A report from the Grattan Institute has highlighted the unfortunate reality facing Australian energy consumers: big price rises, fat retailer margins and a market full of misleading discounts.
Coming amidst fierce debate on the future of the Australian energy system, the report concludes that retailers are not passing through costs to consumers in a transparent manner and are quietly and steadily increasing profit margins.
$250 million a year in Victoria alone
The report’s author, Tony Wood, found that if energy retailers made the same profit margins as are common in other retail sectors, customers would have an extra $250 million in their pockets – each year.
Plus, Victorian customers are paying $120 million per year to fund the sales & marketing activities of energy companies. The retail energy company costs that are added to bills can be as much as 40% of the total bill.
Gratton also found that there is little correlation between the size of the apparent discount that customers are offered and the size of the bill.
Turnbull wades in
Energy affordability is, quite naturally, a topic that is close to customers’ hearts. Even the PM waded into the debate, responding to the Grattan Institute report by saying that “Australian households and businesses are paying too much for their electricity.” Mr Turnbull went on to say that the upcoming review of the National Electricity Market, conducted by Chief Scientist Dr Alan Finkel, would seek to improve price transparency.
The question is, should energy companies be expected or required to deliver greater transparency to customers? We don’t see Coles, JB Hi-Fi or Rebel Sports lifting the veil on their operations and profit margins in full detail, so why ask this of your energy company?
The difference is very simple: energy is an essential service, and there is no substitute for it. You can’t swap your TV to diesel, as entertaining as that mental image may be.
So, what are energy retailers to do?
Imagine you’re one of these big energy retailers. Should you lift the veil and show the world your profit margins? If you’ve been quietly increasing your profit per unit over a number of years, then it’s unlikely you’ll find this an attractive option.
It raises the possibility of government intervention in the form of regulation, something that would likely be damaging to a number of retailers. We can’t remember a time we saw a large energy company lobby for additional regulation, unless it was likely to directly or indirectly make it harder for customers to change retailers.
Would regulation of retail pricing actually help customers?
Not necessarily, so let’s be careful what we wish for. Consider this: Company X has two businesses. One generates power and the other sells it to retail customers. The price that Generator X sells to Retailer X is defined, normally, by the Generator and considers current and future market prices.
A regulator comes along and tells retailers their margins are capped. Retailer X now adds lower margins to its unit rates in line with the new rules. Meanwhile, Generator X has constrained generation output and market prices have risen as a result. Generator X now sells power to its sister business at a higher wholesale cost, meaning that even with lower retail margins customers don’t actually see any more money in their own pocket, and Company X carries on as if nothing happened.
This is, of course, massively simplified but it’s not far off how things work in large energy companies in many parts of the world. The point is this: re-regulating retail prices would require a broad brush regulatory intervention across all parts of the energy system to deliver positive effects to large numbers of customers.
The findings of the report don’t come as a surprise to us. We started Energy Locals with everything that Tony Wood has now published in mind. We certainly didn’t set up Energy Locals with the traditional energy model in mind.
What does this mean in practice?
- Grattan: Energy retailers make about 13% net profit
- Energy Locals: our net profit is well under 5%
- Grattan: Retailer costs are opaque
- Energy Locals: we retain a fixed, per customer service fee of no more than $15 per month – and often less. From this we need to run our operation and manage risk
- Grattan: Energy retailers lead with confusing and misleading discounts
- Energy Locals: our price is the price. What you see is what you pay, and our prices never go up for profit
We’ve adopted this approach because we don’t believe the future of energy is in selling lots and lots of units of energy and making a margin on each one. We reckon the energy company of the future will charge a fixed fee for providing a service that gives you cheaper and cleaner energy, leaving you to focus on using energy rather than avoiding the postie every three months. We’re working back from this end game.
Millions of dollars and years could be spent debating re-regulation of pricing, clean coal and many other lively topics. But we reckon Australians have better things to do with their time and money. Technology is getting cheaper every day and organisations like Energy Locals are gathering people with the right experience to go head to head with the traditional model. So let’s get on with it.
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