Is re-regulation the solution to Australia’s electricity price shock?

Last week, Prime Minister Malcolm Turnbull summoned the major electricity retailers to Canberra, to eyeball them and to tell them that everyone needs to do better. Putting aside the awkward staring contest, the parties did manage to agree on some small but important measures. Under the deal, the information available to consumers should improve, enabling them to more easily compare electricity offers and switch to a better offer.

But does this deal really go far enough for consumers?

A review of energy retail markets in Victoria, released on Sunday, goes a whole lot further. Led by former deputy premier of Victoria, John Thwaites, it calls for a new ‘Basic Service Offer’ – a regulated price for electricity. Until now, Victoria has led the way in opening up the retail electricity sector to competition; re-regulation would represent a major U-turn.

During the 1990s, Australian governments began to break up the government-owned businesses responsible for electricity supply in each state, and introduced competition to the retail and wholesale links in the supply chain.

The idea was that competition would deliver lower prices and encourage retailers to offer better and more innovative products and services. Anyone who pays an electricity bill knows that the reality hasn’t matched the promise.

Now, the Australian Competition and Consumer Commission is reviewing the competitiveness of the retail electricity sector and prices nationally. A preliminary report is due by the end of September, but we may not know until the final report next June whether the ACCC recommends more transparency, re-regulation, or something in between.

For retailers in Victoria, the Thwaites review is the second reproach after we at the Grattan Institute raised concerns in a report called Price Shock in March. The two independent analyses suggest that the retail component of electricity bills is way too high. However, Victoria would be wise to await the findings of the ACCC because it will be able to review retailers’ actual data.

In Price Shock, we recommended market reforms to improve transparency, and protections for vulnerable customers, with a regulated price being a last resort if the benefits of competition failed to emerge after initial reforms were implemented. The Thwaites review jumps straight to a regulated price.

What re-regulation would mean

If Victoria heads down this path, all retailers would have to offer customers a basic electricity service, at or below a price set by the regulator. But whether this reduces electricity bills, especially for those struggling to pay, will depend on the extent to which consumers take up the offer.

There is a real risk that vulnerable but disengaged consumers will not make the switch and so will not get the benefits. Shopping around is not easy, so many consumers don’t know when or where better offers are available.

Alternatively, if all consumers switch to the basic offer, electricity prices would actually increase for some consumers. This is because current offers vary widely; some consumers are on very good deals while others are paying far too much. A new regulated price is unlikely to be as cheap as the best offers currently available.

The best approach would be for the regulated basic price to be available on an ‘opt-out’ basis for vulnerable customers, while everyone else would have the option to ‘opt-in’.

About a third of Victoria’s residential consumers are concession customers. They should all automatically be placed on the retailer’s cheapest offer – with the option to switch to a more expensive premium product if they choose. Other consumers could choose to switch to the cheapest offer, but they would have to take the initiative to make the switch. This would ensure that vulnerable consumers are protected, while helping to keep the price of the basic offer as low as possible.

Re-regulation is no panacea

Setting a regulated price isn’t easy. Too low, and retailers will topple over. Too high, and consumers will pay more.

Another risk with re-regulation is that it will quash innovation. Product innovation is particularly important now because the electricity system is changing and consumer choice can help to drive that change.

The basic offer need not be the only product that retailers make available to their customers. Some consumers would be willing to pay a premium for add-ons or alternative products - such as ‘green choice’ deals that support renewable energy, packages for solar households, and fixed cost ‘all you can eat’ electricity plans.

Products that help consumers manage their electricity use could help to reduce system costs for everyone. For example, retailers could offer risk and reward options that consumers sign-up for, that reward consumers for reducing their electricity use during peak times and for making valuable contributions to the grid via solar panels and battery storage. Retailers will produce such innovative products if enough consumers show that they want more than a basic electricity service.

Ultimately, reducing electricity prices will require a range of reforms that extend beyond the retail market to electricity generation and networks. In the meantime though, the onus is on retailers to prove the benefits of competition through lower prices and innovative offers.

Retailers will report back to the Prime Minister and the ACCC on Friday with their plans to improve affordability for their customers.

The test will be: are these plans good enough to dissuade the Government from stepping in and re-regulating electricity prices?

Banner image: Melbourne’s lights at night, NASA/JSC, US astronaut and Station Commander Tim Kopra