The government faces calls to overhaul the nation’s energy markets after the removal of all price controls has resulted in soaring retail margins for energy retailers.The retail competition margin of gas and electricity retailers has risen to $600 per customer, research by the St Vincent de Paul Society shows, and makes up the largest component of the energy bill.
“The retail component of bills is too high in the deregulated, competitive electricity market,” the report found. “This is either because the cost of competition is high or because competition is ineffective.
Up to 45 per cent of a electricity bill is paid to the retailer in Victoria.
“We have an energy retail market that ensures customers are paying over the odds for an essential service unless they annually dedicate time to compare energy plans and switch retailer.”
The rise in the retail margin means that as much as 45 per cent of the electricity bill is paid to the retailer in Victoria, and only around 11 per cent of the bill covers the cost of the actual electricity used, the survey has found.
In NSW, the retail component is 30 per cent. The balance of the bill is comprised mostly of network (or distribution) charges for delivering the electricity.
Even though the market has been deregulated for several years in Victoria and more recently in NSW, there are still a large number of households who either cannot or have not shopped around for the lowest prices on offer. As a result, these households often pay more than 50 per cent more for their electricity than households who have shopped around.
Retail margins “outrageous”
“There will always be customers who will not or cannot participate in the market, and allowing retailers to charge them a significant premium, just because they can, is not an acceptable outcome,” Gavin Dufty, policy and research manager with the St Vincent de Paul Society, said.
Additionally, when households move onto a competitive contract, it typically runs for just 12 months, the survey has found, so that the household must shop around each year for a new supplier to ensure they do not face price gouging.
“With the outrageous retail premiums that customers are currently being charged, we need the market model fixed rather than just blaming consumers for failing to shop around,” Mr Dufty said. “Unlike other markets, people can’t exit the market.
“In other markets, your contract expires and then the company has to ‘price to entice’ you to continue to use their service. There is no competitive pressure with energy. We need to address that market failure. The retail cost component looks very expensive: the more competition, the bigger the margin.
“If the cost outweighs the gain, is it worth it?” he asked of energy market deregulation.
“Can you unbake the cake? You probably can’t.”
Therefore, government needed to find a way to put competitive pressure on the market, he said, since it was not reasonable to expect households to be ever vigilant about the gas and electricity contract.
“People have got better things to do. It has to be on the COAG energy ministers’ register,” he said, arguing the new Energy Minister, Josh Frydenberg, should “initiate a review of the National Energy Customer Framework in relation to retail pricing in deregulated markets”.
Retailers winning as consumers lose
NSW-based Public Interest Advocacy Centre policy officer Oliver Derum said, obviously, the retailers were very profitable.
“You are seeking to profit by providing an essential service, and there are responsibilities that go with that, to ensure it doesn’t profit overly at the expense of the customer,” he said.
Mercedes Lentz heads Victoria’s Consumer Utilities Advocacy Centre and said: “Regulatory and policy settings need to be explored and ensuring affordability has to be addressed. This is an essential service, how can we allow it to be so unaffordable?
“We need more tools to make it simpler. We need tools to demystify electricity retailing.”
Victoria, for example, has as many as 18 energy retailers offering 4000 products.
“It is highly complex and consumers find it terribly confusing,” she said.
At the same time, consumers did not trust their energy retailers, she said.