Lessons from the Australian electricity pricing reviewSponsored
By Bridget McDonald, Policy Advisor at Vector.
“The National Electricity Market is largely broken and needs to be reset” is how the Australian Consumer and Commerce Commission (ACCC) summed up its review of the Australian electricity market earlier this year.
It’s not surprising given residential power bills in Australia have increased by 35 per cent in the past 10 years. It’s now understood that years of poorly designed policy and regulation have led to highly concentrated markets – and a serious affordability issue for Australian consumers and businesses.
The ACCC’s report has produced a remarkable 56 recommendations aimed at correcting the market by putting consumer interests front and centre. If adopted, it’s thought the changes could save the average Aussie household up to 25 per cent on their electricity bill.
Here we unpack some of the key issues found in the Australian review, and the ACCC's advice on how to fix them:
1. Confusion as a marketing tool.
The ACCC has scolded retailers for “smoke and mirror” tactics that are designed to confuse consumers and thwart their attempts to fairly compare prices.
It’s common practice for retailers to inflate the ‘original price’ of power before applying discounts – often leaving the customer none the wiser on whether they’re getting a good deal or not. In many cases people have unknowingly committed to a worse rate after falling for a fake news “discount”.
The ACCC also found ‘prompt payment discounts’ were being met by just 50 per cent of account holders – meaning customers are regularly stung by hefty late payment penalties, which can add hundreds to their bill each year.
The report also discovered loyal and disadvantaged customers were more susceptible to higher default prices: "The full extent of costs associated with attracting and retaining customers are borne by inactive or loyal customers, and those unable to navigate the complexities of the market."
In terms of remedies, the ACCC recommends a universal default ‘base rate’ is set by the regulator and retailers must refer to it when promoting discounts. It’s also calling for ‘prompt payment discounts’ to be left out of any headline discount offers. The ACCC also wants to see a code established so reliable price comparison websites can take flight.
The UK’s pricing review found similar behaviours from retailers there, and some are concerned the same problems are evident in New Zealand too. Electric Kiwi CEO Luke Blincoe is calling for NZ’s electricity pricing panel to make retailer marketing tactics a key focus of their inquiry.
- Concentrated generation markets.
The ACCC says consolidation of generation resources in Queensland by the state government and the consequences of the NSW government’s privatisation of its generation assets have led a rise in generation concentration..
The subsequent lack of competition has allowed dividend returns to take precedence over better consumer outcomes. This, combined with an increase in demand for electricity, has led to prices high above where they should be.
The ACCC wants to ban electricity generators with a 20 per cent market share from further mergers or acquisitions that would further market consolidation, and recommends the Queensland government divides its generation portfolio into three separately owned, competing parts.
It also recommends the central government increases support for new generation investments, and rules to give the energy regulator more powers to address and penalise market manipulation when it occurs.
There are five major generators in the New Zealand market, and the pricing inquiry panel have said they will look closely to ensure competition is at the right level.
- Green schemes.
In previous years state governments offered feed-in tariffs to consumers prepared to invest in home solar panels.
The ACCC says these tariffs were overly generous, and left those households without the means to invest in solar technology exposed to higher prices.
While many of these schemes have already been phased out, there are some that will continue to run for many years to come. The ACCC wants state governments to wear the costs of these remaining schemes, instead of the non-solar households that are currently subsidising them.
- Gold-plating the networks.
The ACCC inquiry found over-spending by state governments was occurring across government owned transmission and distribution networks, and that this was driving up prices for consumers. The state government owned networks in NSW and Queensland were called out as the worst offenders.
The high cost base in these jurisdictions was largely driven by network reliability standards that were overly prescriptive and, in some instances, specified both inputs and outputs. Indeed, these standards were responsible for the aggressive and sustained investment in transmissions and distribution assets over the last decade, and subsequent increases in consumer electricity prices to cover the costs of those investments.
The ACCC has recommended a mix of write downs, rebates and new regulation to help rebalance the situation and lower prices for Australian consumers. The mix of recommendations also considers the recent privatisation of network infrastructure by the NSW government. The ACCC cite a report by the independent “think-tank” the Grattan Institute which suggested government shareholding of networks was the key reason for the culture of over-investment.
New Zealand has the good fortune of EDBs being privately owned, in most cases, by locally owned by community trusts. The community trust ownership model provides an important discipline on expenditure and limits the incentive for gold-plating. Local community trust network owners redistribute their profits directly back to local consumers, or direct profits to investment in local communities - as opposed to being another revenue source for government treasuries or foreign investment funds.
Private local ownership also limits the risks of EDBs seeking to over invest in their networks as the dual relationship of customers also being owners makes networks sensitive to the long-term impacts of sustained price increases.
Next steps for Australia.
Greg Houston, whose firm HoustonKemp were technical advisers to the ACCC during the electricity price inquiry, visited New Zealand last month to participate in a panel discussion on ‘Preparing electricity markets for the future of energy”.
At the discussion, he said the central government has a huge task ahead of them, given there are a whopping 56 recommendations.
“Regardless of which recommendations the government decides to adopt, I think we are entering a period where consumers and consumer interests will have more influence on how the market operates, and that’s a very good thing,” said Greg.