Savings for those on default electricity contracts, but more needs to be done

16 September 2019

Nearly a million households and business customers on standing offers, or default contracts, in NSW, South Australia, south-east Queensland and Victoria have already seen automatic savings to their electricity bills.

Average savings on standing offers since the electricity pricing reforms came into effect on 1 July 2019 amount to between $130 and $430 a year for households, according to the ACCC’s August 2019 electricity market report, published today.

For small businesses, savings of up to $2050 have been projected for average usage.

But the report also shows that most consumers can achieve further savings by comparing advertised prices and shopping around, particularly with smaller electricity retailers.

About 800,000 household customers and 160,000 small businesses on standing offers were placed on the new, cheaper standing offers from 1 July 2019.

“Prices of many standing offers have already fallen significantly, providing immediate and automatic savings for some households and small businesses,” Mr Sims said.

“We estimate households on standing offers will save an average of between $130 and $430 a year, which is good news for these consumers, while for small businesses, projected savings range between $457 and $2050.”

The standing offer pricing reforms, which were based on recommendations in the ACCC’s Retail Electricity Pricing Inquiry report, reduce and cap the excessive prices of electricity plans for customers who are not on competitive market offers. These customers end up on standing offers, which effectively represent the maximum price.

“We are pleased about the positive changes in the electricity market so far, including a recent announcement of free energy advice tools for small businesses, but urge that other key recommendations be implemented if costs are to come down further,” Mr Sims said.

Changes to advertising and discounting to benefit customers

“There are many offers available in the market that are cheaper than the standing offers,” Mr Sims said.

Under advertising reforms, which also came into effect from 1 July 2019, it is much easier for customers to compare prices, because advertised prices must be compared to a common benchmark (known as the reference price).

“The new advertising requirements also replace previous advertisements with confusing ‘discounts’ which could not really be compared with one another,” Mr Sims said.

In one example, before the reforms, a retailer in South Australia advertised a conditional discount of 9 per cent, which was a deal that would have cost an average consumer $560 more than the cheapest offer without an advertised discount.

The report finds that since 1 July 2019 retailers have moved away from offering discounts that are conditional, for example, on paying on time, making offers easier for consumers to understand and compare.

Typical advertisements before 1 July 2019

Typical advertisements after 1 July

Smaller retailers are offering the lowest prices

ACCC analysis of recent changes in prices shows that a number of smaller retailers had cheaper offers than the ‘big three’ retailers (AGL, EnergyAustralia and Origin).

For example, an average Sydney household could save around $100 per year by switching from a cheapest offer by one of the big three retailers to the cheapest market offer available.

“Our report shows that households can find an even better deal, potentially saving hundreds of dollars a year, by shopping around and looking at the offers of some of the smaller retailers in the market,” Mr Sims said.

As at 12 July 2019, the annual cost of the cheapest market offer for average households, depending on which distribution zone they live in, was

  • $290 to $380 lower than the standing offer price in New South Wales,
  • $260 lower in south-east Queensland and
  • $300 lower in South Australia.

In Victoria, the cheapest market offer, depending on the distribution zone, was $250-$300 a year below the maximum price.

The report also found that in most regions, the big three retailers, when looked at together, had narrowed their price range more than the price range of the market as a whole.

Potential savings after the 1 July 2019 reforms

An average household in the Ausgrid distribution zone in NSW on flat rates would have paid the following annual electricity bills:

  • $1617 before 1 July 2019 (median standing offer price)
  • $1467 after 1 July 2019 (new maximum standing offer price)
  • $1272 (cheapest market offer from the big three retailers available on 12 July 2019, with all discounts)
  • $1177 (cheapest market offer from a smaller retailer, available on 12 July 2019, with all discounts)

“We will continue to monitor the impact of these new reforms on prices and offers in the market, and retailer behaviour.”

Continued reform is needed to restore electricity affordability

The report also examined the cost components of electricity bills, highlighting the importance of progressing policies to restore electricity affordability.

In 2017-18, network costs were the largest component of a retail bill, making up 42 per cent, followed by wholesale costs (33 per cent), retail costs and margin (17 per cent) and environmental green schemes (8 per cent).

Network costs fell by 7.8 per cent, or $55 per customer, in 2017‑18; these costs are highest in New South Wales, South East Queensland and Tasmania, largely due to past over-investment in network assets.

“As we recommended in our Retail Electricity Pricing Inquiry report, addressing this past over-investment by writing down asset values or providing rebates on network charges for privatised assets would save average residential customers in those states at least an extra $100 a year,” Mr Sims said.

“Although environmental green scheme costs make up a relatively small part of the bill, they still have an impact on prices and the reduction in green scheme costs in south-east Queensland of around $60 per customer shows the impact of government decisions to absorb such costs rather than passing them on to customers.”

Wholesale costs increased significantly in 2017-18 by 28 per cent or $113 per customer. Several important reforms focussed on improving competition in the wholesale market are in process, including for wholesale demand response, which would allow electricity users to reduce their demand and save money when prices are high.

The Australian Government is also developing a program to encourage investment in new generation.

“Any proposal to support new investment through government funding will be most effective in improving competition in the wholesale market if it encourages new entrants and does not further entrench the market position of established suppliers,” Mr Sims said.

Background

In August 2018, the then treasurer, the Hon Scott Morrison MP, directed the ACCC to hold an inquiry into prices, profits and margins in relation to the supply of electricity in the National Electricity Market. This is the second report in this inquiry.

The ACCC is required to report at least every 6 months. The next report is scheduled to be released before the end of 2019 and is due to include cost data for 2018-19.

The 1 July 2019 reforms to retailer pricing and advertising in New South Wales, South Australia, and South East Queensland were a key recommendation of the Retail Electricity Pricing Inquiry.

Under the Electricity Retail Code retailers must not set their standing offer prices above a level set by the AER (the default market offer level). If retailers want to advertise discounts, the discount must be in comparison to the default market offer level.

The headline discount on retail offers must also be unconditional. Victoria has implemented similar reforms recommended in the 2017 Thwaites report.

Release number: 
170/19
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