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2018 Retail Energy Competition Review

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2018 Retail Energy Competition Review FINAL REPORT 2018 Retail Energy Competition Review 15 June 2018 Reference: RPR0007 Final Report Inquiries Australian Energy Market Commission PO Box A2449 Sydney South NSW 1235 E: [email protected] T: (02) 8296 7800 F: (02) 8296 7899 Reference: RPR0007 Citation AEMC, 2018 Retail Energy Competition Review, Final Report, 15 June 2018, Sydney. About the AEMC The AEMC reports to the Council of Australian Governments (COAG) through the COAG Energy Council. We have two functions. We make and amend the national electricity, gas and energy retail rules and conduct independent reviews for the COAG Energy Council. This work is copyright. The Copyright Act 1968 permits fair dealing for study, research, news reporting, criticism and review. Selected passages, tables or diagrams may be reproduced for such purposes provided acknowledgement of the source is included. Executive Summary The Retail Energy Competition Review is an annual report that provides an update on the state of competition in the retail energy market and the outcomes that consumers are achieving. It is an important tool for mapping progress and change over time, and in identifying emerging industry issues that require further analysis or action to address. Overview This year’s review found that while competition in the retail energy market continues to evolve, it is currently not delivering the expected benefits to consumers. After a period of stable or improving customer satisfaction, levels of residential and small business consumer confidence and satisfaction with retail energy market have declined significantly over the last year. In particular: • consumers have generally experienced substantial increases in retail energy prices. These price increases have been driven largely by increasing wholesale costs. Network costs are also a significant component of retail prices, and retailers have not actively engaged in the network pricing process on behalf of consumers. • retail energy offers, particularly the discounting behaviour, are confusing for consumers. Consumers tend to only get a better deal if they leave or threaten to leave a retailer. This has led to concerns over energy affordability, and increased interest in the sector from Governments and other regulatory bodies. With retailers being slow to innovate on tariff, pricing and products, consumers have also taken matters into their own hands, with increased investment in distributed energy resources, such as solar PV systems and batteries. There is considerable scope to improve customer experiences and outcomes in the retail energy market by: • retailers changing their pricing behaviour and product offerings to offer tariffs that can be more easily understood by consumers, and being more proactive with their consumer base • facilitating the further empowerment of consumers, through improved ease of access to consumption data, access to enabling technology and education of consumers. Context The most important change in the industry in the past year was the significant increases in retail electricity prices that occurred in July 2017 and January 2018. As shown in Figure 1 below, annual residential electricity bills for the representative consumer rose between, $110 to $316, except in South East Queensland where bills fell by $70. The annual bills for small businesses increased by between five and 28 per cent. This has put pressure on many household and business budgets, and has been referred to as an energy affordability crisis by the chairman of the Australian Competition and Consumer Commission (ACCC) in a National Press Club address in September 2017. Executive Summary i Figure 1 – Residential energy bills since 2017 Source: Energy Made Easy (accessed 5 January 2017 and 21 March 2018) and Victorian Energy Compare (accessed 16 February 2017 and 20 March 2018). Note: Bills are for a median market offer with all discounts realised. Annual consumption levels vary between regions – ranging for electricity from 3865 kWh in Victoria to 7151 kWh in the Australian Capital Territory, ranging for gas from 7366 MJ in Queensland to 62528 MJ in Victoria. Network and wholesale electricity costs have a large bearing on the costs of retailers, making up around 70-80 per cent of the consumer price. Tariff structures of regulated networks also influence the tariff structures of energy retailers. In 2017, the major factor causing the retail electricity price rises was the substantial increase in wholesale costs. This was driven by the retirement of the Northern and Hazelwood generators, and high gas commodity costs. While energy retailers cannot directly control wholesale or regulated network costs, they can participate in network pricing regulatory processes, and they do control their own retail pricing and marketing strategies. The ACCC estimated in 2016/17 that regulated network costs comprised 48 per cent of retail electricity prices nationally. Despite this, retailers have chosen not to engage actively in these regulatory processes. This is in contrast to the telecommunications sector, where retailers have consistently participated in the regulatory proceedings of the National Broadband Network. Further, retail pricing plans tend to pass on the complexity of network tariffs and there has been very limited retail tariff innovation. Discounting remains the predominant form of price competition between retailers. Out of the 5,940 gas and electricity retail market offers available in March 2018, only 20 per cent have no price discounts. The way energy offers are presented and marketed has contributed to increased customer confusion and dissatisfaction in the past year. Over the past year there have been significant reductions in residential and small business customer satisfaction levels in both the electricity and gas sectors. • On value for money, residential consumers rated the energy sector lower than the banking, water, broadband and mobiles sectors. Electricity and gas were also the ii 2018 Retail Energy Competition Review only sectors where positive sentiment on value for money decreased and negative sentiment increased. • Small business customer satisfaction with current electricity providers decreased from 70 per cent to 53 per cent – the lowest level since the survey was first conducted in 2014. The concerns about energy affordability and reduced customer satisfaction have led to a significant increase in interest and intervention in the sector over the past year. This has included: • the retailer roundtable meetings with the Prime Minister on 9 and 30 August 2017 • a series of rule changes proposed to protect consumers, with five from the Hon. Josh Frydenberg MP, Minister for the Environment and Energy • governments directly intervening on price or behaviour in wholesale markets, such as the Queensland Government direction to Stanwell and Tasmanian Government wholesale intervention, or undertaking investments that have potential to influence future wholesale costs and retail prices • governments introducing measures to improve energy affordability, such as the New South Wales Government’s energy affordability package and the Queensland Government’s affordable energy plan • the commencement of the ACCC’s retail electricity pricing inquiry • the completion of the Victorian Government’s retail energy market review, where re-introduction of a form of price regulation, through the Basic Service Offering, is being considered. It is against this background that this year’s review has been carried out. The structure, conduct and performance framework Consistent with last year, the report uses a structure-conduct-performance framework to analyse the state of the industry and outcomes for consumers. Tables 1 and 2 summarises the trends in the key measures and metrics of competition over the past year as they apply to this framework. When assessing competition and the outcomes it delivers for consumers, no single indicator can reveal the state of competition. Rather, these measures should be assessed in combination with other metrics, along with any trends over time to provide a more complete assessment of competition. The developments in structure, conduct and performance over 2017/18 are discussed in more detail below, along with • areas for advancement that could empower consumers more • reforms currently underway or being considered to assist consumers, and • recommendations. There are structural signs that competition is continuing to develop There are 16 gas retail brands and 33 electricity retail brands across the NEM-based jurisdictions. In all jurisdictions with price deregulation, the incumbent Big 3 (Origin Executive Summary iii Energy, AGL and EnergyAustralia) retailer energy market share continues to fall. Since 2010 to 2017, Tier 2 retail market share has increased, ranging from 8.8 per cent in South East Queensland to 16.4 per cent in Victoria. Vertically integrated Tier 2 versus smaller stand-alone retailers The Big 3 maintain dominant positions in each jurisdiction, and the combined market share of these retailers remains over 75 per cent across most jurisdictions, except Victoria, where it is 59 per cent. There are however signs that a number of other electricity retailers are strengthening their competitive positions. This is particularly true for Tier 2 retailers who have generation assets. For example, Alinta Energy, by securing wholesale contracts with CS Energy in Queensland and purchasing the Loy Yang B power station in Victoria, has improved its ability to manage wholesale costs in the current market
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