Energy policy is much in the news lately. With prices soaring consumers want to know why, and what can be done about it. A half dozen recent stories on the CFA news site provide some insights to consumer problems, what’s driving them and how they might be fixed.
In each of the past few years electricity prices have increased by substantially more than the CPI. Why is that? Is de-regulation the cause? Catching up for past under-investment in distribution systems? Increasing use of air-conditioners, affecting peak demand? Or is it a transfer or wealth from consumers to suppliers due to problems in the way prices are set? One thing’s for sure – the carbon price has had an impact on the July 2012 increases, but it can’t be blamed for the long term trend.
In a recent Core Economics piece commentator Stephen King shows that network costs are the largest component of electricity prices and these are driven by the ‘peak’. In other words, the transmission and distribution networks are designed and built to meet the peak load. There is ‘spare capacity’ at other times. So if peak demand is rising but ‘average’ demand is falling, this means bigger networks with more spare capacity most of the time.
Network costs make up 46% of total energy costs. Each year distribution businesses make a bid for a price increase based on their spending plans including building new capacity and maintaining existing capacity.
In June the Consumers Utilities Advocacy Centre called for reform of pricing structures, noting that the Australian Energy Regulator has found that ‘the current restrictions on an objective assessment of the efficiency or the necessity of expenditure proposed by electricity businesses is causing consumers to pay more than they should for a safe and reliable supply of electricity services’ (Time for energy sector reform 15 June 2012 )
More recently an expert panel commissioned by the Standing Council on Energy and Resources has raised doubts about the effectiveness of current price review mechanisms. The expert panel found that network businesses have used the current price setting process to recover an additional $3billion from consumers since it was instituted, in around 2008. The panel noted that some of the decisions made under current rules have had significant impacts on price outcomes but ‘an informed consumer would find it very difficult to discover a credible account, from any authoritative source, of why energy prices are changing as they are’. (Energy review regime effectively ignores consumers, 17 July)
As King points out, it’s peak demand that drives much of the increased investment in energy infrastructure. Are governments, energy regulators and energy businesses doing enough to manage the growth in peak demand?
CFA reviewed consumer groups responses to rising prices in Electricity Prices Require Government Response, 3 July.
Consumer hardship and payment plans
It’s important to remember that, even while they are growing rapidly energy costs still make up a relatively small part of the average consumer’s spending. But we are not all average consumers. For people on lower incomes and with high energy needs (for example those who need to run certain medical equipment) energy prices form a much higher proportion of their budget and can cause them significant financial problems.
Hence the importance of hardship programs. Consumer organisations such as Consumer Action, the Public Interest Advocacy Centre, ACOSS and the Consumer Utilities Advocacy Centre campaign to ensure that hardship programs are effective and fair.
Consumer Action’s recent report The pursuit of the impossible: consumer experience with external collection of retail energy debts criticises energy companies failure to offer payment plans in appropriate cases. The report ‘takes the real life experiences of Victorians and uses them to show why energy retailers are better off dealing with these customers through well administered hardship programs rather than by passing on debts to third parties.’ (Better energy hardship programs needed 16 July)
In NSW the Public Interest Advocacy Centre has called for an an urgent and comprehensive review of consumer assistance measures following the 18% average increase to electricity prices announced by the Independent Pricing & Regulatory Tribunal (Energy assistance needs urgent review, says PIAC, 13 June).
An unfortunate consequence of retail de-regulation has been a mad scramble for customers among the competing energy retailers. Instead of competing on price, the quality of their offers or service or their environmental credentials, retailers often try to win business through hard sells including door-to-door canvassing.
It is important for retailers to work hard to help consumers understand that they may save money by switching providers or switching tariffs within their current provider – but aggressive and sometimes dishonest door-to-door selling produces too much harm according to a number of consumer organisations. Consumer Action is leading the Do Not Knock campaign to help consumers avoid unwanted sellers. (Australians fed up with door to door sales urged to sign new petition)
Consumers in caravan parks, retirement villages and rooming homes
The Consumer Utilities Advocacy Centre (CUAC) has launched a survey that will offer the first systematic examination of the experiences of Victorian electricity consumers in “residential embedded networks”
In residential embedded networks, electricity is bought in bulk for the whole site and then on-sold to residents. In contrast, residential consumers outside of these networks buy their electricity from one of Victoria’s licensed retailers. (Consumer survey: embedded networks 29 June)