Empowering households: solar consumers need a fair go

(This is an excerpt from the Centre for Policy Development’s Go Solar report, which we also report on here. Laura Eadie is CPD’s Research Director for the Sustainable economy program and lead author of the report).

Rooftop solar gives consumers greater choice over their electricity supply and more control over their bills. This introduces effective competition to retail markets for the first time. However, small solar consumers have little market power compared to established electricity retailers and ‘gentailers’, whose business models are threatened by reduced electricity consumption and lower peak wholesale prices.

Consumer advocacy bodies need to actively consider the interests of solar consumers. This is particularly important where a few vertically integrated retailers and generators dominate the market. For example, two retailers with contracts over large generation assets control 70 per cent of the NSW electricity market. Of the eleven NSW retailers, only six offer any feed-in-tariff. Two of these pay less than the wholesale cost of electricity, and only one offers more than the minimum rate recommended by the regulator.

Regulatory frameworks should be designed to pay full value for solar electricity as the industry structure shifts toward decentralised energy and demand management. As a safety net, regulators should set a minimum regulated retail tariff for solar electricity exports, with a higher price paid at peak times. Regulators should also ensure distribution businesses share the value of avoided network costs with solar consumers.

Rooftop solar introduces effective competition to retail markets.

In many states, regulatory settings allow retailers to charge large marketing overheads for selling an identical product.170 In Queensland for example, 5 per cent is added to the regulated tariff as ‘headroom’ on top of retail margins to allow retailers to compete for customers Australia wide, some 20 to 25 per cent of customers switch to a new electricity retailer each year, attracted by discounts of nearly $200.

This increases marketing costs, which are passed on as higher prices for all consumers. The average consumer is likely to be too overloaded with complex information to choose the best deal. Those who do get discounts by switching retailers are subsidised by all other consumers. Based on rough estimates, current retail marketing costs contribute up to $50 per year to the average household bill.

Rooftop solar introduces effective competition to retail markets for the first time. By providing consumers with real choice over where their electricity comes from, it competes with electricity volumes previously sold by retailers. This threatens the business models of stand-alone retailers, and those which also own or control generation assets.

Solar consumers have limited market power

Solar consumers have the right to a fair contract with electricity retailers, and one that is not to their financial disadvantage, under the Australian Consumer Law. However, the structure of the electricity industry, and relationship between retailers and customers, means that solar consumers have limited market power. Where this constrains consumer choice or creates an uneven playing field for solar compared to other sources of electricity, governments may need to intervene to protect consumer rights.

‘Gentailers’ dominate markets

Many electricity companies, often called ‘gentailers’, own or control both generation assets and retail operations, as Figure 11 shows. Origin, AGL and Energy Australia jointly supply 80 percent of small retail electricity customers and control close to 30 percent of mainland National Electricity Market generation capacity. These big ‘gentailers’ are jointly responsible for 58 percent of the new generation capacity commissioned or committed to since 2007.

However, it is not just the big retailers who co-own generation assets. A number of new entrant retailers have integrated with stand-alone generators to reduce their exposure to wholesale price volatility. For example, the retailer Simply Energy has partnered with generator company International Power, and the retailer Lumo Energy with generator company Infratil.

This trend suggests that new entrants are unlikely to reduce the dominance of ‘gentailers’. New retailers have done deals with large generators in the past, and stand-alone generators have sought to expand into retail markets. While new entrants may enhance general competition within the retail market, it does not necessarily increase competition to buy power from distributed generators, such as rooftop solar.

The increasing penetration of rooftop solar is acting to significantly reduce the profits of ‘gentailers’ through the merit order effect. On hot summer afternoons when demand would traditionally spike, taking the wholesale price of electricity with it, the peak is flattened by the large amounts of electricity being produced by rooftop solar. The consequence is that the wholesale price is much lower than it once would have been during critical peak periods and generators’ profits have fallen as a result. Modelling suggests Australia’s current level of rooftop solar could have reduced wholesale electricity revenues by A$300 to A$670 million, based on prices in 2009 – 2010.

It is therefore unsurprising, in a market dominated by retailers who own or control generation assets, that we should see low prices offered for electricity generated by rooftop solar, and a reluctance by retailers to pass on the benefits of lower wholesale prices to consumers.

Solar consumer complaints have surged

A dramatic increase in consumer complaints about solar feed-in tariffs raises further doubt over whether the retail market is competitive enough to provide solar consumers with choice.

As Figure 12 clearly illustrates, the number of solar related complaints, issues and cases recorded by state energy and water ombudsmen have increased dramatically over the past three years. Between 2009—10 and 2011—12 the NSW ombudsman recorded an almost 12-fold increase in complaints, while the Victorian ombudsman recorded a 4-fold increase. In South Australia the number of cases more than doubled between 2010—11 and 2011—12.