Mar 14 2024

High Profile: Calculating consumption for DMO

High Profile: Calculating consumption for DMO 

A draft decision on the next Default Market Offer (DMO) – the regulated price set by the Australian Energy Regulator (AER) – is expected soon and there has already been speculation on what it might be. 

The media’s interest in particular appears to be based around the AER seeking stakeholder views on whether the way it calculates the load profile for energy users should change to take into account smart meter data (also called interval or advance meter data). For that reason, we thought it was useful to outline what is being proposed and why. 

Recommendation 

Each year, the AER commissions a consultant to undertake analysis and make recommendations as to how it should set the wholesale electricity cost element of the DMO. In its 2023 report, which was used as a basis for setting DMO 5, consulting firm ACIL Allen recommended a change to the AER’s methodology which would see the regulator use smart meter data in tandem with the older accumulation meter data the regulator has used to date. The reason? To provide a more accurate picture of a customer’s consumption profile a retailer will need to meet through their contracting arrangements. The consultants also noted doing this sooner rather than later and “when it represents a smaller proportion of customers will result in a modest change”.   

The dataset used to date is known as the net system load profile (NSLP) and controlled load profile (CLP). Given the increasing numbers of households with solar as well as smart meters, and the expectation this can only accelerate with factors like the Australian Energy Market Commission (AEMC) setting a target to have a full rollout of these meters to all households by 2030, it makes sense to make use of this data if the DMO is to more accurately reflect the actual costs incurred by a retailer. There is an expectation more solar will bring “peakier” loads which retailers will need to meet.  

As noted by the AER, the rollout of advanced meters “is expected to create a more accurate view of the consumption patterns of consumers. This combination of peakier load profiles and more accurate data may lead retailers to adapt their hedging strategy e.g. to change the mixture of hedge contracts they purchase and the extent to which they are exposed to the spot price”. 

By seeking to include smart meter data alongside the data from accumulation meters to establish customer usage (or load), the AER is attempting to develop a benchmark wholesale energy cost for a representative retailer. 

ACIL Allen has pointed to the use of smart meter data improving “the estimation of the cost of supplying energy to small customers because the interval meter data in addition to the NSLP better reflects the shape of small customers’ load”.  

The consultant’s report also argued delaying use of the data would run the risk of a future “step change” (or shock) to the way wholesale costs are calculated in the regulated price. Given all meters are expected to be smart meters under the AEMC’s target, this would occur in the next six years. 

In light of these developments, the AER sought stakeholder views on the question of whether the way it estimates load profiles should be changed and noted “a blended load profile including advanced [or smart] meter data would more accurately represent the load that a prudent retailer would hedge”.  Retailers agree with this assessment and consider utilising such a blended approach will smooth out the change if undertaken in the near term. Deferring the change will ultimately see a greater impact in future years.  

It’s Complicated 

The complications and difficulties in setting a regulated price are highlighted by the need for this proposed change which reflects changes in usage patterns from the grid and the change in technology, such as smart meters. With the major increase in rooftop solar, around a third of homes are now estimated to have PV installations, and with it, smart meters.   

Unsurprisingly, the AER expects the number of solar PV systems to continue to increase, with the need for this to be reflected in future DMO decisions.  

Retailers have agreed with ACIL Allen’s assessment and have argued accurate data should be used sooner rather than later to better reflect the actual costs incurred by retailers. This would also align with the stated aims of the DMO to:

  • allow retailers to recover the efficient costs of providing services, including a reasonable retail margin and costs associated with customer acquisition and retention, and
  • maintain incentives for competition, innovation and investment by retailers, and incentives for consumers to engage in the market.

The retail allowance includes compensation to retailers for their costs to serve, the costs involved in acquiring and retaining customers, the costs of smart meters, allowance for bad and doubtful debt, plus, IT systems and call centres. 

Of course, the other objective of the DMO is to protect consumers from “unreasonable” electricity prices.  All these objectives need to be balanced, which is the tricky part. The DMO acts as a reference price in the market and is intended to be a safety net for the estimated 10 per cent of households that have not gone on to a market price.  It is not meant to be the best offer available and does need to allow retailers room to recover reasonable costs. For that reason, it should be based on the best possible data available. 

In light of this, the Australian Energy Council agrees that the AER should use smart meter data alongside the NSLP in its calculations for all future determinations, particularly given the growing proportion of customer load settled under smart meter data. When governments choose to regulate prices, it is incumbent on regulators to use the best possible information to set a price that most accurately reflects the costs retailers face, not set a price that meets political expectations. If governments consider this cost is higher than customers can bear, its role is to support households and businesses through concessions, rebates, and bill relief, as has been provided in the past 12 months.  

For customers who can switch, the message is now is not the time to wait for regulated prices to fall. Engage with the market, shop around using one of the Government run comparison sites and find a cheaper deal today.  

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