The retail electricity market for households and small businesses in Victoria Analysis of offers and bills July 2017 Executive Summary This Report examines the electricity retail market in Victoria from the perspective of the offers that are made to households and small businesses. It also examines a sample of 686 household electricity bills for electricity purchased over the period from December 2016 to April 2017. The main objective of this Report is to establish quantitative evidence of whether the retail market is delivering outcomes that are in customers’ interests. The three main strands of analysis in this Report are retail electricity prices, the retailers’ charge for their service of retailing electricity, and the savings that customers might obtain by switching to other retail offers. Prices The price of electricity to customers depends on many factors but most notably their level of consumption, the pattern of their consumption (if they are on time-variant tariffs), their location and the prices in their contracts with their retailer. The analysis of retailers’ offers shows a wide range of prices even for the same customer profile. The analysis of the sample of bills also shows a wide range between highest and lowest although the median price amongst the popular retailers is similar. The average price of electricity for the cohort of customers in the sample consuming 3.75% above and below 4,000 kWh per year, is 34.7 cents per kWh (after GST). This is 15% higher than the estimate of the representative electricity price for households in Victoria, produced by the Australian Energy Markets Commission (AEMC)1. The difference is likely to be partly explained by the AEMC’s assumption that customers are always on their retailers’ cheapest offers. 1 A like-for-like comparison of average prices charged by the Big Three retailers finds that they are 22% higher in the sample than the AEMC’s latest estimates – see page 57. 2 Retailers’ charges The amount that retailers charge for their services is not separately itemised on customers’ bills. Instead it has to be deduced by subtracting the known or estimated charges for the other elements (the purchase of wholesale electricity, charge for network and metering and environmental levies) that together with the retailers’ charge make up the bill that the customer is charged. The breakdown of the bill for the representative customer in the sample is shown in Figure E1. Figure E1: Disaggregation of average household electricity bill from sample Representativehousehold electricity%bill%from%sample% $1,600 $1,400 $126% $18% $55% $88% $1,200 $263% $1,000 $415% $800 $600 $423% $400 $200 $0 Retailer's%%%%%%%%%%%%%%%%%Network%%%%%%%%%%%Wholesale%%%%%%%%%%%%%%Metering%%%%%%%%%%%%% Federal% Victoria% GST charge charge charge charge environmental environmental Looking at the estimate of the retailers’ charge across the sample, we find that for three- quarters of customers, the retailers’ charge is more than the wholesale charge, and for households in three of the five distribution areas, the retailers’ charge is higher than the network charge for most customers. The retailers’ charge in Victoria is remarkable by comparison with the estimated retailer charge in other European countries, many of which have fully or partially deregulated retail energy markets. Figure E2 below presents this comparison where the retailers’ charge (on the Y-axis) is presented in cents per kWh. 3 Figure E2: Cross-country comparison of retailers’ charges for their retail service, to residential customers (cents per kWh) 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% Retailers'%charge%%(Australian%cents%per%kWh) ! Italy Spain France Poland Ireland Austria Greece Estonia Finland Holland Victoria Norway Sweden Slovakia Belgium Slovenia Portugal Hungary Germany Denmark Lithuania EU%Average Queensland Luxumbourg Great%Britain South%Australia New%South%Wales While the range of the retailers’ charge in the sample bills varies considerably, the retailers with the greatest number of bills in the sample (corresponding to their market share in the population) tended to have the highest retailer charge as a proportion of their customers’ bills, as shown in Figure E3 below: 4 Figure E3. Distribution of retailer charges as a percentage of total bill (after GST), by retailer For most households in the sample, the retailers’ charge for its services is the biggest single component of their electricity bill. About three out of four households in the sample are paying more for electricity to be sold to them by their retailers than they are paying for it to be produced by generators. Comparing the retailers’ charge with the charge for network services, the analysis finds that in three out of the five distribution regions in Victoria, most households are being charged more for electricity to be sold to them than they are paying for it to be transported over the transmission and distribution network. The estimate of the retailers’ charge in the sample of bills is affected by assumptions of the wholesale price. The conclusion that the retailers’ charge is more than the wholesale charge is robust to far higher estimates of the wholesale price than the one used in this report. 