“Too complex, too hard, too often unfair:” Plan to reform electricity pricing backs contentious tariff changes

Australia’s electricity market rule maker will push ahead with a hotly contested recommendation to radically change how network costs are recovered from customers, while opting to put dodgy retailer behaviour to the sunlight test, rather than banning it.

The Australian Energy Market Commission (AEMC) on Thursday published the final recommendations from its Pricing Review: Electricity pricing for a consumer-driven future, settling on four directives, revised and pared back from the six draft recommendations published in December last year.

The AEMC says the four final recommendations are designed to simplify electricity retailing rules and prices, reduce penalties for disengagement, improve information and tools, and reform network pricing to address upstream cost drivers.

“Electricity pricing has become too complex, too hard to compare, and too often unfair. You shouldn’t need to be an energy expert to get a fair deal, and long-standing customers should not pay more than someone who just walked in the door,” AEMC chair Anna Collyer said in statement on Thursday.

“This review sets out a clear roadmap for change. These are recommendations only, bringing them to life will require further work, consultation and collaboration with consumer representatives, industry and governments over the years ahead.”

Fixed it!

The most anticipated final recommendation is that networks should charge a fixed price for connection to the grid – a part of the consumer bill stack the AEMC says might be more accurately called a “shared network access charge” – rather than recovering their costs based on how much electricity each consumer uses.

The transition away from volumetric tariffs to bills with a larger fixed charge component was recommended in the draft report, and – as the AEMC notes – received “a significant number of submissions” from a broad range of stakeholders explaining why they thought it was a terrible idea.

“Low electricity users – those in energy efficient homes or people who are less wealthy – shouldn’t have to pay for infrastructure that is built for the benefit of high energy users,” said one submission.“[I]t should be user pays, where high electricity users pay more,” said another.

“[All consumers facing the same fixed charges] undermines equity and contradicts the principle that users should pay in proportion to usage,” another submission added.

This time around, the AEMC says stakeholder feedback has helped it to clarify that it is not prescribing a specific tariff or set of tariffs.

“Some stakeholders were concerned that these reforms might force all customers onto the same type of network pricing. This is not the case,” the final report says.

“The reforms do not set a single tariff or pricing model. Instead, they provide guidance on how network tariff structures should be designed, promoting improved consumer outcomes over time.

“Decisions about specific tariffs will continue to be made by networks and the AER through existing processes, taking into account local conditions and energy service provider capability.

“This is not a one‑size‑fits‑all approach – customers won’t all pay the same. Instead, design choices should guide networks to recover costs in a way that broadly reflects the benefits different customers receive and provide from being connected to the shared network.”

All of that said, the AEMC is still recommending a gradual transition away from a network pricing framework that relies on price signals delivered through volumetric tariffs, which it argues are no longer fit for purpose.

“Recovering a significant share of network costs through volumetric charges broadly linked what consumers paid with how they used the grid, i.e. the more you consumed, the more you paid,” the report says.

“That assumption no longer holds. Electricity flows are two-way. A shared grid cannot be funded sustainably through volumetric charges in a system where some consumers can dramatically reduce their net consumption while continuing to rely on the network.

“Even where a consumer imports less electricity from the grid, they may still rely on the network being available at their premises for reliability, backup and access. Many consumers may also reduce imports while increasing exports, which still requires use of the shared network.”

Nice for the networks

Another major criticism of higher fixed charges, to paraphrase Tristan Edis on these pages earlier this week, is that networks shouldn’t be able to jack up prices to some customers to make up for costs they can’t recover from other customers who decide to get less of their electricity from the grid.

But Anna Collyer says answers to this criticism could come from a separate review that is about to get underway, designed to examine whether networks have the right incentives to keep their costs down.

“I think the question of what the network should recover is an important one, but it’s got some complexity to it, and so we think we’ll look at it in the network regulation review,” Collyer told Renew Economy.

“From a timing perspective … we would need to receive and then progress through consultation or rule changes to make any of the changes to network pricing, and so we could do that in parallel with considering these network issues, so that we weren’t doing something that wasn’t consistent.

“I think there’s been a bit of… putting the cart before the horse,” she added. “[That review is] literally about to kick off, so I don’t think that it’s insurmountable.

