Australia’s Broken Electricity Pricing Model

With a wealth of experience spanning over four decades in shaping Australia’s energy efficiency policies, Alan Pears highlights the progress made in the system alongside its persistent shortcomings. Having advised governments at all levels, Pears has played a pivotal role in advancing energy-efficient appliances, green building standards, and mandatory home insulation regulations.

In a recent submission to the Australian Energy Market Commission’s electricity pricing review, Pears contends that Australia’s energy pricing system is fundamentally flawed and in dire need of reform.

The Issue of Bounded Rationality

Pears argues that Australia’s energy system is trapped in a cycle of “bounded rationality,” where limited thinking drives decisions on pricing and policy. This results in consumers bearing a disproportionate burden, even when they make efforts to reduce their energy consumption.

According to Pears, energy is not a desired commodity in itself; rather, people seek warm homes, well-lit spaces, and hot showers. Energy costs represent just a fraction of their decision-making process.

The Challenge with Network Charges

Despite the widespread adoption of energy-efficient technologies such as solar panels and heat pumps by many households, they continue to face significant daily network charges. These charges, intended to cover network transmission and infrastructure costs, form a substantial portion of the average Australian household’s energy bill without offering consumers the means to manage or decrease their expenses.

Pears questions the rationale behind retailers’ reluctance to promote reduced energy consumption due to the fixed costs associated with energy networks, which diminishes the incentive for energy conservation.

The Pitfalls of Time-of-Use Tariffs

Pears criticises the implementation of time-of-use tariffs and the deployment of smart meters as ineffective strategies to encourage energy consumption during off-peak hours. He highlights the impracticality of high prices during peak usage times when consumers most need electricity, leading to a lack of incentive for adjusting energy usage patterns.

He advocates for a flat tariff system that rewards consumers for energy savings and self-generated electricity, proposing that households receive credits for the energy they conserve or produce.

The Solar Conundrum

Pears expresses concern over the significant reduction in feed-in tariffs for rooftop solar systems, which, while logical from an industry perspective, feel like a betrayal to many consumers who invested in solar technology based on previous financial assumptions.

He emphasises the need for transparent and substantial savings to incentivise consumers to adopt new energy models successfully.

Rethinking Energy Pricing Models

Pears highlights the inefficiencies of “postage stamp pricing” in Australia’s energy system, where consumers pay a uniform rate for electricity regardless of their location on the grid. He suggests exploring solutions such as those implemented in Western Australia, where micro-grids and solar energy are leveraged to enhance efficiency in remote areas.

He calls for a redistribution of financial risk within the energy sector to drive innovation and encourage a shift away from traditional pricing structures.

An Empowered Future for Consumers

Pears envisions a future where consumers have the tools to manage their energy consumption effectively and are rewarded for their efforts. He advocates for the widespread availability of smart technologies like plug-in batteries, solar panels, and user-friendly appliances to empower households in making sustainable energy choices.

Ultimately, Pears sees energy pricing reform as a crucial step towards building a smarter, more sustainable energy future that benefits both consumers and the grid.

For the full interview with Alan Pears, tune in to the SwitchedOn podcast.