rss
5

Competition isn’t working in Australia’s energy retail markets

Print Friendly

The Conversation

Residential electricity prices in Canada and the United States are typically less a half those in Australia. Tony Phillips/AAP

Residential electricity prices in Canada and the United States are typically less a half those in Australia. Tony Phillips/AAP

Australia’s residential electricity prices are amongst the highest in the world so it’s not hard to see why customers have been up in arms about high prices. The Conversation

Comparing the charges for electricity retail services in Australia and in other countries, we find Australia’s charges are much higher. The difference is particularly stark when comparing retailer charges in New South Wales with those in Denmark, Germany, Italy and Britain which have the highest electricity prices in Europe.

Residential electricity prices in Canada and the United States are typically less than half those in Australia and so the situation in Australia is even more damning in that comparison.

The prime minister’s recent request to the ACCC to review the retail end of the electricity market will put this part of the industry under the spotlight. This request follows the Victorian government’s appointment of a panel to review the Victorian retail energy market.

But rising concern about retail markets is not unique to Australia. In Britain, retail energy markets have received prime ministerial attention for many years. In what the British government described as the most significant review of its industry in the 30 years since privatisation, their Competition and Markets Authority concluded that significant changes needed to be made, although some ex-regulators disputed their estimates of the problem.

These reviews indicate changing attitudes in government. The Australian Energy Markets Commission reviews Australia’s retail energy markets every year and has consistently concluded that they are working well. Similarly, the Independent Pricing and Administrative Tribunal advised the New South Wales government last year that their retail energy market is working well. Evidently the Commonwealth and Victorian government are now seeking a second opinion.

How Australia’s electricity retail market is set up

The business of retailing electricity is really finding out what customers want and then offering deals that meet those requirements. More specifically, it’s the business of procuring electricity and network services, acquiring retail customers, selling to those customers and then metering, billing and collecting revenue.

Analysis of regulatory filings shows that around 6.5 million of Australia’s 10 million households and small business customers (those in New South Wales, South Australia, South East Queensland and Victoria) can choose their retailer. These four deregulated markets are dominated by three retailers that also own sufficient generation to supply those customers.

After more than a decade of retail competition, the three big retailers typically still supply at least 80% of all customers in each regional market. While in some of the regional markets, customers can choose amongst 24 retailers, the new entrant retailers have invariably grown their customer base slowly, if at all, despite powerful incentives to the contrary.

Social services organisations, customer advocates and some independent energy economists have long voiced concerns about retail energy markets. Their concerns centre on the amount that the retailers’ charge, that customers are not happy and that electricity is becoming increasingly unaffordable.

The Grattan Institute recently published a blunt critique that went one step further. It suggested that not only are retailers charging a great deal, but that this is explained not by high costs but by excessive profits.

Competition and consumer choice

The official reviews in Australia hitherto have taken the line that if customers don’t engage in the market they can’t complain. But electricity is complex and customers need skill and a great deal of effort to reliably evaluate the market.

Since it’s a repeat purchase, active engagement means ongoing effort. Even customers with the necessary skills seem to often conclude they have better things to do with their time, as evidenced in switching rates. Pervasive advertising and the profitability of the commercial switching websites provides additional evidence of the challenge new entrant retailers face in acquiring customers.

Why would it be so hard and expensive for new entrant retailers to attract customers if they were not loyal? Therein lies an explanation for Australia’s incumbent retailers’ apparently extraordinary profits.

Andy Vesey, the chief executive of Australia’s largest electricity retailer AGL described the retail market as one that penalises customer loyalty. While such candour is admirable, even hardcore market economists question the effectiveness of a market in which retailers profit most from their most loyal customers.

The issue is non-trivial: in its cost of living surveys, customer advocate Choice has found that electricity prices are consistently the top cost of living concern for households. Electricity poverty payments to deal with affordability problems, are understood to now be costing state governments several hundreds of millions of dollars each year.

Next steps

While it has been a long time coming, the ACCC’s review in addition to the Victorian government’s review, is to be welcomed.

