Many retailers operate in the NSW energy markets
Different retailers have been able to operate in NSW since 2002. Before this, there was a single government-owned supplier in each network area that provided both distribution and retailing services.
In the early days of competition, IPART continued to set limits on retail prices for the Government suppliers in each network. The NSW Government removed retail price regulation for electricity from July 2014, when the AEMC found that competition was sufficiently developed. It removed retail price regulation from gas in July 2017.
When price regulation was removed, IPART commenced a new role monitoring competition in these markets.
What is the purpose of competition?
Competition was introduced into energy retail markets to provide value for customers in the longer term. Without competition, there are limited incentives for businesses to become more efficient over time.
In a competitive market, businesses need to find new ways of doing things to gain customers – either by becoming more efficient to reduce prices, or by offering a better product or service. If a business increases its prices above what it costs to supply the service (including a reasonable profit), then they will be outcompeted and lose customers.
Market driven cost reductions should outweigh the costs to competition
There are some costs to competition. For example, businesses need to spend money on marketing to attract customers. In the energy market, systems needed to be set up to transfer customers from one retailer to another. However, these costs should be outweighed by the continual pressure on retailers to reduce their key cost drivers. This means buying wholesale energy efficiently to avoid exposure to high price spikes or finding new ways to drive down these costs – like rewarding customers to reduce energy usage when wholesale prices are high, or selling electricity from household batteries back into the market at these times.
Pricing differences can accelerate competition
As retailers compete with each other, a range of prices will emerge in the market. This reflects the variation in service and product offerings, and the different price strategies retailers use to recover their costs.
A common strategy has been for retailers to charge higher prices to customers who are less price sensitive and less willing or able to switch retailers – recovering more of their costs from these customers. This has been referred to as ‘loyalty tax’. Many people consider that this pricing strategy is unfair and inappropriate for an essential service where there has traditionally been little product differentiation. However, differences between prices encourage people to shop around because they can make savings. As retailers attempt to outcompete each other for these customers, they should become more efficient and the quality of services and products should improve.
In 2019-20, the Australian Energy Regulator re-introduced a cap on the prices that retailers can charge customers that have not entered into a plan. This is called the “default market offer” or DMO. This was intended to balance the objectives of protecting customers from very high prices, and providing an incentive for customers and retailers to engage in the market to drive better outcomes over the longer term. Since the DMO was put in place, the gap between the highest and lowest prices has narrowed.
Competitive markets should result in relatively lower prices in the long run
Although retailers constantly face competitive pressure to either lower their prices or develop new and better products, this does not mean that price rises will not occur in competitive markets. Even efficient, competitive retailers must respond to external cost pressures they can’t control (though we would expect retailers may have different ways of responding). In electricity markets, this can include the network costs faced by retailers, or increases in the cost of energy itself.
However, over the long run, we would expect competition to deliver lower prices and more choice compared to a situation without competition, where retailers face no incentive to adapt to consumer preferences for lower prices or innovative products.
Strong protections are required for customers experiencing vulnerability
Energy is different from other products because it is an essential service. Therefore, strong customer protections are needed to ensure that customers are able to connect with a retailer, and to provide customers in financial difficulties with different options for paying their bills to stay connected.
In addition to the Australian Consumer Law, which applies to all businesses, energy retailers must comply with the National Energy Retail Law and Rules. These provide energy-specific consumer protections and more detailed provisions regulating the rights and obligations of retailers and consumers in retailer energy markets.
In any market, there will continue to be customers experiencing vulnerability even with additional protections. Governments provide targeted assistance to these customers through the social welfare system.
The NSW Government offers a range of assistance to households including the Low-Income Household Rebate and NSW Gas rebates among others. You should visit the NSW Government’s Savings Finder website or book an appointment with a specialist to check if you are eligible for assistance.