Price shock for electricity reforms

19 July, 2017

With higher power bills on the way this winter, small businesses with electricity consumption sitting in the non-contestable range will be looking forward to the looming prospect of retail electricity competition in WA as a cure for rising energy costs.

But one of Australia’s top energy experts says the State Government must learn the hard lessons from Victoria’s experiences before rushing into full deregulation.

Tony Wood, Energy Program Director at the Melbourne-based Grattan Institute, says retail competition in Victoria, the state with the biggest number of electricity retailers, “hasn’t really delivered the lower prices” that were expected of it.

“That doesn’t mean retail competition can’t work, but the WA policy makers would learn an awful lot by looking very closely at what’s happened on the East Coast, in terms of how to avoid those sorts of outcomes we’ve seen in Victoria,” he told BP Digital on the sidelines of an APPEA and CCI gas market reform seminar.

Victoria was the earliest state to embrace deregulation of its electricity supply and introduced what is known as Full Retail Contestability (FRC) in 2002.

WA, while deregulating the retail gas market in 2004, has restrictions in the retail electricity market which means most residential customers and small businesses cannot choose their supplier of choice.

The previous Liberal-National Government said it would open up the residential and small business electricity market to FRC from July 2019. While not making a commitment, Energy Minister and Treasurer Wyatt has said it would be “wonderful” if this timeline could be met, and that he wants to see the current arrangement end “sooner rather than later”.

If the market is opened to new commercial players, such as AGL and Origin Energy, home owners and small businesses would be able to choose their electricity providers, much like they already can for gas.

Indeed, for customers sitting on the cusp of 50MWhrs, it seems absurd that they cannot go into the market to try and save 10-20 per cent on a bill. Analysts believe the WA Government’s recent 10.9 per cent hike in household electricity bills for this financial year is paving the way for more market-reflective prices and, eventually, FRC.

But Wood says the McGowan Labor Government needn’t rush reform, as there are two important studies underway: the Thwaites review of electricity and gas retail markets in Victoria, to be published shortly, and a broader review by the Australian Competition and Consumer Commission.

Both will help inform WA’s policy makers, he argues.

“I wouldn’t be rushing into retail competition just yet,” he says.

“Retail competition is a valuable thing but we don’t want to find a situation where all we do is add costs and not drive down prices, which is what we’ve seen in Victoria so far.

“It can be avoided but requires some careful thought and, in that particular area, there is a lot that could be learned to the benefit of Western Australians.”

CCI’s long standing position – that will be contained in its pre-budget submission – is to move toward cost reflective tariffs. Once this is underway, retail participants will be encouraged to enter the WA market, if they’re allowed.

“Economics 101 says that a competitive market will bring lower prices for consumers, the theory is a no-brainer,” says CCI National Policy Adviser Joe Doleschal-Ridnell.

“The WA experience in the retail gas market has been overall very positive, and there is no reason why this could not apply to electricity.

“What the Grattan Institute study shows is that the design of FRC should be introduced with the best interests of consumers in mind. The Grattan Paper suggests that, unlike other commodities, electricity consumers are ’sticky’ and have not invested the time and effort to investigate the benefits of changing retailers. Changing consumer attitudes to energy and technologies like monitoring your usage through your smart phone will assist breaking down this dynamic,” Doleschal-Ridnell says.

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