Article - The 2018 ACCC Electricity Inquiry shakes up the energy market
Photo by Johannes Plenio
On 11 July 2018, the Australian Competition and Consumer Commission (ACCC) released its Retail Electricity Pricing Inquiry—Final Report. A copy of the report can be found here.
The ACCC Report calls for material changes to the energy market and made 56 recommendations.
The National Electricity Market is largely broken and needs to be reset. Previous approaches to policy, regulatory design and competition in this sector over at least the past decade have resulted in a serious electricity affordability problem for consumers and businesses.
ACCC Chair Rod Sims
On the whole, the ACCC Report is yet another comprehensive report on the electricity market and system failures. The report makes salient observations and has a list of well researched recommendations. Here is my analysis on what is important about this report and what we should be doing in Victoria.
Victorian energy consumers will be particularly interested in some of the ACCC’s recommendations, and how they align with the Victorian Independent Review into the electricity and gas markets in Victoria (which I wrote about here.)
But let’s first look at some interesting ACCC Report recommendations that could impact on new electricity generation.
Support for the financing of new electricity generation
The ACCC recommends a new financing mechanism
The ACCC Report supports corporate power purchase agreements (PPAs) as a way to sponsor new electricity generation.
Recent corporate PPAs have being signed by the likes of City of Melbourne, Sun Metals and Telstra to support new wind and solar farms. It is pleasing to see the ACCC's support for new electricity generation and for corporate PPAs as a mechanism (noting that the Report does not prescribe specific technologies).
The ACCC Report also advocates that the Commonwealth Government provide support for new electricity generation by guaranteeing it will pay a fixed price in the later years of a project. This scheme would deliver many benefits:
the additional revenue stream in later years would provide financiers with sufficient certainty to bankroll a project;
a fixed price that is low enough would minimise risks to the Commonwealth budget; and
a low fixed price would also leave an incentive for the project developer to find a higher price in later years through a corporate PPA.
Inspiration for the 2025 Victorian renewable energy target?
Although the ACCC meant its recommendation for the Commonwealth government to support new generation, Victoria could be inspired to announce government support for a pipeline of future renewable energy auctions to meet its 2025 renewable energy target. To limit the impacts on its budget, it could adopt a similar ‘fixed price’ scheme to the one the ACCC recommended to the Commonwealth.
Announcing a pipeline of future auctions would:
provide policy certainty on how the Victorian government will meet its 2025 target;
support further development of a Victorian supply chain (I wrote about the benefits here);
provide certainty for investors - bankers, financiers and manufacturers - to continue to invest in the renewable energy sector in Victoria rather than elsewhere; and
ultimately deliver lower prices for Victorian consumers.
Let’s now go back to the comparison of the ACCC and Victorian reports.
Similarities with the Victorian Independent Review
Regulating some energy offers
Similar to the Victorian Independent Review (which I summarised here), the ACCC Report finds that disengaged consumers pay more than they should because the energy market is not transparent. The ACCC Report calls for broader regulation (or re-regulation in Victoria) of power prices and energy offers.
Making the information available to consumers more transparent
The ACCC Report talks about a “confusing and unfair” market including “misleading” discounts and on-time discounts. In response to similar findings in its Review, the Victorian Government has tasked the Essential Services Commission (ESC) with developing new standards for bills and marketing materials to help simplify the information that consumers have access to. The ESC publishes regular updates on its work here. It will be interesting to see how the Victorian measures will fit in with the implementation of the ACCC recommendations.
Improving outcomes for vulnerable consumers
The ACCC Report recommends improvements to the states’ concession schemes (the Victorian Review discusses an investigation of the concession scheme) and funding to assist vulnerable consumers to choose a low-priced electricity offer that suits their circumstances (the Victorian Review refers to a brokerage service).
This is perhaps one of the biggest failure of our inaction - the disproportionate impact these excessive prices have on the most vulnerable people in our community. People with bigger incomes and not facing the complications of being renters (ie the split-incentive problem) will continue to transition to solar, batteries and other alternatives. People with very low incomes will not have these choices and cannot wait anymore for solutions.
Providing independent information to compare energy offers
The ACCC Report recommends governments provide funding to raise awareness of independent, government-run energy comparator websites.
Victoria has a good head start here with its Victorian Energy Compare website.
The ACCC recommendation should also provide a good basis for the Victorian government to continue funding its website in future budgets and provide better information to consumers (ie addressing the current information asymmetry).
Differences with the Victorian Independent Review
What could replace ‘standing’ offers
The ACCC today and the Victorian Review in August 2017 both recommend abolishing the ‘standing’ offers, but they differ in what replaces them.
The ACCC recommends a new ‘default’ offer consistent across all retailers, set at a price determined by the Australian Energy Regulator whereas the Victorian Review recommended a no-frills ‘Basic Service Offer’ (BSO), at a price to be determined by the ESC.
The main points of difference are around:
the conditions that would apply to the ‘default’ offer and the BSO;
the price: the ACCC's ‘default’ offer would not be the cheapest offer as it includes an allowance for retailers to recover customer acquisition and retention costs.
The default offer is, in a sense, a premium offer with additional safeguard features that come at a cost.
ACCC Report
It will be interesting to see whether the Victorian Government accepts the Review’s recommendation to implement a BSO, and if so, how that BSO would be designed and how it would interact with the ACCC's ‘default’ offer. The Victorian Government has previously said it would release its Final Response to the Victorian Review in mid-2018.
Voluntary write downs to impact network businesses in NSW, TAS and QLD
This won’t impact Victorian consumers, but it was interesting to read the ACCC Report recommendation for voluntary write downs of network over-investment in NSW, QLD and TAS.
In very rough terms, this means that the network businesses would lower the value of their energy assets (e.g. poles and wires) in their books, and in turn, consumers don't need to 'pay back' as much to recoup the cost of those investments. This would be a positive outcome for consumers as it would lower bills.
The flipside is that since most of those States own their network businesses, the States would ultimately weather the impact of the write-downs on their finances (Note: NSW recently privatised its assets but was nevertheless listed in the ACCC Report as the body that would compensate NSW consumers).
This would be another hit to the profitability of those regulated energy businesses after the Australian Energy Regulator only recently released its decision to lower the rate of return that they will be able to claim.
The 56 recommendations are worthy of review and decision at the soonest possible time. Perhaps the next COAG Energy Ministers meeting in August 2018 could consider these 56 important recommendations while finalising its deliberations on the National Energy Guarantee?
This article was first published on LinkedIn.