Prime Minister Malcolm Turnbull has hauled the large power companies into Canberra today to tell them to stop using an array of techniques that act to hit consumers with what the ABC TV’s Checkout program has entitled the “laziness tax”.
The laziness tax – also called the “snoozer premium”, or “loyalty penalty” – is where consumers who fail to regularly shop around and swap power companies are likely to pay as much as $1000 per year more than they should.
This is because power and gas companies price their services in such a way that you automatically default through inaction onto very high electricity tariffs well above what you could obtain if you shopped around.
This is likely to be a very common problem because a recent survey found 50 per cent of electricity consumers hadn’t switched energy providers in the last 5 years.
According to news reports, the upshot of the Prime Minister’s stern words with the power retailers is that they will notify you of changes they make to their retail charges, and the implications for your annual bill. They’ll also give you the web address of the Government energy price comparison websites: www.energymadeeasy.gov.au and for Victoria: https://compare.switchon.vic.gov.au/
The problem is that they already notify customers of tariff changes, and it isn’t working. The sad thing is that the PM only had to push the reforms slightly further to make a world of difference.
Before outlining the solution and why the current plan won’t work, it’s important to understand how power retailers can manage to earn very good margins from what is a very simple commodity billing service. To do this it helps to contrast gas and electricity with how we purchase petrol, where retailer margins are tiny.
With petrol we pay immediately after we fill up and before we consume the petrol and the price of the petrol from different suppliers is literally up in lights all over the place. It is an active purchase decision where we are very conscious about the price we pay per litre and what’s on offer from various suppliers.
Electricity and gas are purchased in a passive manner – when we switch on lights, turn on the hot water tap or switch on the heater we don’t decide before hand who offers us the best price and then immediately go and pay them for the energy we’re about to consume.
Instead, we only get hit with the bill and see the price as much as 2 months later. Indeed, if we’re on a direct debit arrangement we may not even look at the bill or even notice how much we’ve paid for energy.
Consequently, while we know $1.50 per litre for petrol is really expensive and $1 per litre is really cheap, most don’t have clue whether 30 cents per kilowatt-hour plus a $1.20 daily supply charge is a good or bad deal. We just pay the electricity bill with disgruntled resignation, unaware just how much better a deal we might be able to get.
Because we don’t have a clue about prices per kilowatt-hour, retailers have instead chosen to advertise their wares in something we can grasp – percentage discounts.
This kind of made sense when we had government regulated price caps in place because the regulated price provided a standardised reference price across all the retailers.
But once they were removed the scale of the discount provides no meaningful indication of how cheap or expensive a retailer’s offer really is. T
his is because in the background retailers can hike up their own reference prices (entitled standing offers) from which the discount is measured to whatever they want. That means a retailer offering no discount at all can in fact provide a lower price than one offering a 40% discount.
But what it particularly problematic about this practice of using discounts, is that they can be be used to exploit your inattention over time. So once the power retailer has managed to sign-you up, they can then ultimately milk your inherent tendency to just passively keep buying electricity without paying much attention.
They can do this by either having the discount expire say after 12 months, or by hiking up the underlying reference price from which the discount is calculated.
So sure if you’re on direct debit you’ll qualify for the pay-on-time discount. But you’ll also probably forget to actively review your power bill and not realise the underlying charges have gone up.
While retailers already notify you that they’ve changed their tariffs or adjusted their discounts through a note in your bill, this doesn’t work very well because:
- our inherent tendency to stick with the status quo and not bother actively investigating alternatives;
- there’s nothing provided with the note with which you can effectively compare the new prices to competing alternatives from other providers, instead you have to actively search the web to find other offers; and
- if we’ve been lured onto direct debit to get a juicy discount we may not even look at our billing information at all.
Instead there are two reforms that government could implement which accept and act to work around the fact we purchase electricity in a passive manner, while making the most of market competition.
The first, least interventionist option involves taking all that great data in the government energy price comparison websites, and actively bringing to the attention of customers how much they could save from moving to another offer from another retailer, not just the retailer they are already with.
Under this reform customers’ energy usage data would be combined with data on the various tariff options on government comparison websites to determine the three offers on the market that would give each customer their lowest annual bill.
These would be presented in a standardised format on customer bills that allowed the customer to quickly compare these offers relative to what they pay under their current retail contract.
Below is an example of how this bill disclosure statement could be presented on the front page of the bill.
Now the real beauty of this particular proposal is that I suspect customers wouldn’t even need to do anything to see benefits from this bill disclosure requirement.
That’s because once retailers start printing out bills that show they’re charging their customers hundreds of dollars more than their competitors (or even their own offers made to other customers), they’ll act to immediately lower the prices they charge their existing customers.
The second more significant reform, which I proposed back in 2015 when I was the editor of Climate Spectator, would be to move towards a system that actively switches long-time passive customers to whichever retailer offers them the best price in a government-run auction process.
At present there are large numbers of customers that through inaction have ended up on exorbitantly high standing offer tariffs.
They can sit on these for years. Such customer accounts after sitting on the standing offer for say 2 years would be bundled into lots, and on their behalf the government would seek via auction the lowest price bid from retailers.
Consumers would be notified in advance of this process and would be able to opt-out of the auction process if they wished. In addition, consumers would remain free to switch away from the retailer that won their account in the auction if they wished.
These reforms act to exploit the true power of efficient markets where competition is about delivering genuine benefits to consumers, rather than who is better at exploiting our vulnerabilities.
Tristan Edis is Director – Analysis & Advisory with Green Energy Markets. Green Energy Markets assists clients make informed investment, trading and policy decisions in the areas of clean energy and carbon abatement.
Follow on Twitter: @TristanEdis