Electricity price reform, but at what cost?
A year ago this week, Australian governments took a hard-nosed position with our retail electricity regulations: they blew most of the system and started over.
To protect vulnerable consumers from being ripped off and to make it easier for them to find cheap electricity, governments changed the rules about how power companies had to market their discounts, and created a new safety net.
Customers who do not shop around for the cheapest electricity are now placed on a mid-priced deal, not the most expensive.
So now is a good time to ask: did the reforms work? Are we better off now than we were a year ago and how do we use the new rules to save a buck?
A year ago, you could not be confident that a 25 per cent discount was cheaper than a 15 per cent reduction because electricity retailers created their own rates to apply the deductions.
Those who shopped around and knew their stuff could save more than $500 a year compared to someone who did not. Those who took the “default” option ended up on the most expensive plans.
So Victoria, NSW, Queensland and South Australia all introduced a reference price for electricity, which they considered a fair, mid-market deal. This became the new default plan for those who paid a “loyalty tax” through their inaction.
The changes resulted in an immediate win for many of the most vulnerable consumers – a discount for about 15 per cent of households.
All power retailers who wanted to offer discounts were asked to compare their reductions to the reference price, so consumers could make apples-for-apples comparisons.
However, the changes bought about some unintended consequences.
Under the old system, there were discounts of up to 40 per cent in Victoria and 30 per cent in NSW and Queenslandfor paying on time. In the new era, those numbers dropped overnight to between 10 per cent and 15 per cent.
Even though the end cost of electricity was not much different from those big discounts under the old rules, the numbers just weren’t as attractive any more, and customers stopped switching providers.
Data collected by the Australian Energy Market Operator tells the story:
- A record two million people switched energy providers in the year leading up to the changes.
- In the first month after the adjustments, switching dropped by 24 per cent year on year.
- In the year since the changes, we are on track for a 17 per cent drop year on year.
It appears the reforms have made the retail energy market less competitive – at least in the first year.
While some power retailers have embraced the new percentage discount off the reference price model, others have found ways to avoid it.
Even the government’s energy comparison website energymadeeasy.gov.au still doesn’t mandate the reference price language to describe plans listed on the site. This makes little sense.
If this is all news to you, that is also major failure of governments in getting the message out to consumers. When you make major reforms to assist customers, you have got to tell them about it.
If there has been a major public awareness campaign over the past year, I haven’t seen it.
Of course, all that most of us want to know about energy market reform is this: how does it make my life easier and cheaper?
Fortunately, thanks to the reforms, there is now a relatively simple answer to those questions.
The cheapest half a dozen or so plans are at least 10 per cent less than the government reference price in Victoria, and at least 15 per cent less in NSW, SA and Queensland. So that’s your discount new rule of thumb. Go forth and shop around.