Price shock: is the retail electricity market failing consumers?

14 Mar 2017

Competition in electricity retailing hasn’t delivered what was promised: lower prices for consumers. The failure is worst in Victoria, the state with the most retailers and the longest experience of deregulation. Profit margins appear to be higher than in other retail sectors – and more than double the margin that regulators considered fair when they set retail electricity prices. Victorians would save about $250 million a year if the profit margin of electricity retailers fell to match that of other retail businesses.

The price problem goes beyond Victoria. Across Melbourne, Sydney, Brisbane and Adelaide, consumers are paying nearly twice as much for electricity as they were a decade ago. Electricity bills are the number one cost concern for Australian households. High gas prices, the shutdown of older coal-fired generators and the shift to renewables are increasing bills everywhere. But the price rise should be less in Victoria because there has not been major new investments in poles and wires, unlike NSW and Queensland.

Lower price deals are available, but most consumers find the market so complicated that they have given up trying to find them. Thus, many Australians, including some of the most vulnerable, are paying more than they need to. The way retailers advertise their discounts is confusing and possibly misleading. And even consumers who take advantage of discounts can end up paying much higher prices when their contract expires. Electricity is an essential service without substitutes, so many consumers feel stuck and simply give up.

Nor has competition yet delivered the promised innovation in customer service. Most offers provide a discount for people who switch their retailer, pay their bills on time, or pay via direct debit; but there has been little real innovation around the service itself. Retailers have been slow to build offers based on the benefits available through smart meters, or the bundling of solar-power and battery-storage systems. Instead they have super-charged their marketing costs for a commodity product that almost every consumer was going to buy anyway.

Competition has delivered lower costs in the wholesale/generation sector where the purchases are specialised. In contrast, the benefits of retail competition in electricity may just be less than the costs. But it is too early to give up on competition altogether.

The experience in other countries, particularly the UK, shows that reregulating prices can cause problems of its own. Retailers say that major innovation is just around the corner, and governments should not look after ‘lazy’ customers. Nonetheless, governments should require retailers to tell customers precisely how much they will pay under ‘discount’ deals, and to advertise in ways that make prices easier to compare. They should require retailers to adequately warn customers when their contract is about to expire and how much extra they will pay if they take no action. They should encourage retailers to provide detailed data on their profit margins to an independent body, and threaten to mandate disclosure if they don’t. The results of these and other actions recommended in this report should be monitored against the realistic expectations of competition. The industry is on notice. We may yet see fairer prices. We may yet see real innovation. But if not, governments will have no choice but to return to price regulation.

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