Economy

Consumers win big on electricity prices

In a major win for consumers, the Government has largely committed to implementing the recommendations from an independent review of electricity prices, Marc Daalder reports.

Energy Minister Megan Woods has released the final report of an independent review of electricity prices and committed to implementing most of its recommendations.

The Electricity Price Review was a requirement of the coalition agreement between Labour and New Zealand First and has been in progress since April 2018.

Its chief recommendations, including the creation of a regular wholesale electricity market to help independent retailers, extending discount rates to all eligible consumers and temporarily banning "win-back" offers that are used to stop people from switching energy companies, have been accepted by the Government.

"They're really getting to the really important changes that need to be made, so we're absolutely delighted," said Flick Electric chief executive Steve O'Connor.

Electricity Retailers of New Zealand chief executive Cameron Burrows cautioned against overstating how uncompetitive the market is. "It's relatively high-performing. We've got power bills at the lowest level in 10 years, we've got the highest switching rate in eight years, we've got the 10th lowest power prices in the developed world," he said.

"But we're always looking for things we can do to improve. We really support the vast majority of the changes that the Government is looking to impress."

Taking a longer view on residential power prices, however, reveals they have jumped 79 percent since 1990, after accounting for inflation, according to a document from the independent reviewers. Over the past two decades, New Zealand’s residential prices have risen faster than in most other OECD nations.

Government to ban anti-consumer practices

Two of the most significant practices identified by the EPR as problematic are prompt payment discounts and "win-back" offers.

Many retailers offer discounts to customers who pay their bill on time. However, these discounts are only applied if the customers ask - thus, most people who are eligible for them don't receive them. Moreover, they don't really reflect the cost of recovering overdue bills, which is what they're supposed to be related to.

"A lot of people assume they're on a really great deal because they say, 'Hey, I get 25 percent off my bill,' when, actually, nope. You've had a 25 percent inflated price and then had 25 percent off it," O'Connor said.

The EPR determined that these discounts "disproportionately hurt low-income consumers" and "are confusing when customers try to compare retailers' prices". It recommended banning the practice, while still allowing companies to charge "reasonable late payment fees".

Instead of moving to regulate the practice, the Government will "write to the industry setting out the findings of the review and the expectation that they make discounts available to all consumers and reflect the true costs of managing late payments from their customers".

But, if retailers fail to meet that expectation, it will regulate.

Meridian, the majority-state-owned energy generator and retailer has already abolished the discounts, passing them on to all consumers automatically. According to Woods, this saw consumers save $5 million and if other companies follow suit, they will save another $45 million.

However, that figure is still dwarfed by the $800 million that power generators earn above what they would if the market was truly competitive, according to the University of Auckland.

Interim prohibition on win-backs

The Government is also asking the Electricity Authority to issue a moratorium against a second practice: win-back offers. When consumers attempt to change energy providers, their current provider will offer steep discounts in an attempt to win them back.

"This practice is good for the individual consumer concerned, but not for competition generally if it eventually undermines choice. Win-backs are arguably one of the bigger barriers independent retailers face in expanding their market share, and we recommend they are banned," the EPR states.

Entrenched retailers - and especially large generator-retailers - benefit from apathy among consumers. The Electricity Authority says that as many as 750,000 households haven't switched electricity providers since 2002. The increased prices consumers pay for not switching add up to around $400 million per year – something that Electric Kiwi terms a “loyalty tax”.

The five largest generator-retailers (known as 'gentailers') have a market share of 90 percent, which the EPR says has "hardly changed from a decade ago".

Win-back offers are one of the ways the gentailers prevent customers from switching. Mercury has recovered 40 percent of its potential defectors through win-back offers. Removing these will allow independent retailers to compete more fairly for customers.

However, in other jurisdictions, governments have gone further on win-back offers. In the UK, O'Connor said, not only are win-backs banned but retailers have to apply those discounts to all consumers, in the same way that the Government here is tackling prompt payment discounts.

"We're already seeing about half of all households compare plans every year and about half of those decide to switch and half of them decide they're on the right one already," Burrows said. "We really think everyone should compare at least once a year."

Wholesale market competitiveness also a target

Temporarily banning win-back offers isn't the only move the Government will make to keep the market competitive. The EPR observed that the market is currently composed of a handful of major gentailers and dozens of independent retailers which buy and sell electricity from gentailers on the wholesale market.

The difficulty with this is that the gentailers have failed in their market-making obligations. "The current wholesale contract market is not working effectively. It relies heavily on the four biggest generator-retailers voluntarily quoting buy and sell prices with spreads of no more than 5 per cent for certain contracts," the EPR stated.

"When it works this way, it adds depth to the contracts market and ensures clear price signals. But spreads in recent times have been as wide as 50 per cent, apparently in response to uncertainty caused by low rainfall and/or gas shortages."

In order to correct this, the Government will force gentailers to sell into the wholesale market at affordable prices if they don't develop their own affordable market-making scheme in the next 12 months. However, the Government hasn't gone so far as to endorse the details of the obligations that the EPR suggested.

"The mandatory market-making obligation should include definitions of the parties on which the obligation applies, the maximum permissible spreads between prices quoted for buying and selling contracts, the contract volume obligations and the conditions that would trigger a relaxation or suspension of the obligation," the EPR stated.

Industry reaction cautiously supportive

"There's a number of areas where we're really keen to work with the Government and the [Electricity Authority] to work up some of the detail of these proposals, to understand exactly how they're going to drive the best outcomes," Burrows said.

"I think what's really important with the wholesale markets is that although we've seen higher prices over last year and we'd love to see them lower, actually that hasn't translated into higher bills for customers. We've got a really competitive electricity market."

Mercury Energy was more equivocal. “We embrace competition and agree that there are benefits to consumers through it, noting smaller retailers seeking ‘an even playing field’ will also have to step up how they support vulnerable customers,” the gentailer said in a statement.

For his part, O'Connor says that "it's essential in any market that someone has to make that market".

"That's something we'll be encouraging takes place very quickly," he said. He declined to comment further on the wholesale market measures, citing a need to coordinate with other independent retailers.

These concerns are buoyed by a perception that gentailers are earning massive profits through high wholesale prices. While the EPR was unable to conclude whether this is the case, the Government will force gentailers to release more information about their profitability in accordance with an EPR recommendation.

Focus on energy hardship

A significant number of the EPR’s recommendations dealt with energy hardship. In particular, the review took aim at low fixed charge tariff regulations, which cap the fixed charge component of low-usage plans at $0.30.

In other words, regulations cap the fixed charge tariff that people who use less energy can be charged. These people are usually smaller families, higher-income, and have insulated homes or an additional source of energy, like solar panels.

Phasing this out would allow companies to charge low-users more equitably. As it stands, high-users pay more, even though they’re more likely to be low income, subsidising the low-users’ charges. The Electricity Network’s Association found that the $0.30 charge meets only 5 percent of network costs, while the average residential household pays $2.00 and meets 33 percent of network costs.

Users of solar panels will face increased energy charges under this recommendation, but the Government has asked energy officials to begin developing a plan to phase out the low fixed charge tariffs.

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