Many Australian households are on a more expensive electricity plan than they need to be, and changes are needed to improve competition in the electricity market and deliver better outcomes for consumers, the ACCC has concluded in its latest Electricity Market Inquiry Report released today.
The ACCC collected the prices of flat rate market offers for more than five million residential customers in New South Wales, Victoria, South East Queensland, and South Australia, and compared them to prices available to new customers and the prices of government-set default offers. Flat rate, rather than time-of-use or demand, is the tariff type that most households are on.
“Electricity retailers offer cheaper plans to attract new customers but over time we observe these plans becoming relatively more expensive, so many loyal customers will be paying more than they need to be,” ACCC Commissioner Anna Brakey said.
“Prices for new customers tend to be competitive, but we are concerned that the market is not delivering for customers who do not regularly switch or engage with their existing retailer.”
In August 2023, 79 per cent of residential customers were paying estimated prices equal to or higher than the median offer available on Energy Made Easy or Victorian Energy Compare. This indicates that many households could save money by changing their electricity plan.
The report also shows that the estimated cost for residential customers on market offers (flat rate) increased by significantly more than the default offers. This resulted in 47 per cent of residential customers with an estimated annual cost equal to or higher than the default offer in August 2023. For concession customers the figure was 42 per cent.
“Almost half of all households on flat rate market offers were paying equal to or more than the default offer, which was intended to be a reference price and safety net to protect disengaged consumers from unreasonably high prices,” Ms Brakey said.
“For most customers there are plans currently in the market that are cheaper than the default offer.”
“We strongly encourage consumers to use the government energy price comparison sites to find a cheaper deal, but we’re also recommending that policy makers identify and address the barriers that are preventing many people from changing electricity plans and accessing cheaper market offers,” Ms Brakey said.
Figure 1: More residential flat rate market offer customers are paying prices equal to the default offers even when they achieve their conditional discount
Source: ACCC analysis of retailers’ data.
Legacy plans with large conditional discounts persist
The ACCC’s analysis of retailers’ prices for existing customers also shows that customers on legacy market offers with large conditional discounts, such as a pay-on-time discount, are still paying close to the default offer even when they achieve their discounts. Customers who do not achieve their discounts risk paying significantly more than the default offer.
About six per cent of residential customers in the ACCC’s sample, or 290,000 households, are on market offers with conditional discounts in which the unconditional price is more than 25 per cent above the default offer.
“Customers who have the largest conditional discounts are generally on plans with the highest prices, and they would very likely be better off switching to a new market offer with lower underlying prices,” Ms Brakey said.
“A large discount may create the illusion of a good deal but if achieving that discount merely brings the price back to the level of the default offer, we would question the value of that plan. Most customers should be able to find a deal better than the default offer.”
Additional regulation of conditional discounts was introduced in 2020 that limited them to reasonable levels, but the changes did not apply to pre-existing contracts. The ACCC has recommended that policy makers consider how to reduce the number of customers that remain on plans with large conditional discounts, given the potential for those customers to be paying more than necessary.
Small retailers will face challenges in managing wholesale market risk
The level of retail competition in the National Electricity Market has stalled recently, after increasing significantly between 2016–17 and 2021–22. Several retailers exited the market during last year’s energy crisis and there have not been corresponding entries by new retailers since.
Small standalone retailers and new entrants play an important role in the market, with their best offers generally competitive with the best market offers from larger retailers. The ACCC believes it is critical that the conditions for competition are supported throughout the energy transition.
As the mix of Australia’s electricity generation changes further in coming years, price variation in the wholesale spot market will be increasingly driven by changes in weather, which will make it harder to predict when high prices will occur. Greater uncertainty will make hedging exposure to high prices more difficult, particularly for standalone retailers that do not have generation assets.
The report explains that smaller retailers are already finding it difficult to obtain hedging contracts to manage their financial risk.
“The transition will change the risks faced by retailers, as well as the sources and the types of contracts available,” Ms Brakey said.
The availability of hedging products currently used by retailers will reduce as coal plants are retired. Retailer demand for products that guarantee prices at all times of the day is also likely to reduce, as typical spot prices during the middle of the day continue to drop with increased solar generation. New types of products, bundled from different suppliers, will likely be needed to enable standalone retailers to manage their financial risks.
The report warns that this will be complex, and, without intervention, it is not clear that new hedging products suited to the future needs of retailers and generators will emerge before they are needed.
The ACCC has recommended that the Government investigate, in consultation with the ASX and market participants, whether there are ways to support new hedging products being listed on the ASX in a timelier manner.
“We’re concerned that smaller retailers and new entrants may find it increasingly difficult to manage short-term price risk, and we think government measures may be needed to ensure these retailers can access hedging contracts while the contract market adapts,” Ms Brakey said.
Traditionally, generators enter hedging contracts with retailers to protect against low spot prices and retailers do so to protect against high spot prices. Governments typically support renewable projects by offering some sort of long-term protection against low spot market prices. Governments are effectively entering a contract with the generator, significantly reducing their need to contract with retailers.
The ACCC has recommended that more contracts are made available from government-supported renewable projects to provide standalone retailers with risk management options.
Note to editors
The ACCC’s retail pricing analysis relies on model annual usage assumptions, which may not account for all features of an energy plan like solar feed-in tariffs. The ACCC’s analysis demonstrates the possible savings available from switching plans.
Individual household bills will vary according to electricity usage. Customers should use their historical electricity usage and level of solar exports, if applicable, to compare energy plans on Energy Made Easy or Victorian Energy Compare.
Background
In June 2018, the ACCC recommended the introduction of a default offer to replace high-priced standing offers, and a requirement for discounts to be calculated with reference to this default offer as well as restrictions on conditional discounts. These recommendations were implemented through the Competition and Consumer (Industry Code—Electricity Retail) Regulations 2019 which commenced on 1 July 2019.
Following the conclusion of the Retail Electricity Pricing Inquiry, in 2018 the Australian Government directed the ACCC to hold an inquiry into prices, profits, and margins in the supply of electricity in the National Electricity Market.
Under the terms of reference for this inquiry, the ACCC has a broad-ranging remit to monitor aspects of the National Electricity Market, including electricity prices faced by customers, contract market liquidity, and the effects of policy changes.
Previous reports as part of this inquiry have alternated between analysing the billing data of residential and small business customers, and retailers’ costs and profits in supplying electricity to customers (‘cost stacks’). Chapter two of the December 2023 report has the cost stack analysis. The next report as part of this inquiry is scheduled for June 2024.