You snooze you lose in Victoria’s electricity market

The wide range of prices that Victorians are paying for what is the same electricity should be a lesson to consumers, policymakers and regulators in all other Australian states.

Victoria has gone further than any other state in deregulating its energy retail sector. Its energy market is also the least dominated by the biggest three retailers. Yet Victoria also has the largest gap between those who pay the most and those who pay the least for energy.

Consumers on the cheapest offers are paying at least 30 per cent less than those on the most expensive offers.

In a recent industry workshop hosted by the University of Melbourne and funded by the Carlton Connect Initiative, we brought together retailers, distribution businesses, policy makers and customer welfare agencies to discuss the nature of customer engagement, technology and vulnerability.

The winners

There are some customers who are highly active and reap benefits in the retail market. They make informed choices about how they purchase, generate, store and trade electricity. They keep up to date with information provided by retailers and government, pay on time, switch retailers regularly to get better deals and pay close attention to their energy use. These customers generally pay lower prices because retailers want to acquire or keep them as customers.

But these highly engaged customers are in the minority. Only 25 per cent of electricity consumers in Victoria have switched in the last year. Some 10 per cent have never changed retailers. There is limited pressure on providers to price competitively for disengaged customers who remain loyal irrespective of price. Awareness of the Victorian Government’s free energy comparison website – Victorian Energy Compare - is low.

The losers

Many consumers find the offers too complicated and therefore difficult to compare. Consumers, particularly the elderly and regional householders, are generally wary of the market and reluctant to engage.

Not everyone needs to be actively engaged with the retail market. For middle to high income earners, the cost of being disengaged is low. Electricity comprises a very low proportion of their disposable income and they can easily afford the extra cost.

However, there are customers who are highly price sensitive and would like to engage but face barriers to doing so, such as people with disability, poor digital literacy, or lack of time due to carer responsibilities.

It is inequitable that such customers are treated the same way as wealthier customers who do not consider it worth their effort to switch.

So-called ‘pay on time’ discounts of up to 30 per cent are common, however these really function as late payment penalties. Such a penalty is most likely to impact those who struggle to make ends meet or who miss a payment because of disruptions to their personal circumstances.

Customer protections and concessions exist in all states to help customers experiencing financial hardship to manage their bills and energy use to avoid disconnection. Some hardship customers are highly engaged with their retailers and other service providers and are well-served by these protections.

Unfortunately, there are many other consumers who are ineligible, unaware or unwilling to access existing customer protections and concessions. This often includes households experiencing a sudden change of life circumstances, for example job loss, illness, or having a child.

Our research seeks to understand the nature and drivers of customer engagement and energy use to inform market and policy reforms in the context of the major social-technological changes that are underway. The most notable of these changes include the rise of distributed generation, through the likes of roof top solar, as well as smart meters, electric vehicles and the growth of renewable energy.

More regulation?

There are a number of ways that policy makers might address the problems of retail market price dispersion and inequality that we have outlined above, including:

• Ensure concessions are appropriately targeted and maintain their value relative to current energy prices
  
• Regulate the market so retailers must offer their best tariff to low income vulnerable households
  
• Require retailers to ensure long-term customers on standing offers are informed of the best market offers available
  
• Require retailers to provide a transparent outline of the different components of the price they charge consumers. This includes wholesale energy costs, network services and government policies such as environmental schemes and meters.
  
• Limit pay-on-time discounts
  

There are pros and cons to these options and they will be well-canvassed in the Victorian Retail Market Review currently being undertaken by the Victorian State Government.

The lesson from Victoria is that a more competitive, deregulated electricity market can lead to a widening gap between active and passive participants. We need to find ways to close that gap to avoid socially regressive outcomes.

Simple tips to save money

If you want to be more active in the retail market and find the best deal, here’s what you can do:

• Compare: Use trustworthy energy comparison sites, like the independent Victorian Energy Compare site, Switch On, to find out the lowest offers for your household or small business.
  

• Shop around: If you don’t shop around, you’ll stay on the gazetted ‘standing offer’ and pay a significant premium. You can achieve substantial savings (up to $830 per year for electricity and $480 for gas) by switching from the standing to a competitive market offer.
  
• Switch regularly: Loyalty does not pay in the retail market. In facts it costs dearly. Retailer discounts apply for a defined benefit period (usually one year), and will generally increase once this is over. Consumers may or may not be notified when the benefit period ends. Regular switching ensures that you are on the best offer you can be over time.
  
• Pay on time: Retailers tend to discount if you pay on time. But if you struggle to pay bills on time, don’t be seduced by a plan with 30 per cent discount for on-time payments. Think of it as a 30 per cent penalty for late payments.
  
• Get to know your energy use: Once you are aware of the way you use energy you could save money by choosing a more suitable tariff or changing your behaviour, appliances or fittings. All Victorian households have smart meters that provide real time data on energy consumption. Some energy providers enable you to access this data easily online or via your smartphone. Alternatively there are devices such as in-home-displays that can provide alerts when your electricity consumption level changes.
  

Banner image: Wikimedia