Big power players will be able to dance around ACCC proposals

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Don’t get too excited about the ACCC proposals on energy prices – the big players will be able to dance around them, precisely because of the huge power and protections offered them by the industry regulators, particularly around competition.

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Australian Competition and Consumer Commission chairman Rod Sims says the big utilities who have been profiteering from extraordinary high power prices should have much to fear from his voluminous report – but the reality is that little may change, despite his huffing and puffing.

“Our recommendations are unashamedly to help consumers get better deals and that will mean lower returns for the major retailers,” Sims told the AFR in an interview on Monday. “I have no hesitation in favouring consumers over the shareholders I’m afraid.”

But leading analysts – and many of the big company competitors – don’t think much will change, because the big energy players will simply continue to take advantage of their market power and slice and dice bills and discounts to ensure that their revenue does not decline.

In a new report, Morgan Stanley analysts point to what is known as the “loyalty tax” – which is a way of describing the extra money that utilities extract from inactive customers, who end up cross-subsidising the discounts offered to others.

This level of cross-subsidy dwarfs any subsidy ever invented for renewable energy – by a considerable margin – and at one stage was even enshrined in regulated tariffs in NSW by Sim’s former employer, IPART, through what was known as “retail headroom”.

This referred to the amount of money retailers could charge customers so they had enough spare cash to offer discounts to more active customers on the look out for discounts.

Sims now wants to address a practice that he helped to establish as the norm in the industry by reducing the level of this “loyalty tax”, and doing this by reducing the price “cap’, or standing offers.

The ACCC thinks this could reduce bills by around $170 a year to consumers – arguing that this will automatically deliver savings to all consumers. The Morgan Stanley analysis suggests that Sims is kidding himself.


The analysts say likes of listed companies AGL and Origin Energy (and presumably EnergyAustralia and the now federal government-owned Snowy Hydro) will be able to recoup the lost income from lower standing offers by reducing the scale of discounts to others.

“We think the current oligopolistic industry structure means that larger incumbents, AGL and ORG, would readily recoup the loyalty tax cut,” the analysts write.

“We estimate that billing utilities would need to reduce discounts by less than 300bps (basis points) across the board, to recoup the one-off price cut.”

They could do this through a number of ways: by reducing available discounts by  around $48 ( or 2.9% of an average bill), or by not passing on forward LGC price reductions, or by some combination of lower discounts and lower customer acquisition costs.

And then they deliver the killer line: “Reduced discounting will also reduce competition in the market, in our view.”

And that’s the most damning assessment of this proposal: Observers suggest that the only way to address prices over the longer term is to increase competition. But it is not clear that either the ACCC recommendations, of the National Energy Guarantee it favours, can do this.

The ACCC also proposes various measures to stop incumbents increasing their market share, but as Adrian Merrick from Energy Locals pointed out last week, it doesn’t do anything about the status quo.

The means that the best measure for customers to deal with bill stress is to install rooftop solar, and maybe battery storage. It will help accelerate disruption in the industry, which will lead to more competition.

But the ACCC wants up-front subsidies to be abolished, if not now then by 2021. That would likely impact lower income householders, and the low income housing, renters and market dwellers for whom rooftop solar was difficult to access.

The business models being put together to try to deliver rooftop solar and battery storage to this constituency will be further challenged by the sudden removal of subsidies, which in any case are declining year by year in line with the expected cost reductions of the technology.

This graph from Morgan Stanley indicates that the sector is ripe for disruption, but it is only likely to occur with new entrants (smaller retail competitors), new suppliers (new wind and solar farms), new buyers (rooftop solar) and energy efficiency.

And these are exactly the things that the incumbents – with the assistance of regulators like IPART and the ACCC – have fought so hard against for the last few years.

And speak to some of the new and emerging retailers about the practices of the big players in the market. Brutal and relentless.

The ACCC reckons its total suite of recommendations will deliver cost savings of around $400 a year to average households.

But Morgan Stanley is not so sure, because network write downs are unlikely to occur, and most of the wholesale price reductions are locked into the forward curve anyway thanks to the added renewables that the incumbents, and the likes of the ACCC and IPART have fought.

On that basis it risks delivering a similar outcome to the NEG – reduced competition and serving only to delay and lock out disruptive technologies, and reinforce the dominance of the established oligarchs. You could hardly invent a softer outcome for them in the face of such dramatic technology change.

Note: Out of interest, and following Sims’ proposal to abolish the upfront rebates for rooftop solar, we asked the ACCC if its chairman had installed rooftop solar on his home, and when.

We were told: “He has not yet installed rooftop solar at his home. He is now actively looking at doing so.”

 

Giles Parkinson is founder and editor of RenewEconomy.com.au, and is also the founder of OneStepOffTheGrid.com.au and founder/editor of www.TheDriven.io. Giles has been a journalist for 35 years and is a former business and deputy editor of the Australian Financial Review.

