revised-Oct2025.pdf 

Some controversies in the Application of Marginal Cost pricing to Accelerate Electrification: A case study of Ratemaking in California: <p>Some Controversies in the Application of Marginal Cost Pricing to Accelerate Electrification: A Case Study of Ratemaking in California</p> by Ahmad Faruqui :: SSRN 

Farrier Swier for ENA, ENA.pdf 

Ron Ben David AEMC Pricing Review. Six recommendations 

Australian Energy Market Commission. (2025). Pricing Review: Electricity pricing for a consumer-driven future – Draft Report. https://www.aemc.gov.au/market-reviews-advice/pricing-review-electricity-pricing-consumer-driven-future 

Farrier Swier Consulting. (2025). Submission to AEMC Pricing Review by Energy Networks Australia. https://www.aemc.gov.au/sites/default/files/2025-07/ENA.pdf 

Tooth, R. (2025). Long Run Marginal Cost for Pricing (Revised). SRG Expert. https://srgexpert.com/wp-content/uploads/2025/10/Tooth-LRMC-for-Pricing-Revised-Oct2025.pdf 

Faruqui, A. (2025). Some Controversies in the Application of Marginal Cost Pricing to Accelerate Electrification: A Case Study of Ratemaking in California. SSRN. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=5929834