Penny drops for Turnbull: Consumers are being gouged on energy

Confusion is profit. It is one of the unwritten tenets of Australia’s retail electricity businesses. And it’s worked beautifully for the electricity industry as it has for the mobile phone and other sectors.

The principle is simple: overwhelm the consumer with a bewildering set of options for their billing arrangements; some will find their way through to a good deal, but most will give up – delivering bumper profit margins from consumers possibly paying 50 per cent more than they should be for the service.

Australia’s retailers have acted like an unchallenged oligopoly for years, thanks to their market power and their complete capture of the regulators who should have been keeping tight on the reins.

The farce – and there is no other way to describe an electricity market that fails to deliver electricity to consumers any cheaper, and hardly any cleaner, than a diesel gen-set – is so deep that utilities even convinced pricing regulators to grant them something called “retail headroom”.

Essentially the right to charge all households extra money “to pay” for the cost of providing discounts for those smart enough to shop around for the cheapest deals.

It’s a merry go-round of money, but the consumer is never invited on. As Adrian Merrick, the founder of a consumer-based start-up Energy Locals has noted, the fact that retailers are able to offer discounts of up to 50 per cent shows the likely size of the mark-up they impose on all customers.

The problem is, there is such little visibility in Australia’s electricity markets – both in retail and wholesale markets, particularly the nature of long-term contracts – that you have to wonder what the regulators thought their purpose was, apart from being invited to nice lunches.

Finally, however, the Coalition government has decided to tackle this head on – deflecting its obsession with renewable energy sources and commissioning first the ACCC to investigate this nonsense, and now summoning the retail heads to a meeting in Canberra next Wednesday with prime minister Malcolm Turnbull.

Turnbull has apparently discovered that many households and businesses are paying significantly more than they should be, as they are pushed onto higher plans. He says they need to be given better information so they can seek better deals.

“This situation must be addressed – urgently and directly,” Turnbull wrote in a letter to the companies, asking them “what the electricity sector can do to ensure no family pays any more for electricity than it needs to.”

The natural response is to be less greedy, but that is hard to achieve when shareholders are breathing down the necks of boards and executives for ever rising profits.

The Queensland government showed what can be done when consumers are prioritised over profits, and in the space of a wink, a nod, and a letter of instruction, Queensland-state owned generators have gone from producing the most expensive power in the country to the cheapest.

Turnbull’s summons to the summit comes as Australia’s electricity retailers prepare to release what many expect to be bumper profits, at least from their electricity customers.  AGL is due to deliver its earnings the very next day. Analysts expect AGL’s earnings to jump 50 per cent over the next few years as it locks in the benefits of recent price rises.

As Michelle Grattan reports in The Conversation, Turnbull says the electricity price rises of the past decade have “put serious strain on Australian households and businesses. Disconnections have risen sharply in some states, and there are reports of spikes in the number of people suffering financial stress.”

“It is simply not good enough that some families and businesses cannot always afford to turn on their lights, heating and equipment …. it is important to ensure no family pays a cent more for electricity than it needs to.”

Thankfully, the government is realising that the problem is not with renewable energy schemes, or even renewable energy itself.

The surge in prices have come from a mixture of over investment and gold plating in networks – something that may be addressed in the move to cut down the networks’ avenue to appeal regulatory decisions  – and in the surge in wholesale prices and retail margins.

The wholesale prices, it is now widely recognised, are not the fault of wind or solar investments, but rising gas prices and bidding patterns by the handful of generators that dominate the market.

The reality is that Australian are probably paying twice as much as they should be for an essential service. The arrival of new technologies, such as rooftop solar, battery storage and smart controls, means that they will have the opportunity to deliver that cost saving themselves, by disconnecting from the grid.

That’s not a great outcome. Some defection is inevitable. But what is needed now is a wholesale rethink of the rules and regulations put into place that have served little but to defend the position of the incumbents.

This means encouraging more renewables into the system, not preventing them. It is clear from all assessments that renewables offer the path to a much cleaner, cheaper and smarter system.

But to achieve this, and to deliver real cost savings to consumers, then it may be necessary to a broom through the hierarchy of people responsible for those rules then so be it.

After chewing the heads off the retail chiefs, Turnbull could be well advised to bring federal and state regulators to the table and ask them what they are going to do about it. Chief among them should be the main rule makes, the Australian Energy Market Commission.