“I guess … one message I’d like to get out there is, rather than protecting networks from change in technology, we want to push them, so they’re actually making the best use of technology by rewarding customers and not building new assets.

“Like, don’t build the assets, use the batteries, pay the battery owners, because that is a much more efficient way of recognising everybody’s investments and getting the most value out of it,” Collyer said.

Shining a light… or missing an opportunity?

Beyond the recommendations on network tariff reforms, the final report recommends working with stakeholders to help develop a fit-for-purpose retail energy offer comparison tool that would build on the efforts of the federal government’s Energy Made Easy website and Victoria’s Energy Compare.

Also on the retail side of the equation, the AEMC has backed away from its draft proposal to ban the so-called “loyalty tax,” a quirk of the market called out in a super complaint made last year by consumer advocacy group Choice to the Australian Competition and Consumer Commission (ACCC).

The complaint alleged that consumers are missing out on an average of $430 of savings a year because they are unknowingly on a higher-cost version of their retail electricity plan. And while the AEMC had suggested banning this practice in its draft, it now recommends subjecting it to the sunlight test, instead.

The proposed reform would “shine a light” on behaviour that contributes to negative outcomes for loyal customers, including by requiring retailers to notify customers who have been on the same plan for four years how much extra they paid compared to a better offer.

Retailers would also be required to report that data to the Australian Energy Regulator, which would publish it, the report says.

“For the first time, Australians will be able to see which energy providers are routinely charging loyal customers more and hold them to account for it.”

Energy Consumers Australia, however, says this watered down approach to bad retailer behaviour is a “massive missed opportunity.”

“The loyalty tax is a trap that households, small business, and even retailers find themselves in. Just to keep their market share, retailers will offer unrealistic low prices – which they then need to hike up, often by 20% or more, within a year,” ECA CEO Brendan French said on Thursday. 

“What’s worse, they fund these low prices by charging loyal customers more. In reality, it’s a Catch-22 because no retailer can really afford to step out of this cycle. This is why we all hoped that the AEMC, as the system rule maker, would step in.

“The failure to tackle the loyalty tax in a substantive way is yet another example of how broken the current energy market is for consumers,” says French.

“It perpetuates a model in which the entire obligation for getting a fair deal falls on households and small businesses. Today’s announcement underlines yet again the critical need for a consumer duty – which would ensure business models like the loyalty tax are tested against standards of fairness and suitability.”

On the other hand, the ECA says it “strongly welcomes” the AEMC’s recommendation on network tariffs, “another area in which current pricing leads to inequitable outcomes.”

“The changes recommended by the AEMC would result in reforms that are broadly beneficial to different types of consumers – including those with solar and batteries and those electrifying,” says the ECA’s general manager of advocacy and policy, Brian Spak.

“They would send more accurate price signals to retailers and consumer devices like batteries, helping them get paid for the value they bring to the entire energy system.

“The reforms would also help households without the ability or means to purchase a battery or solar by ensuring that all consumers pay for the impacts they place on the grid and no more.

“It is critical, however, that vulnerable low-consumption households receive additional protection via differentiated standing charges.” 

(Not) the final word

Overall, the AEMC says that the review presents an opportunity to make it easier for consumers to find the best, cheapest energy plan for them – one that reflects how they use energy, and for those who do – also how they generate and store it.

“Network tariff reforms aim to reward behaviour that reduces network costs, while energy prices should reward behaviour that reduces energy costs. Together, better alignment of local supply and demand reduces total system costs by deferring new network and generation investment,” it says.

“This supports simpler, more transparent offerings from proactive energy service providers, encourages efficient behaviour, and reduces the need for blunt interventions such as usage limits over time.”

And Collyer stresses that there is plenty of work to be done to get all the settings right and factor in all of the stakeholder feedback, before moving ahead on actually changing the rules.

“The final report is clear that any changes would include explicit protections to ensure consumers can benefit from change without facing sudden or unexpected bill increases.

“Getting those protections right is part of the work ahead,” she said.

“Electricity pricing will not change next week or next year. What we recommend changes today, is the direction, and our commitment to getting there together with consumers, industry and governments.”

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