Pricing ‘noise’ drowns out the Power of Choice model


In Australia, the Power of Choice regulation – a series of government-led industry-wide reforms to the way the National Electricity Market operates – set in motion opening the market to be more competitive. The knock-on effect should provide consumers with more opportunities to make informed choices about the way they use electricity products and services.

However, the 2018 Retail Energy Competition Review – an annual report that provides an update on the state of competition in the retail energy market and the outcomes that consumers are achieving– issued by the Australian Energy Market Commission (AEMC) in June indicates a market under strain.

This year’s review found that while competition in the retail energy market continues to evolve, it is not delivering the expected benefits to consumers. After a period of stable or improving customer satisfaction, levels of residential and small business consumer confidence and satisfaction with the retail energy market have declined significantly over the last year.

Admitting failure, the AEMC report states that the competitive energy market has not yet evolved in a way that is delivering the desired outcomes for consumers.

Pricing practices of energy retailers and the predominance of discounts have created a confusing and complicated landscape for consumers to traverse.

Given that consumers have limited time,ability and willingness to compare offers, the levels of pricing ‘noise’ that exists undermine the likelihood they can select the best retailer and plan for their circumstances. The most common characteristics of retail energy market pricing are outlined below.

Complex and confusing tariff structures

Retailers have chosen to minimise the risk by passing through complex network pricing structures that in some cases add up to three usage blocks above those specified by networks. This makes it more difficult for consumers to comprehend and compare tariffs. In contrast, the report noted that in the mobile sector, retailers manage complex costs and provide simply priced offerings.

Discount claims are hard to compare

Marketing campaigns focus on percentage discounts off the standing price that are inconsistent between retailers, which invariably make it difficult for consumers to compare offers. A higher percentage discount does not always align with a cheaper customer outcome. The comparison is further complicated because discounts apply to different parts of the bill, with some only applying to usage and others to the whole bill.

Many discounts are conditional

Of the 5,940 gas and electricity retail offers available in March 2018 across NEM based jurisdictions, 57% had at least one conditional offering. The most common is for customers paying their bill on time.

This practice has become more prevalent,with the highest ‘pay on time’ discount reaching 47% in Victoria. Notably, ‘pay on time’ discounts result in a ‘late payment fee’ despite these being banned in several jurisdictions.

Increasing price dispersion

In theory, a broad distribution of pricing offers is often associated with an effectively competitive market and enhanced outcomes for customers. This generally suggests effective customer segmentation and retailers competing to provide products and services tailored to each customer’s preferences.

However, price dispersion in retail energy appears to be driven by discounting practices, rather than appropriate market segmentation. This suggests retailers are differentiating based on customer inertia,rather than customer preferences.

Is there any good news?

In the past year, retailers have made efforts to introduce plans for ‘no discount’, fixed price and fixed bill along with a series of payment options including prepayment.

These new pricing offers are all simpler for consumers to understand, compare and make informed decisions about. However,at this stage, these alternative offers remain limited, and the uptake by consumers is unclear.

There has also been the emergence of new energy service providers who are utilising technology, digital platforms and software solutions to create simple service offerings.

The providers are supplying services in competition to, or in collaboration with,retailers and are using business models where technology allows additional value from the market to be realised, and the benefit shared between the retailer and customer. While the level of product and service innovation by traditional retailers remains limited, there are indications they are starting to reconsider their value proposition to consumers.

Residential consumers’ perspective

Energy Consumer Australia’s Energy Consumer Sentiment Survey published in December 2017 reports weaker results than the previous year and correlates the significant rises in price and bills to customers that occurred in 2017. Overall,consumer trust in the energy sector has dropped from 50% in 2017 to 39% in 2018, with consumers responding in various ways to the challenges faced in engaging with the market and the price increases: including becoming disengaged consumers; being motivated to shop around for better deals; or investing in solar PV or batteries to gain greater control over their energy consumption and bills.

The biggest concern is around vulnerable consumers, who have been particularly affected by the price increases. The AEMC is currently considering a rule change that proposes to strengthen retailer obligations so that ‘hardship customers`are given adequate support. The refreshed arrangements should ideally work with the range of complementary jurisdictional concession schemes to support customers with their energy affordability.

Business consumers’ perspective

This consumer segment tends to pay more per unit of energy and consume energy at considerably higher levels than residential consumers, but do not have the same hardship or payment plan protection savailable to them. Over the past year, this has led to a growing divide between how different types of businesses engage with the retail energy market.

In particular, businesses with more employees (generally above 100) are more aware of their energy consumption and management options and are more confident in finding the right information to choose plans. However, smaller businesses are less optimistic about finding the correct information, have lower levels of trust inr etail markets and are less likely to invest in new technology.

The AEMC survey also revealed that over the past year, 36% of small business customers were surprised by the increase in their energy bill, and of those: • approximately half absorbed the price rise;• nearly half made efforts to reduce their consumption; and • 17% looked to change retailers.

Taking a progressive stance, retailers have been more active in approaching businesses,with a 30% increase in approaches from the previous year, and 90% of small businesses contacted by a call from a retailer, a rise of 33% from the previous year.

Improving consumer empowerment

The AEMC advises that smart meters,improved access to consumption data, and software platforms with smart comparison algorithms can assist consumers to understand their consumption profile better and thereby find the best retail offering for their circumstances.

There is also a need to facilitate improved access to enabling technology that gives consumers more control over their energy consumption and bills, such as distributed energy resources. Another key area is the improved consumer education, which plays an essential role in assisting consumers to understand their bills and their options to address high bills; and helps to dispel misconceptions in the market.

A further recommendation is the establishment of an industry code of conduct for energy comparison websites.

The intention is for the code to provide improved transparency about the commercial relationship between retailers and the site,and on what retailers and offers are being compared. The website should also be designed to ensure consumers receive a like for like comparison.

Development of the code and, if necessary,any authorisation process obtained from ACCC, should be funded by industry and involve representatives from consumers and other affected stakeholder groups. All comparison websites should display, in a prominent location, the number of retailers and plans represented on their site as a proportion of all retailers and plans available in the consumer’s distribution area. This would let consumers know the market coverage of the comparison service and provide some perspective on whether the recommended deal is likely to be the best for their circumstances.

Not taking this recommendation lightly,the AEMC has stipulated that failing the development of an effective code, regulatory measures may be considered. It is believed that these advancements will enable consumers to make better decisions and apply additional pressure on retailers to improve their pricing practices and product and service offerings.

The result will be an empowered consumer who has access to the necessary tools and resources to navigate the retail energy market quickly; along with the technology to reduce their dependence on the market if dissatisfied.

This article was originally published in Smart Energy International 4-2018.