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10 Comments
  1. Peter F 5 months ago

    “On that basis it risks delivering a similar outcome to the NEG – reduced competition and serving only to delay and lock out disruptive technologies, and reinforce the dominance of the established oligarchs. You could hardly invent a softer outcome for them in the face of such dramatic technology change”

    Isn’t that the point. We have to protect the incumbents any way we can

    As far as I can work out East west rooftop solar will produce at least 1,400 kWh/yr per kW installed and cost about $1.05 per watt under current conditions. At the current rate of decline it can probably be 85 c/watt by the time subsidies were ended and that would increase the price back to $1.10 per watt post subsidy.
    East west facing solar would probably mean that with a little bit of juggling of dishwashers, washing machines, clothes dryers, water heating and pool pumps will mean 50-65% of energy use can be supplied from the roof so for the average customer a 6 kW system will reduce grid demand by about 3-4,000 kWh/y or about $800-1,100 at current prices. That is a payback of 6 years with zero feed in tariff and zero subsidy.
    The beauty of removing subsidies is that then neither the incumbents or the regulators have any control. If they don’t want to pay FITs, buy a battery it will make a profit. If they want to push up the daily charge to $2/day buy two batteries,10 kW of solar and a 2 kW generator to run a few dozen hours per year and tell them where to go.
    All these shenanigans will do is delay grid scale renewables a bit and force energy efficiency and behind the meter generation/ storage to facilitate demand defection.

    Here is my prediction. If the coalition succeeds in its delaying tactics we will see widespread financial distress among FF generators and Transmission and distribution companies

    • MaxG 5 months ago

      Right on the money!

  2. Rod 5 months ago

    One way to make prices easier to compare would be to eliminate the daily supply charge (or whatever it is called in your State).
    I’d like to see discounts eliminated rather than reduced. All of these things are deliberately designed to confuse the customer.

    • Joe 5 months ago

      The ACCC did mention the confusion tactic in its latest report and Click Energy and One Big Switch are being taken to court for deceptions. But hey, anyone that is remotely interested in comparing plan / pricing offers by The Energy Sharks would already know what The ACCC was talking about. The Energy Sharks all charge different daily supply charges, different consumption tariff rates, different FiT’s and then comes the different discount offers like pay on time discount, discount off your consumption etc . It makes it difficult, deliberately so perhaps. A job for a Maths Professor to sort.

    • Greg Hudson 5 months ago

      Discounts are not confusing for anyone with half a brain. Maybe for those who can’t be bothered using a calculator?
      I’m lucky. I have 2 brains, but one is lost, and the other one is out looking for it 😉

      • Rod 5 months ago

        We’ve had this discussion and you failed miserably to find me a better deal.
        Just like mobile phone and broadband plans these “offers” are deliberately deceptive. The 3rd party calculators can’t be trusted and the Govt. calculators don’t have enough variables to make an accurate comparison.
        The only way for solar owners with FiTS to compare is by creating their own tool and trawling through the hundreds of offers.
        The only way to get the “special” offers is to actually sign up with a rival. They send a notification to your current provider who then contacts you to offer you the “special” offer.

  3. Les Johnston 5 months ago

    The gentailers are making huge profits. I have been offered 30% off electricity and 20% off gas. What industry offers 20-30% price reductions? There is so much fat in the gentailers basket. Who else is offering 20-30% off?

    • Greg Hudson 5 months ago

      I’m on an Alinta’s ‘Fair Deal’ 43% discount of their flat rate of 28.44c (ex GST) which is 16.21c + GST = 17.83c/kWh (PostCode 3141).
      (recently negotiated a better deal than what I originally had, which was 29.9c before discount). Note: the discount only applies to power used, and there is no discount on the daily service charge (which is fair enough because that fee is charged by the distributor).
      If you are in Vic, use the following site to compare prices:
      https://compare.energy.vic.gov.au/

    • john 5 months ago

      As you know there has to be a large amount of rip off in the price offered.
      It is unconscionable that we have this situation.

  4. john 5 months ago

    It is total rubbish that retailers can offer discounts.
    How about we go back to the system where there is no need for 14 or so retailers who rip you off and just have a simple cost of energy?
    This situation is total rubbish the cost of power is 1 the cost to give it to you is 1 plus reading your meter, which can be done by a computer cost about .001 of a cent.
    Why do we have retailers?
    I will tell you why we have retailers it is so you the dumb stupid consumer need a choice from 1 YES 1 source of power but you want choice from what exactly 14 or more ripoff merchants. Welcome to competition that is manufactured because you do not understand the actual product.
    My assessment is you get what you demanded an artificial industry that delivers you nothing but your are wiling to pay for vapor air delivery welcome to the educated idiot delivered to you by the clownish attitude that competition is good for you.

    How can you get competition from a price that is 1 you can not .

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