02/02/2021 What’s it like being on a real-time electricity pricing plan? Observations from my poorly insulated townhouse


For 4 months I have been on a real-time retail electricity plan. This plan is a departure from the traditional electricity tariff structure of a day charge and a flat-rate volumetric energy charge. Instead, there is a monthly $10 subscription fee, and cost passthrough all regulated network charges, environmental charges, and energy costs at the prevailing wholesale spot price. These spot prices can be very volatile, which has the potential to be challenging for a household like mine with low-tech appliances. To date, I have “saved” 35% relative to the Victorian Default Offer and 21% relative to my previous plan. Yet there is more to consider than just headline savings …

This post contains a brief background on electricity tariffs before jumping into my observations as a real-time pricing customer before promoting a new working paper that examines who would pay more or less under real-time pricing. If you want to discuss, click on this LinkedIn link.

Note: This post contains my personal views only and I do not represent any firm that participates in retail electricity markets.


Background: Electricity metering, wholesale prices and retail tariffs

Historically, meters were mechanical, like an odometer. Two manual readings of the meter (usually 1-3 months apart) and you have the total usage over that period. Utilities had 2 data points available for them to use in billing – total days connected and total energy consumed. It is perhaps not surprising that most billing structures took on a similar structure: a day charge and a flat-rate volumetric energy charge.

This retail tariff structure is not ideal from an economic efficiency perspective – the cost of electrical energy can vary greatly across seasons, days, hours and sometimes minutes. Intuitively, you can think that the lowest cost power stations will run nearly all the time (or in the case of wind + solar, whenever they can), and when demand for energy is low, wholesale prices are low. But when there is a lot of electricity demand (and/or when wind + solar conditions are poor), then the higher cost power stations must start-up, pushing up wholesale prices as they need to recover their costs and earn a profit. So the tariff structure doesn’t do much to reward folks that don’t use much energy in the peak periods – instead they essentially cross-subsidise those that use energy in the peak periods. Further, the tariffs don’t incentivise the reduction of energy at peak times, privately it costs me the same to wash my clothes at midday or at 6pm, even though the true cost can be a lot more at 6pm (in terms of generating costs, and often environmental costs if factoring the cost of carbon emissions from power stations).

We are not talking about small wholesale price differences. Here is the average wholesale price in each hour of the day for Victoria in 2019, broken up by the non-summer and summer months. By-and-large, prices are lower overnight and during the middle-of-the-day, with a small morning peak and a larger evening peak.* In non-summer, the average trough price is about a half of the average peak price. In summer, it is about a third. This isn’t to say every evening is expensive, and every noon is cheap - it might be that a handful of days might have extremely high wholesale prices at the peak and others not so high.