Risk isn’t everything, but for now, it’s almost everything

Last year, the Australian Energy Market Commission (AEMC) initiated an inquiry into pricing for a consumer-driven energy future.[1] The commission commendably committed to supporting all consumers in a future energy market where distributed consumer energy resources (CER) are expected to proliferate. This inquiry sits within a broader suite of regulatory and policy reviews.

My initial submission to the inquiry forewarned that unless the commission is prepared to “rethink how it thinks” about consumers and markets, it will inevitably reach the same conclusions as every one of its previous reviews.[2] Those reviews have seen the commission repeatedly recommending:

• market rules enabling more choice for consumers
• providing consumers with more (useful) information
• urging and supporting more shopping around by consumers, and
• exposing consumers to more efficient price signals.

These “four mores” explain almost every rule change in the consumer-facing energy market over the past 20 years, including rules currently under consideration.[3] There are, however, some inconvenient realities with which the commission and policy makers must come to terms.

The ACCC’s latest report in its ongoing inquiry into the National Electricity Market (NEM), ought to provide the commission with a sobering reality check.[4] Yet again, the ACCC has found the so-called "loyalty penalty" is alive-and-well in the retail electricity market.[5]

More than 80 per cent of Australian households in the National Electricity Network (NEM) could move to a cheaper electricity plan if they shopped around or contacted their electricity provider

This “penalty” can cost customers hundreds of dollars per year, yet they still don’t switch. This outcome is the direct consequence of the retail market’s design, the unrealistic assumptions it makes about consumers and competition, and the conduct it permits by retailers. As the ACCC observes:

Most retailers’ price setting policies or processes intentionally treat the setting and adjustment of prices for new and existing offer prices differently. This contributes to those customers who do not switch regularly paying a ‘loyalty penalty’.

Why does this even matter? After all, loyalty penalties can be found in other markets. What makes this market different? The is one simple answer: the energy transition. If consumers lose faith in the energy market and its administration, then community and political support for the energy transition (and reform) will be imperilled. This is too high a risk to take.

Word on the street is that the commission may be looking to pull a regulatory rabbit out of its rule-changing hat. These ‘rabbits’ might include a broader suite of default contracts or obliging retailers to offer fixed-form energy plans. History tells us these solutions are unlikely to make much difference to how consumers engage with the energy market. These additional products will just add to the confusion involved in shopping around. Moreover, they are likely to be mispriced.

If these products are priced by regulators, the regulators will set prices at a level that effectively impose zero commercial risk on retailers.[6] This is consistent with longstanding regulatory wisdom and practice. Moreover, regulators can be expected to become even more conservative as retailers’ input costs become increasingly volatile in the years ahead.

Alternatively, the commission may yet again decide to place its faith in the supposedly competitive retail energy market to price these products (despite the ACCC’s repeated findings). But remember, we’ve been here before. In 2009, the pricing of standing offers was deregulated. This proved to be an unparalleled failure in the history of the NEM.

So where to from here for the AEMC’s inquiry?

First, the Commission must acknowledge and commit to avoiding the ineffectual outcomes of its past inquiries. As I have urged:[7]

The Commission … must eschew well-worn tropes about markets and consumers; and it must not let assumptions get in the way of reality

Perhaps the best place for the commission to start is with how it organises its thinking about consumers. The commission’s latest consultation paper claims the level of consumer engagement with the energy market is driven by their access to resources and their interest in the energy market. This taxonomy suffers from at least three flaws. First, it assumes resources and interest sufficiently support effective engagement. Second, it assumes a strongly positive relationship between engagement and successful consumer outcomes. And most fatally, it offers nothing by way of describing the successful consumer outcomes the commission believes it is pursuing.

I have proposed a more robust taxonomy for thinking about consumers’ relationship with the energy market. It identifies that the two relevant consumer characteristics are: consumers’ differing risk profiles, and their differing proficiencies in managing risk. The three primary consumer risks involve:

• identifying a contract appropriately structured for their circumstances, then
• acting in a manner that is rewarded (not penalised) by the contract, then
• avoiding falling prey to a loyalty penalty.

The objective of any reforms – the successful outcome the commission should be pursuing – should be to avoid exposing consumers to risks (and associated costs) they are ill-equipped to understand, manage or price.

The way forward may not be obvious. What is obvious, however, is that conventional regulatory thinking will only perpetuate the shortcomings of the retail energy market and imperil ongoing community support for the energy transition.

Dr Ron Ben-David is a Professorial Fellow with the Monash Business School and an associate of the Monash Energy Institute.

[1] https://www.aemc.gov.au/market-reviews-advice/pricing-review-electricity-pricing-consumer-driven-future

[2] https://www.aemc.gov.au/sites/default/files/2024-09/240822%20-%20EPR0097%20-%20Ron%20Ben-David.pdf

[3] For example, see: https://www.aemc.gov.au/rule-changes/real-time-data-consumers

[4] https://www.accc.gov.au/about-us/publications/serial-publications/inquiry-into-the-national-electricity-market-2018-25-reports/inquiry-into-the-national-electricity-market-report-december-2024

[5] https://www.accc.gov.au/media-release/no-reward-for-being-loyal-australians-urged-to-shop-around-for-a-better-value-electricity-plan

[6] The Essential Services Commission sets the Victorian Default Offer (VDO) while the AER sets the Default Market Offer (DMO) in other NEM jurisdictions.

[7] https://www.monash.edu/__data/assets/pdf_file/0006/3842835/Ron-Ben-David-Submission-to-AEMC-Pricing-Review-12-December-2024.pdf