With Indigo Power’s annual reprice coming up at the new financial year, Indigo Power’s analyst, Nick Mason-Smith assesses different retail contracts and explains Indigo Power’s current approach to pricing.
“A bottle of milk, thanks.”
Low fat, no fat, full cream, high calcium, high protein, soy, light skim, Omega 3, high calcium with vitamin D & folate or extra dollop?
Electricity customers are more different from each other than they have ever been before – many have solar panels, some have (and thanks to the Cheaper Home Batteries initiative, likely many more will have) battery storage, and some have electric vehicles. Making sense of the range of offers in the retail electricity market – determining which are a good fit for which kind of customer – is challenging.
Price signals have become far more relevant to the retail electricity market than they once were. For years, most customers – apart from some large businesses – used basic meters that recorded only a single reading every few months, so retailers could offer only a handful of simple tariff structures. Smart meters, now widespread, give retailers far richer data, opening the door to a wider variety of offers. We can frame today’s retail contracts by the financial risks customers assume:
- Flat tariffs: your bill is driven solely by total electricity imported from the grid over the billing period.
- Time-of-use tariffs: rates change with the time you draw power, rewarding off-peak use and penalising peak-time demand.
- Dynamic pricing: extends time-of-use by tying rates to a volatile external factor—typically the real-time wholesale market price.
- Virtual power plants (VPPs): essentially a time-of-use tariff where the retailer can control flexible assets (e.g. household batteries or smart appliances) to optimise both your costs and grid support.
More choice should let retailers pass on sharper prices where customers are willing to shoulder risk that retailers previously carried. Yet as offers proliferate, the likelihood of mismatches between a customer’s appetite for risk and the tariff they select also rises. In the following sections we examine time-of-use tariffs, dynamic pricing and VPPs, and set out the reasoning behind our preferred pricing approach.
Time of use pricing
There are two main motivations for time-of-use pricing. One is because the total amount of distribution network (poles and wires) that is built depends on the amount of electricity it might be expected to carry under times of peak electricity consumption (peak demand). If customers can reduce their contribution to peak demand (or prevent it from growing), this reduces the required amount of network infrastructure required – a cost which is ultimately paid by all customers of that network1. Peak demand conditions occur infrequently, and generally during heatwaves.
Time-of-use tariffs are a blunt instrument that apply every day of the year, when (from the perspective of the poles and wires company) only a handful of days each year are important.
The second motivation for time-of-use pricing is that of the electricity retailer. The wholesale price of electricity varies considerably due to supply and demand fluctuations, with renewable energy generation significantly reducing prices at times when it is abundant. Time-of-use pricing provides a way of rewarding customers for shifting load out of the expensive evening peak (or, phrased differently, it provides a way of passing the shape risk back to the customer).
We recently introduced the Energy Shapers plan; imports are cheaper from 10 am to 3 pm and carry a small surcharge at other times. This incentivises energy sharing but also rewards consumption patterns that lower our supply costs, which allows us to deliver better pricing across our whole customer base.
Virtual power plants
Virtual power plants (VPPs) are retail electricity contracts where the customer provides their retailer with control of their energy devices (generally batteries and solar, but potentially electric vehicles (EVs) as well and water heaters). The customer pays a time-of-use tariff and receives a VPP payment or credit that reduces their total bill. Retailers can use the customer’s energy devices to reduce their cost to serve both the VPP customer and other customers (a customer base with controllable loads and generation can be operated to manage price volatility and reduce risk).
In a VPP, households sell the right to control their batteries and other smart devices back to the retailer, at a price the retailer sets. As Finn Peacock, the founder of Solar Quotes observes, ‘Most people buy batteries to regain control of their energy usage, not let someone else meddle with it.’2
Dynamic pricing
Dynamic pricing is a retail contract in which the price paid by the customer moves according to some factor that isn’t pre-determined at the time of entering the contract. The most apparent example is wholesale passthrough pricing, in which (subject to certain limitations) the price that the customer pays for electricity varies in line with the wholesale electricity price. This price moves every five minutes and varies significantly between negative prices (being paid to consume) up to extreme peaks (I’ve heard it said that Australian spot electricity is the most volatile commodity market in the world). While this makes for a potentially expensive (or rewarding) cup of tea, this provides a strong price incentive for price-responsive devices like batteries.
Dynamic pricing does not necessarily need to provide straight wholesale market exposure. For example, we had an extremely windy week in late August of 2024. Because wind was the marginal generator – the generator whose output was adjusted to balance electricity supply and demand – for much of that week, there was a lot of renewable generation surplus to demand that was spilled. This sort of event (which is likely to become more commonplace as we increase the proportion of renewable energy in our electricity system) turns energy efficiency on its head: there is little point in conserving energy when it will otherwise go to ground. While time-of-use tariffs can’t communicate surplus wind, dynamic pricing can.
