Electricity reference pricing is only part of the solution

by Diviv Group Support | Nov 02, 2018

As first announced at the 2018 AFR Energy Summit, the Federal Government is moving to adopt default offers and reference pricing for electricity - expected to provide consumers and SMEs with price relief and transparency. However, better pricing is only a partial solution to the challenges currently facing Australia’s electricity market.

Morrison moves to introduce default energy price
The Australian Prime Minister, Scott Morrison, recently announced that the Federal Government will seek to adopt a number of recommendations handed down in the ACCC’s Electricity Pricing Inquiry report released in June 2018.

Specifically, the Government is proposing to abolish the Standing Offer for individual and small-to-medium enterprise (SME) electricity users who are not subject to state-based price regulation, and replace it with a Default Tariff set by the Australian Energy Regulator (AER) which will vary by network area. All retailers will then be compelled to reference this Default Tariff when quoting discounts to customers.

The Government has requested that the AER work towards publicly releasing the default prices and reference bill by April 2019. The AER will now move into a period of industry consultation while the Federal Government works with their state and territory counterparts to advance the legislation.

Ultimately, the objective is to deliver more transparency around pricing and discounts for residential electricity consumers and SMEs when comparing, or moving between, offers from energy retailers.

Price relief welcome but further steps required
While further clarification is needed around the calculation of the reference pricing and mechanisms to determine associated variable costs to consumers, Energy Action welcomes any action taken by the Government that will help provide price relief for electricity users.

As noted above, the move by the Government is expected to support greater price transparency and comparability of offers in the market. However, introducing reference pricing won’t necessarily assist to reduce electricity prices in isolation.

Consumers and SMEs will still need to shop around to identify the best rate. This can often be a time-consuming exercise and requires expertise to filter through the terms and conditions associated with a new offer or understand the cost of switching providers. This is particularly true for SMEs given the Default Tariff would be determined at a distribution network level, and those operating across multiple sites may need to compare a greater number of offers.

If reference pricing is introduced, it is important for consumers and SMEs to understand the costs associated with changing retailers. Currently, the regulatory guidelines at a state and territory level, which are near-uniform, outline no termination fees for standard contracts, and termination amounts for fixed term market contracts are included within the terms and conditions and levied at a ‘reasonable’ level. Once reference pricing is legislated, it is expected that regulators may provide further clarification within their guidelines on the definition of ‘reasonable’.

The impact for commercial and industrial energy users
The default price and referencing is limited to residential and smaller scale energy users, and doesn’t apply to larger commercial and industrial businesses.

This is the case as the cost of electricity for SMEs is typically higher on a per unit basis compared to larger users, given they are not consuming sufficient volumes to negotiate better prices. Conversely, larger scale energy users have access to alterative procurement solutions that can optimise their pricing and contracting. This could include requests for proposals, structured products or utilising Energy Action’s reverse auction platform.

Pricing isn’t the only crucial factor
While the move towards referencing pricing is a positive step to helping consumers and SMEs optimise the price they pay for electricity, more support for energy efficiency initiatives can deliver an even greater benefit.

Where reference pricing is likely to provide most assistance to those electricity users not currently on an optimal plan, all energy users and the market can benefit from lowering electricity consumption through managing demand and implementing steps to increase efficiency.

There are a number of options available to deliver more efficient electricity consumption, whether it is monitoring and tracking usage through online portals, upgrading appliances or equipment or installing more efficient lighting solutions. And while these can deliver substantial cost savings through lower overall consumption, subsidising and supporting these initiatives doesn’t appear to be a top priority for policy makers.

In June this year, The American Council for an Energy Efficient Economy's (ACEEE) released its global rankings comparing energy efficiency policies, and of the 25 top energy consuming nations, Australia’s position fell to 18.

This further highlights the need to increase the focus on energy efficiency as way to augment other policy developments and keep pace with other global leaders. By investing more in energy efficiency it can support greater reliability of energy supply overall and help reduce overall electricity costs.