My recent Renew Economy article seems to have provoked some interesting discussion on electricity pricing. But few of the comments seem to have focused on key consumer thinking and the differences between retailer and network thinking.
Consumers like rewards and dislike penalties, especially if they feel unable to avoid the penalties. Also, a big occasional bonus is often noticed much more than a trickle of small bonuses, especially when those small bonuses have to be offset against big visible penalties and a high overall bill.
Retailers do market research. I suspect this tells them that most consumers don’t like change, especially when they don’t trust energy suppliers or regulators to act in their interests.
For example, Victorian retailers have been able to charge higher fixed daily prices than in some other states because the Kennett government doubled supply charges in 1992: Victorians now sees that as the norm.
This happens with gas as well as electricity: a recent Brotherhood of St Laurence paper showed Victorian fixed charges were highest, even though we have the highest density of consumers and the highest gas consumption per consumer. Let’s get real, energy retailers charge what they think people will pay, and structure tariffs to minimise customer churn.
Retailers are concerned about customer churn and loyalty as they are big costs. That’s one reason why they like Virtual Power Plants, which lock in customers with long term contracts, as well as allowing them to hedge their costs. They must frame themselves as ‘good guys’ that are trustworthy.
That’s why, in my recent article, I suggested keeping retail electricity prices in evenings and early mornings at (or near) present flat prices and offering bonuses for usage during the day, when supply is cheap, on a billing period basis.
That sends consumers a visible message that shifting demand to daytime, especially when it’s sunny, is a good thing. These bonuses could be seasonal to reflect the reality that we are awash with solar in sunny mild or hot weather but cold cloudy winter weather slashes solar generation.
Small variations in unit price of electricity are ‘in the noise’ for many consumers: the overall energy bill and peak prices at times when they feel electricity is essential dominate their perceptions, and that shapes their thinking.
At the same time, many perceive demand at key times to be essential, so they feel punished if prices increase at those times. Market research should tell energy businesses and regulators this.
I was amused some time back when Monash people conducted a survey on perceptions of consumers and the energy industry related to eleven issues. There was not much agreement. When will the energy industry and policy makers understand that it is the consumer’s perceptions that matter. They override ‘sophisticated’ economics.
I have been doing a lot of work recently with A2EP and RACE for 2030 on ‘value chains’.
This has highlighted the enormous financial, resource and energy inefficiencies at the interfaces between players in the value chain, and the serious failure of individual players to recognise that all the money comes from the end consumer, driven by their perceptions of reality. Businesses are often fighting over how the money from consumers is shared. This seems to apply to energy.
The electricity spot market distorts wholesale prices upwards at times of high demand relative to supply – and all the generators playing in the spot market make windfall profits.
This model has not been effective at its main objective, which was to encourage investment in new supply at times when and places where it’s needed. That’s why state governments are stepping in.
For network operators, the peak demand costs for local networks and regional ones are very different. Most neighbourhoods have excess capacity because providers must accept that their customers can all draw up to 15 kW of load through standard meters, and the extra cost of fatter wires during construction is small.
If high density housing or lots of consumers upgrade to 3-phase, there may be local limits. But the big costs associated with peak demand for network operators seem likely to be between neighbourhoods and the high voltage grid.
So to what extent does charging an individual consumer a high demand charge (that occurs once in a month) or a high ‘peak’ unit charge in mornings and evenings reflect real costs? Energy Consumers Australia seem to be working on this.
It’s not surprising that a lot of consumers would like to install PV, batteries, efficient appliances and smart management, as well as upgrading their homes’ thermal efficiency, as a form of defence against the madness of energy markets.
It’s a pity that most don’t realise that solar is not a silver bullet, as it delivers a lot less energy in winter when southern state energy demand is high due to inefficient heating of inefficient buildings.
Maybe people will eventually understand that high thermal performance buildings and high efficiency heat pumps and sophisticated demand management, potentially at the appliance level, will dramatically cut winter demand.
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