It’s more than 20 years since the electricity and gas markets were opened to retail competition. Retail deregulation never attracted the intellectual investment that went into establishing wholesale energy markets and regulating energy networks.
Little consideration was given to how consumers would respond to a deregulated retail market and therefore, how that market would evolve. Today, the second energy market revolution has begun and history is repeating itself.
For the past two decades, energy customers have largely had to negotiate a market based on only one decision variable: Price.Â
Even in this one-dimensional market, the evidence shows customers have rarely found the best deal for their energy needs. Customers just aren’t the highly active and discerning shoppers the regulations assume them to be.
Looking to the future, we see a market demanding customers navigate not one, but many decision variables, such as:
- the price of grid supplied electricity
- the price of electricity exported to the grid
- volume controls on outflows (exports) of electricity
- volume agreements regarding the use and timing of load
- delegated control over onsite electricity load
- penalties when customers breach or over-ride agreed volume limits
- delegated control of onsite battery services
- terms of access to offsite battery services
- the price of offsite battery services
- control and ‘ownership’ of electricity stored in offsite batteries
- payments for provision of ancillary system services
- what else?
Many of these variables may also be dynamic, meaning they will change with market conditions rather than having set values specifiable in a contract. Future contracts may also involve complicated financing arrangements as well as multiple service providers.
If customers haven’t successfully navigated a market constructed around one decision variable, how can they be expected to navigate the labyrinthine market coming their way?
This question usually prompts two answers.
First, it is argued service providers will sort it out by creating simple, understandable products. Sorry. That response isn’t supported by the experience of the past 20 years.Â
Second, it’s suggested ‘machines’ (algorithms) will do the work for customers by optimising across all the decision variables in real time.
Maybe so. But how will customers judge whether they are being promised a fair deal when they shop around for a machine? How will they know whether the machine they purchased is delivering the value it promised?
Now, bear in mind two sobering findings reported by the Australian Energy Regulator:
- 44Â per cent of Australians have low literacy and numeracy skills, andÂ
- 40-45Â per cent of customers cannot identify the cheapest option when presented with just three vanilla energy plans.
So, let’s be very, very careful about what we allow regulators to assume about consumers and service providers in the emerging energy market.
A market-led energy transition will create great opportunities for consumers, but it will also bring greatly expanded opportunities for consumer harm. This harm must be avoided if community support for the energy transition is to be sustained. The regulatory framework must be modernised.
In a recent paper, I propose repealing seemingly endless lists of rules and regulations and replacing them with a single, simple and universal duty of care requiring all energy service providers to act in a customer’s best interests.Â
The duty means a service provider would be responsible for ensuring its services meet customers’ expectations throughout the contract lifecycle, from offer to termination. A service provider would be any party who can control, constrain or prevent the flow of electricity into, around, or from, a customer’s premises.
Yes, this will be a difficult reform to implement. It will face concerted resistance. But let’s be clear. What’s the alternative?
Dr Ron Ben-David is Professorial Fellow at the Faculty of Business and Economics at Monash University
