Cheaper energy? Why you should pay attention to your bills this July

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Regulatory changes, coming into effect from 1 July 2019, could see Australians save on their electricity bills with the implementation of ‘default’ electricity offers, writes Energy Research Analyst Aleks Milosev.

Changes set by the Australian Government could see the cost of electricity in New South Wales, south-east Queensland and South Australia reduced by up to $280 over a year[1].

Meanwhile Victorians could see the cost of electricity slashed by up to $560 over a year, following the introduction of the Victorian Default Offer (VDO) implemented by the Victorian Government[2].

However, this coming July may not benefit the ‘savvy’ energy consumer, with electricity prices at the lower end of the market potentially increased due to changes coming into effect this July.

Why are regulatory changes taking place?

The changes coming into effect is in response to the growing complexity of the energy retail market, which has arguably led to price gouging of inactive or disengaged consumers on standing offers, and in some cases, exorbitant costs incurred on consumers not meeting conditions to receive advertised discounts.

The Australian Competition and Consumer Commission (ACCC) found that standing offers were no longer working as intended—as a default protection for consumers who were not engaged in the market. Instead, consumers on standing offers could incur a cost between $646 to $1,669 more annually than the average market offer as seen on Canstar Blue Electricity comparison tool[3].

Big headline discounts may sound enticing, though they often come with conditions such as on-time payment; missing these conditions will lead to a bigger electricity bill. Canstar Blue’s consumer research has found that almost 1 in 4 consumers are not meeting their discount conditions for direct debit or pay-on-time. Of those not meeting conditions, on average, are missing out on a little over a quarter of the years discounted amount, costing consumers hundreds of dollars[4].

The Australian Energy Market Commission (AEMC) has recently noted that 59 percent of consumers missing conditions to receive discounts are some of the most financially vulnerable[5]. Missing pay-on-time discounts could cost an Australian household up to $970 annually[6].

Energy consumer conditional discount pie graphs

What regulations are coming into effect on 1 July 2019?

The upcoming regulatory changes will transform the energy retail market, effecting pricing of electricity plans, and how those plans are advertised by retailers.

In New South Wales, south-east Queensland and South Australia, the Australian Energy Regulator (AER) will set a reference price (the DMO) in relation to electricity supply to consumers in certain distributor areas[7].

The reference price will act as a ‘cap’ on the cost retailers can incur on the consumer on standing offers. Market offers will need to indicate the difference from the reference price and headline discounts must be unconditional.

In Victoria, the Essential Services Commission (ESC) will determine the VDO which will specify the prices charged to consumers on standing offer electricity plans[8]. From 1 July, any Victorian on a standing offer will default to the VDO.

While the DMO will cap standing offers, and the VDO will be available to customers, electricity retailers will still be able to offer prices which differ to the default offer, through market offers.

Following the ACCC’s recommendations[9], regulatory changes will also require retailers to provide clear advice to consumers. Retailers will not be able to advertise headline discount which are conditional, and any headline discount advertised will need to be unconditional. If the advertisement contains a conditional discount, then the conditions will need to be stated clearly and prominently.

How Will This Effect the Energy Retail Market?

There is no doubt that the energy retail market will now change – in the most part – largely for the better. Consumers, particularly those that are not engaged, or the financially vulnerable, could be better off from July 1.

Consumers on standing offers should notice the effects foremost come July 1. Consumers moving off standing offers in New South Wales, south-east Queensland and South Australia may see the cost of electricity reduced by up to $280 over the course of a year. Meanwhile consumers on standing offers in Victoria could see the cost of electricity slashed by up to $560 over a year.

In the current market, the majority of energy plans sitting above the reference price and the VDO (on cost) are standing offers. However, there are a number of market offers which will need to alter pricing to comply with regulation.

Annual costs by distribution network

Source: canstarblue.com.au, 4/06/2019; based single rate tariff electricity plans on estimated annual usage between 3,900 kWh and 4,900 kWh in the distributor zones: Ausgrid, Endeavour Energy, Energex, Essential Energy, and SA Power Networks.

Currently, the cost of electricity may range from just a little over $1,000, up to almost $3,000 over a year [10]. Regulation should see these exorbitant range of prices contract to the benefit of consumers, though, may also result in a less competitive market.

Market offers currently at the lower end of the cost-spectrum may see increase in pricing to offset the loss of the higher priced standing offers, which may negatively impact the savvy energy consumer.

The restrictions around how retailers advertise will also have a noticeable effect through the prohibition of conditional discounts as the headline act. This should see the end of advertisements touting big energy discounts, which often are conditional to on-time payments, and may not be applied the full amount of the bill.

Taking all this in consideration, come July 1, the energy retail landscape will likely see much change with new plans coming on to the market, and changes in pricing for plans retailers may intend to keep on.

It’s always a good idea to keep an eye on current offers on energy, and with the changes coming into effect this July, it is no better time to jump on Canstar Blue’s electricity comparison tool to compare electricity plans.

[1] Source: canstarblue.com.au, 4/06/2019; based on the difference on annual cost between the average cost on standing offers compared to the reference price set by the Australian Energy Regulator (AER) in the Essential Energy distribution zone. Annual costs are calculated on estimated annual usage of 4,600 kWh over an annual period for single rate tariff plans.

[2] Source: canstarblue.com.au, 4/06/2019; based on the difference on annual cost between the average cost of Standing Offers compared to the VDO set by the Essential Services Commission (ESC) in the Powercor distribution zone. Annual costs are calculated on estimated annual usage of 4,000 kWh over an annual period for single rate tariff plans.

[3] Source: canstarblue.com.au, 4/06/2019; based on the annual cost difference of average market offer and the most expensive standing offer, on single rate tariffs, with an estimated annual usage between 3,900 kWh and 4,900 kWh in the distributor zones: Ausgrid, Endeavour Energy, Energex, Essential Energy, and SA Power Networks.

[4] Source: Canstar Blue Consumer survey, 2019.

[5] Source: https://www.aemc.gov.au/sites/default/files/2019-02/Rule%20change%20request_0.pdf

[6] Source: canstarblue.com.au, 4/06/2019; based on a 3-person household, single rate tariffs for postcodes 2000, 2115, 2311, 3000, 3011, 3012, 3064, 3107, 4000, and 5000.

[7] Source: https://www.aer.gov.au/retail-markets/retail-guidelines-reviews/retail-electricity-prices-review-determination-of-default-market-offer-prices

[8] Source: https://www.esc.vic.gov.au/electricity-and-gas/inquiries-studies-and-reviews/electricity-and-gas-retail-markets-review-implementation-2018/electricity-and-gas-retail-markets-review-implementation-2018-victorian-default-offer

[9] Source: https://www.accc.gov.au/publications/restoring-electricity-affordability-australias-competitive-advantage

[10] Source: canstarblue.com.au, 4/06/2019; based single rate tariff electricity plans on estimated annual usage between 3,900 kWh and 4,900 kWh in the distributor zones: Ausgrid, Endeavour Energy, Energex, Essential Energy, and SA Power Networks.

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