A great deal of effort will need to be made to get to the heart of the matter. Retail energy markets are complex and the amount that a retailer charges a customer for its services is not known for certain – it has to be estimated by subtracting the charges for network services, wholesale production, metering and environmental charges from the customer’s actual bill.

Not only do customers’ bills differ greatly but the components of the bill differ greatly for different customers and so obtaining reasonable estimates of retailers’ charges across the industry requires effort and care.

Fairly evaluating retailers’ offers and how much of their offers are explained by the retailers’ charge, is the place to start. Then finding out what customers are actually paying, and what retailers’ costs and profit margins are, is essential in assessing the nature and extent of market failure.

The reviews will need to cover tricky ground in assessing the economies of scale in retailing, and the value to electricity retailers of also owning electricity generation businesses that supply them. The extent to which high customer acquisition costs provide an advantage to the dominant incumbent retailers who don’t incur those costs unless they are seeking to expand their market share must also feature in the analysis.

There is reason to be hopeful about the ACCC and Victorian government reviews. Done well, they can allow sunlight into this part of the industry. As they say in regulatory circles, sunlight is the best disinfectant.

Bruce Mountain is the Director of Carbon and Energy Markets and co-founder of retail market data provider, MarkIntell.

Source: The Conversation. Reproduced with permission.  

Share this:

  • Consolidation seems to be a pretty standard outcome of any market in Australia. It would be interesting to see a comparison of the profitability of utilities vs banks, for example. Both operate in regulated markets with a large number of competitors and a small number of “tier 1” service providers.

    Cheers.

    Dave P.

  • Sorry for being so skeptical but the ACCC performance in terms of addressing anti-competitive actions appears abysmal – just more good jobs for the boys.

    On a different aspect, there is a lot of noise from the government on how more coal fired power station will bring electricity costs down, which are high due to renewables and the RET.
    My question is that if c.15% of power generated comes from renewables of which c. half is from wind and solar i.e. 7,5% of total generation and the other half from hydro, most of which (I think) is not covered under the RET. How can the 7.5% from wind and solar be dramatically driving up the price of the other 85% of thermal power???
    Also, why does nobody raise this argument??

  • Joe

    I don’t want this so called ‘energy market’. I want an ‘energy service’ at a fair price. This is what we used to have before all of this privatisation. Privatisation, we were promised, would deliver cheaper prices and more efficient everything. Just like every other privatisation…an epic fail…for which us consumers have to pick up the tab. Over the last 10 or so years the wholesale price of electricity has been relatively flat but the retail price has doubled, which we ALL know about. That ain’t the fault of renewables !

    • MaxG

      It requires systems thinking as to why we live in the world we do: illusionary democracies, neoliberalism present in the other major party; corporations ruling the world (see FTAs, TPPS, etc), politicians in bed with the corporations; all with one goal, to destroy the social fabric, make the rich richer and the rest poorer with no regard for the planet. Profits over people, and privatise profits and socialise costs…

  • Just_Chris

    The problem is transparency.

    The poles and wires should be a fixed daily charge that is exactly the same for everyone preferably across the whole NEM because poles and wires are a fixed cost.

    The cost per kWh should be a multiple of the spot price with a cap on the top and a minimum price at the bottom. The FIT from your solar or battery or diesel generator should also be a multiple of the spot price. Everything else should be in the T&C’s. There should be no discounts or other guff around the multiple. It should be like a loan, you have in black and white the APR, for comparison with power there should be a simple multiple.

    When you go to the price comparison site it should say:

    AGL
    power – 2.5x FIT – 1.25x

    Energy Australia
    Power – 2x FIT – 1.5x

    Origin
    Power – 3x FIT – 2x

    Everyone could see what they were getting, you could compare easily and you would change your behaviour to reduce your bill. Any funny business from the generation companies pushing up the price and we’ll all be running co-gen units or increasing the size of our solar battery systems. There would need to be other rules to correct market failures and to ensure that the grid still worked but essentially if the system is transparent and real then it’ll work. The problem comes from the artificial fixed price mess of offers and discounts that we have at the moment.