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Electricity price increases – Boredom turns to fear

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Electricity price increases – Boredom turns to fear
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Oligopolies and Slavery … where has my Magic Pudding gone?

Electricity was always pretty boring but it has now become scary, because power bills now occupy a significant proportion of the typical household budget.  No doubt fuelled by this trend, we have been fielding a few interesting questions from customers in the last few months:

  1. Why has something so BORING now become SCARY?
  2. Why are there so many electricity companies, and why do some charge more than others?
  3. How the hell can SHOPPING online alleviate FEAR?
  4. Can I switch if I have a contract?

We’ve provided some detail below, but the short answers are:

  1. Electricity price increases are pushing many Victorian households below the poverty line.
  2. Three-quarters of the market is locked up by three large players desperate to maximise profit.  The regulator in Victoria has recognised the benefit to customers from switching to a smaller retailer that is more motivated to give the customer a good deal.
  3. Shopping gives customers more control over purchasing, so that electricity retailing ceases to be something that is DONE to them.
  4. Slavery went out of fashion a long time ago … the maximum penalty for breaking an electricity contract is $22, but some retailers are using all manner of trickery and gimmicks to enslave customers … don’t get sucked in.  In all but the most extreme cases, Powershop has been giving customers a credit for the value of any penalties imposed by their current retailer.

Now for a bit more detail …

1. Why has something so BORING become SCARY?

A few decades ago, electricity was a bit like how water used to be … you just kept the garden tap running all day while you mowed the lawn and washed the Torana (or Cortina depending on your household’s religion) and the guttering, and then hosed the debris off the driveway into the gutter when you were done … it was an ever-abundant, near-free magic pudding.

Since 1991, electricity prices in Melbourne have increased 55%, over and above the effects of inflation.  At a typical household bill of $2,000 p.a. (although families with kids tend to be higher than this), it is a big whack when you overlay it on the after-housing disposable income of Australian families (see right).  A few thousand dollars to turn on the telly and the heater is big when you start with a median disposable income package of $31k, which needs to cover food, clothes school etc.  In fact, for a 20thpercentile family, this puts them perilously close to the poverty line of $15,665 p.a.

2. Why are there so many electricity companies, and why do some charge more than others?

Fundamentally, the price of energy is determined in in a wholesale spot price “pool” called the National Electricity Market, so that demand (how much is being used) is matched off against supply (how much gets produced) based on an equilibrium (market clearing) price every half hour.  When demand is low, sources of supply with the cheapest marginal cost (wind, solar and brown coal) are used to clear the market.  When demand is high, the “cheap” forms of supply are supplemented with more expensive formats (eg gas and hydro) at a higher clearing price.

This dynamic results in some weird stuff.  While the average wholesale price in Victoria might be (say) $50 per megawatt hour (noting that a typical household uses 4-6 megawatt hours per year), in any given half hour period it can be as high as $13,100 per megawatt hour, and as low as negative $1,000 per megawatt hour.

This kind of volatility would be terrifying for the average household (as borne out by various studies on time-of-use metering).  To mitigate against this problem, retailers occupy the role of being financially responsible in the wholesale market for the energy consumed by their customers, riding the highs and lows of that market on behalf of their customers.  The customer in turn sees a “smoothed” price for energy, combining other costs associated with delivering the electricity (poles & wires, metering, administration etc).  The real question is whether the “smoothed” price is a fair price.

There are certainly a large number of retailers of electricity (especially in Victoria).  Assuming an efficient market with good information, this would be a good thing for consumers, driving down prices.  The problem with electricity – and one of the reasons it has been mind-numbingly boring – is that the basis on which consumers get charged for their power is incredibly confusing.

Can you name any other consumer service in respect of which the customer is charged for something that they cannot see, concealing the amount that it will cost them until AFTER they have used it?

The other oft-forgotten dynamic that defines electricity retailing in this country is that, while there are “many retailers” operating in this market – over 75% of the market is dominated by the three majors.  The regulator in Victoria has recognised the benefit to customers from switching to a smaller retailer that is more motivated to give the customer a good deal (see http://www.esc.vic.gov.au/getattachment/18cdbfc4-107b-497a-ab59-6cce797957c7/Electricity-Retail-Margins-Discussion-Paper.pdf).

Furthermore, the majority of the remaining retailers have no generation assets of their own, and are dependent on electricity hedging contracts with the majors in order to support their retail positions.  In fact, if you look at the history of the market in Australia, many of these “new entrants” are subject to one of two possible fates: (i) they fall over when wholesale market conditions become rough; (ii) they get gobbled up by one of the majors (eg APG was recently acquired by AGL).  In either case, the benefit to consumers is short-lived.

Hence why Powershop is backed by renewable-focused Meridian Energy Australia, which enables us to have a long term strategy in market, reflecting the asset life of our generation projects.  If you are at all interested in the renewable energy debate, we also recently commissioned an economic research paper that demonstrated that some renewable policies deliver net economic benefits to consumers (see http://images.theage.com.au/file/2013/06/25/4518185/SKM.pdf).

Overlay the absurdity of invisible post-pay combined with market power of the major players on the disposable income position of many households referred to above and bingo … the old-school power bill tips someone into bankruptcy because they had no opportunity to budget for it accurately.

3. How the hell can SHOPPING alleviate FEAR?

Bewildered by the oppressive situation created by the traditional electricity billing arrangement, Powershop posed a simple question – what if you could buy electricity like it was a consumer product in a supermarket?  What if you could see what (and how much) you were using, and understand how much it would cost BEFORE you were asked to pay for it?

Simply by joining Powershop, customers get a great price and complete visibility of how much electricity they are using and what it is costing them, BEFORE they are asked to pay for it.  In addition, those customers who use our simple analysis tools and online store (also available as an app on iPhone or Android – see below) can do much more, like:

  • Make smarter electricity purchases, such as buying “bargain basement” specials, or buying next summer’s power at a cheaper price;
  • Identify sources of waste, like the faulty beer fridge or the leaking hot water service;
  • Pay for their electricity how and when it suits them;
  • Choose if and how they would like to offset their environmental impacts.
4. Can I switch if I have a contract?

Notwithstanding cheeky advertising to the contrary, residential electricity contracts cannot be fixed in their term.  The maximum penalty that can be charged for early termination is $22, plus the pro-rated reimbursement of any benefits given to the customer (eg football membership) for signing up.

Notwithstanding that the law is clear in this issue, a report in Melbourne’s Herald Sun newspaper recently suggested that some energy customers have been ripped off by hundreds of thousands of dollars in an exit fee penalty “rort” uncovered by the Essential Services Commission.

Whether or not exit fees have been validly charged is a sideshow to the bigger issue of some electricity retailers trapping customers through trickery and gimmicks baked into complex sign-on rewards and exit fees.

Whether or not these fees are legal doesn’t change the fact that they stink, and are not good for their customers, who typically have no control over what they pay for their electricity.  Slavery went out of fashion a long time ago.  If a customer is offered a better deal elsewhere, they should be assisted to leave their current retail contract so they can take advantage of the best deal available in the market.

Customers should not have to wait for the outcome of a Government inquiry to work out whether or not they have been ripped off.  In all but the most extreme circumstances, Powershop has been reimbursing new residential customers the value of any clawbacks or penalties imposed by their current retailer.

Grocery customers aren’t fined for shopping at a new supermarket … why should it be any different for electricity?

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