Dynamic pricing is also sometimes used by electricity networks. Medium and large businesses in AusNet’s distribution network pay critical peak demand charges, which depend on their grid demand during four hours of five days each year, with each event communicated one day in advance. This encourages demand reduction when (from the network’s perspective) it matters, without needlessly encouraging it every single day.
Meter unbundling
A meter defines a contractual boundary – and it is possible to have multiple boundaries. This is already the case for some customers who have a circuit that is separately metered and charged. These dedicated circuits are typically used for resistive hot water heating or slab heating but can be used for other appliances as well. They are controlled by the DNSP and turn on overnight. A recent rule change3 allows electricity retailers to price devices rather than circuits, meaning your EV could be on a peaky rate (encouraging you to charge outside of the evening peak) while the rest of your house stays on a standard plan.
What if I just want milk that tastes like real milk?
A premise upon which smart meter rollout is based is the assumption that electricity imports from the grid are, at least in part, ‘flexible’. Much as we might vary our avocado purchases at the supermarket depending on their price, so too will we make decisions to consume more or less electricity at certain times of the day according to price. We may also decide to invest in technologies that help us manage our exposure to these prices.
This premise is not without basis. The rate at which households install insulation and solar panels depends on the price of electricity. Peak pricing for electricity, for instance, provides an incentive for households to invest in energy storage. Reducing the cost of daytime electricity imports reduces the incentive to install solar panels. And provided it has sufficient storage and insulation, our experience of a shower will be independent of when the hot water heats.
There are, of course, limits to electricity flexibility. Our lives are lived according to routines that have nothing to do with our utilities. While some are happy to sit around in the dark at times of high electricity spot prices4, many of us wouldn’t enjoy using an essential service in this way.
Social researcher Yolande Strengers coined the term ‘resource man’ to describe an imaginary electricity industry archetype consumer. Resource Man:
responds rationally to price signals and makes informed decisions based on up-to-date and detailed data provided about the costs, resource units (kilowatt hours), and impacts (greenhouse gas emissions) of his consumption. For these tasks he needs information, dynamic prices, and enabling technologies, such as automated smart appliances and micro-generation systems, which allow him to transform his home into a resource control station. He is both in control of his energy consumption and assigns this control to technologies to manage on his behalf…5
Resource Man is an ironic representation of the electricity industry’s view of people. People’s lives extend beyond the electricity market:
A key risk with Resource Man is that we simply overlook the majority of social activity in which energy consumption is implicated. We focus on kilowatt hours rather than laundry, greenhouse gas emissions rather than home comfort, and electricity costs rather than new dietary trends, emerging cooking appliances, and meal planning.6
In a recent Energy Insiders podcast, Strengers noted that people’s motivations extend beyond price:
“There are actually far greater opportunities in engaging people around their values, their priorities—getting them to think about energy sharing rather than energy trading.”7
Indigo Power’s energy-sharing portal tracks how much electricity customers share with each other. Our ‘Energy Shapers’ plan supports this by lowering import charges from 10am to 3pm and adding a small surcharge at other times. The plan offers a clear price signal that households can follow without materially penalising the everyday routines of our customers.
Indigo Power applies time of use pricing, providing gentle, regular price signals, without passing the market risk and its management onto our customers. We seek to offer pricing that can be easily interpreted, is fair and transparent, and shares any financial benefits equally. Avoiding consumption during peak periods, for instance, reduces Indigo Power’s hedging costs, creating a financial benefit that can be shared across all Indigo Power customers through lower pricing. Adding in a VPP offer could create further financial benefit; however, we believe customers value full control over their battery and household appliances.
We want to hear from you. What does your household or small business want from electricity pricing? How flexible are you?
On Thursday July 24, at 11am we’ll be hosting a pricing webinar. We’ll explain how we price electricity and the recent pricing trends; and give you an opportunity to provide feedback.
Footnotes:
- Preventing expensive grid upgrades by encouraging peak demand reduction was a major motivation for the Australian Energy Market Commission’s (AEMC) adoption of the ‘cost-reflective network prices’ rule change in 2014: https://www.aemc.gov.au/news-centre/media-releases/new-rules-for-cost-reflective-network-prices ↩︎
- https://www.solarquotes.com.au/battery-storage/virtual-power-plants/ ↩︎
- https://www.aemc.gov.au/rule-changes/unlocking-CER-benefits-through-flexible-trading ↩︎
- https://www.afr.com/policy/energy-and-climate/the-energy-warlords-saving-thousands-on-their-power-bills-20250318-p5lkgx ↩︎
- https://dl.acm.org/doi/fullHtml/10.1145/2621931 ↩︎
- https://dl.acm.org/doi/fullHtml/10.1145/2621931 ↩︎
- https://onestepoffthegrid.com.au/smart-tech-dumb-assumptions-why-energy-consumers-dont-behave-like-the-industry-expects/ ↩︎
As an analyst, Nick specialises in energy systems and sustainability initiatives. He explains the complexities of integrating community-scale batteries, aiming to revolutionise energy distribution and resilience. Nick leads a federally-funded feasibility study on community-scale batteries in North East Victoria.