5 Saving by switching A well established narrative in the discourse on retail energy markets in Australia is that customers can save significantly by switching supplier. This report tested this by analysing the savings that customers in the sample would receive if they switched to the least expensive offer. The analysis found that customers in the sample could, on average, reduce their bills by $294 per year, or around 21% by switching to the least expensive offer. Segmentation of the savings into three clusters is shown in Figure E4. Figure E4: Switching savings in three clusters • The “Low saving” cluster accounts for 204 out of the 686 bills. The median saving for customers in this cluster is $84 per year. • The “Moderate saving” cluster has 280 bills and a median saving of $223 per year. • The “High saving” cluster has 155 bills with median saving of $501 per year. In addition to bills in these three clusters, there were 33 bills that were cheaper than any offer in the market and there were 8 bills with savings of more than $1,000. The analysis of switching savings also shows that customers served by the retailers with the greatest number of customers in the sample will tend to save more than customers of other less popular retailers. This analysis assumes that customers are able to identify the least expensive offer for themselves taking account of their consumption profile, whether or not they have 6 controlled load or solar, their location and their tariff type. It also assumes that customers are able to access and evaluate all the relevant competing offers and that the cheapest offers for them remain available for at least a year (or that customers switch to comparably cheap offers if the chosen offer changes). These are onerous assumptions and so the analysis tested the savings that customers might obtain if they switched to the second, third, fourth and up to the tenth cheapest offer. This found that the savings reduced considerably so that if the customer switched to the fifth cheapest offer, the median saving in the sample would be less than half what it would be if they switched to the cheapest offer. This suggests that the narrative that customers can reduce their bill by switching should be tempered by the evidence that the extent of savings depends greatly on customers’ ability to identify and switch to the cheapest offer – and continue to switch again if the cheapest offer changes. Finally the analysis of switching saving considered the extent to which customers might reduce their bills by switching to the least expensive offer from their own retailer. This also showed a wide range of savings for bills in the sample. However, the median saving that customers might achieve by switching to the lowest offer from their own retailer is considerably lower than the saving that they might achieve by switching to the lowest offer in the market. 7 Table of Contents 1 Introduction 13 Part A 2 Description of the retail market 15 2.1 Customer numbers 15 2.2 Retailers and retail offers 16 2.3 Fixed versus variable charges in retail offers 22 2.4 Discounts 24 2.5 Incentives 27 2.6 Network versus retail charges 27 2.7 The comparison challenge 30 3 Bill disaggregation based on retail offers 34 3.1 Method 34 3.1.1 Estimating the bill 34 3.1.2 Estimating the wholesale charge 37 3.1.3 Estimating network charge 40 3.1.4 Estimating environmental charges 40 3.1.5 Metering charges 41 3.1.6 GST 41 3.2 Results 41 4 Inter-state and international comparison of prices and retailer charges in residential offers 43 4.1 Prices 44 4.2 Retailer charges 44 Part B 5 Sample data description 46 6 Retailers’ charges in the sample bills 58 7 Switching savings 71 8 7.1 Savings by switching to the least expensive offer in the market 72 7.2 Cluster analysis of saving 76 7.3 Impact of ability to identify cheapest offer 77 7.4 Savings by switching to the least expensive offer from the existing retailer 78 Appendix A: Data and analytical tools 82 Appendix B: Load profile assumptions 83 9 Table of Figures Figure 1. Box plot of annual charge ($)by retailer assuming 4 MWh per year ....... 19 Figure 2. Box plot of annual charge ($)by retailer in Powercor area assuming 4 MWh per year .................................................................................................. 19 Figure 3. Analysis of residential time of use tariffs (market offers) ......................... 20 Figure 4. Offer duration: number of days before 14 May 2017 when offers were introduced to the market (all market offers, residential and small business) ................................................................................................