Article - What's in it for consumers? Vic Government responds to the retail energy market review

Over the last few months, I have had the opportunity to lead the Victorian Government’s response to the Independent Review into the electricity and gas markets in Victoria.

The Independent Review into the electricity and gas markets in Victoria

The bipartisan Review was undertaken by John Thwaites, Terry Mulder and Patricia Faulkner, and was based on detailed research into energy retail prices. A copy of the independent Review can be found here.

The Review also received comprehensive submissions from industry, community, individuals and electricity and gas retailers, including AGL, Alinta, EnergyAustralia, Lumo, Origin and Powershop.

The Review provided a number of recommendations about protecting consumers, promoting transparency and supporting Victorian families and businesses from increasing energy prices.

You can find my summary of the 11 Review recommendations here.

The Review found that the 'retailer charge' - the amount that retailers charge consumers for their operating costs, financing costs and profit margin - represents around a third of what a typical Victorian residential consumer pays on their bill. That amounts to $489 (or 34%) of their electricity bill and $472 (or 32%) of their gas bill. For a typical small business, the retailer charge represents between $647 (or 22%) of their electricity bill and $1,755 (or 24%) of their gas bill.

 
 

This retailer charge is also much greater in Victoria than in New South Wales, South Australia, Queensland, and many European countries.

 
 

However, it is not all bad news for Victorian consumers.

The Review also found that in Victoria, the retailer charge varies depending on which retailer a customer is with. While the median retailer charge for all Tier 1 retailers (AGL, EnergyAustralia and Origin) was consistently greater than 20% of an electricity bill, the median retailer charge is below 20% of the bill for a large number of Tier 2 and Tier 3 retailers. This is shown by the black line for each retailer below.

 
 

“Most consumers could make significant savings from switching.”

Independent Review

A key conclusion of the Review, highlighted in the chart below, is that most consumers could make significant savings from switching energy offers. For nearly a quarter of consumers, the median saving by switching to another electricity offer is at least $500. Even engaged customers, who are more likely to regularly shop around for better offers in the market, could make modest savings.

 
 

Interim response to the Review

The Victorian Government released its interim response to the Review on 11 March 2018.

The interim response can be found here.

The Basic Service Offer remains under consideration

The Review recommended the provision of a Basic Service Offer (BSO) and the abolition of standing offers (recommendations 1 and 2) . These two recommendations remain under consideration, and government will start consulting with stakeholders on the design of a BSO and any alternatives to a BSO.

The Review recommended introducing a BSO in response to some market failures in the Victorian energy retail market:

  • consumers have no choice but to engage in the market because energy is an essential service;

  • competition requires retailers to invest funds to acquire or retain customers; those costs have increased over time, and end up being passed onto consumers;

  • larger, incumbent retailers have advantages over their newer, smaller competitors and can use their existing customer base to their advantage;

  • opaque information on energy offers means consumers don't often switch offers; and

  • there are barriers to innovation in energy products and services.

The Review envisaged that the BSO would be provided by each retailer and would introduce a ‘no frills’ offer in the market, at a price not exceeding a regulated price. The Review described this as "a reasonable price of energy in the market". The BSO would be based around a clear price signal, and would be a response to market failures.

The Review panel made its recommendations by drawing on a set of key economic principles, such as aiming to make the market more efficient, making information more transparent and aiming to lower costs while maintaining sufficient protection for consumers.

Following similar principles, the design of a BSO should aim to drive greater efficiency and innovation in the market while guarding against any unintended consequences of introducing regulation on consumers. Detailed design will need to consider what's in scope of a BSO, what price to apply and how to set that price. This will be part of upcoming consultation with stakeholders.

The government supports all remaining Review recommendations

The government supports Review recommendations 3 to 11. Consumers can expect a suite of actions to be delivered over the next year that will make information on bills more easily comparable and will start to put back some power into consumers' hands by making the market and contracting practices more transparent. Vulnerable consumers will also benefit from actions such as a pilot for energy brokerage services. 

Implementation of Review recommendation 8A should deliver interesting future findings around how the Victorian retail energy market is evolving, and whether its competitiveness and efficiency improves over time.

What's next

The government's final response to the Review is expected in mid-2018 and will draw on the outcomes of stakeholder consultation and the work of the Essential Services Commission.

I would like to commend Bruce Mountain from CME Carbon Market Economics and the DELWP team on this critically important work to keep downward pressure on power bills. It is great to be part of this leading edge economic reform by Victorian Government.

This article was first published in LinkedIn.

Marilyne Crestias