Deregulation failure

New regulations expose energy price gouging through ‘free’ comparison sites

File 20190108 32148 1va5ylf.jpg?ixlib=rb 1.1
Consumers who used comparison sites typically paid 5-12% more than the lowest possible offer.
Yung Chang/Unsplash, CC BY-SA

Bruce Mountain, Victoria University

A new regulation has highlighted the thousands of offers electricity retailers make to new customers, mostly through commercial comparison sites. These sites typically do not include the best possible offers, funnelling consumers into higher-cost plans in exchange for fees from energy companies.

From January 1 companies selling electricity in New South Wales, South East Queensland and South Australia are required to publish all of the offers they make to new customers on the Australian Energy Regulator’s Energy Made Easy price comparison website. Retailers in Victoria are subject to Victorian regulations.

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At the time of writing two of the three largest retailers, Energy Australia and Origin Energy, have complied. Before the change, Origin Energy and Energy Australia posted 547 publicly available market offers across the three markets. They now post 2,010 market offers in these markets, the difference explained by the offers they make available through commercial comparison sites.

Commercial comparison sites include offers from a subset of competing retailers. One of the largest comparison sites, iSelect, includes offers from 11 retailers (out of 22) that sell electricity to households in Sydney. The smaller comparison sites cover offers from fewer retailers – in some cases as few as three competing retailers. Some of the comparison sites do not disclose the identity or number of their commercial “partners”.

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I analysed Origin Energy and Energy Australia’s offers to assess whether they are making better offers through the commercial comparison sites, than they make to customers directly. Using the retail market in Sydney as a case study, none of the offers that Energy Australia made available through commercial sites were cheaper than the offers it made to customers that signed up directly. In the case of Origin Energy, there were two offers on commercial sites that were better than the offers they made directly.

Typically prices in the offers available through the commercial sites were 5%-12% higher than offers the retailers made directly. One commercial comparison site had an Energy Australia offer that was 34% more expensive than if the household had signed up to Energy Australia directly.

The same picture is seen in the rest of New South Wales, Queensland and South Australia.

Commercial comparison sites earn a commission (or “referral” fee) from the retailers for the consumers they send to those retailers. Since they are paid by the retailers, the commercial comparison sites describe their service to electricity consumers as “100% free”, “no cost to you” and “free to use”.

But providing better deals to consumers may bite the hand that feeds: retailers can be expected to be willing to pay higher commissions for customers that pay higher prices. Commercial comparison sites therefore have an incentive to provide the appearance – but not necessarily the reality – of a competitive market.

Should policy change?

It could be argued that this state of affairs requires no policy response. If the commercial comparison sites offer some convenience, consumers may wish to still use them; otherwise the sites will wither of their own accord. (One might suggest the operating margin of just 1.9% for iSelect’s energy comparison division – as disclosed in their latest Annual Report is a sign this is already occurring.)

The counter-argument is that the complexity and tedium of electricity bills is such that the commercial comparison sites will always have the upper hand in pulling the wool over their users’ eyes: users are unlikely to be able to work out how comprehensively they are being fleeced. Evidence to support this argument would be whether electricity customers are leaving meaningful amounts of money on the table.

On this, the picture is now pretty clear. Several studies and businesses have compared customers’ actual bills with all the offers in the market. The 2017 Thwaites review in Victoria found on average customers would be $294 per year (about 25%) better off if they were on the best deal in the market.

In 2018, CHOICE’s Transformer service found average annual bill savings of $622 for the customers that paid for their service. And in its trial, Service New South Wales found average savings of more than $520 per year for the customers that used their service.

And in research currently under way using CHOICE’s data, we’re finding customers who switched retailers in the last 12 months typically only saved half as much as they would have, had they been able to find the best deal in the market. While it is unreasonable to expect everyone will find the best deal, the existence of such a large gap for the typical customer is an indictment of the market.

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Motivated to some extent by perceived shortfalls in the commercial comparison sites, governments have long provided tax-payer funded comparison sites. The Victorian state government currently compensates customers who use theirs. Federally, the Australian Energy Regulator has been awarded additional funding to improve and expand the comparison site it provides.

Taxpayer funded comparison sites may be part of the solution, but customers so far have not been overly drawn to them. This may change in future.

Irrespective, the primary evidence of inadequate market coverage and typically higher prices provided by the commercial sites, and the circumstantial evidence that customers are in fact leaving lots of money on the table even when they engage in the market, suggests that cleaning up the commercial comparison business now merits serious attention.The Conversation

Bruce Mountain, Director, Victoria Energy Policy Centre, Victoria University

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Way back in 2012 “AUSTRALIA’S largest power generator, Macquarie Generation, was accused of manipulating prices in the wholesale electricity market in an attempt to offset the effect of the carbon tax.

According to the Australian Energy Regulator, Macquarie Generation has not been alone, with AGL boosting prices in South Australia with the ”extreme pricing” also evident in the Victorian and Tasmanian markets.

The ACCC boiled down its concerns to two points, that comparison sites “do not always make recommendations that are in the best interests of consumers”; and they “do not always adequately disclose the number of retailers and offers that they consider in making a recommendation to a consumer”.

On the former point, the report said: “Intermediaries often receive different levels of commission from different retailers, which creates an incentive to promote one offer over another, depending on the available commission.

Destabilise the grid with wind energy and then compensate with fast-acting gas generation at
peak prices. Now here’s one for the ACCC to watch. Did anyone notice the most recent capital investments of Origin and AGL to place Open Cycle Gas Turbines (OCGT) in strategic alignment with wind energy investment? Take note of the choice of generator. Combined Cycle Gas Turbines (CCGT—0.4 tCO2/MW) are much more efficient than OCGTs (0.7 tCO2/MW) from an emissions perspective, but unlike OCGTs, they do not have the ability to ramp up and down as quickly. If their investment strategy was to produce gas- generated electricity with the lowest carbon emissions possible, then CCGT would be the choice. If their investment strategy was to produce gas-generated electricity which could take advantage of opportunities in the market via its flexibility in ramping up and down on demand to satisfy grid instability issues, then OCGT would be the choice. Who pays for this fast- acting, shadowing capacity at peak prices? Yes—you guessed it again—individuals (that is, voters) and industry.

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Electricity price spikes caused by energy companies 'gaming' the system, report finds

Analysis finds fossil fuel generators may have withheld electricity at ‘strategic’ times and got an additional $30.3m windfall

Huge spikes in wholesale electricity prices in South Australia have been a result of energy companies “gaming” the system and exploiting their unusual market power to charge “monopoly rents”, according to an in-depth report by the Melbourne Energy Institute.

The analysis found fossil fuel generators may have withheld electricity at “strategic” times during 2015, causing massive price spikes, which have led to a $30.3m windfall.

The report also found evidence of similar practices from generators on 7 July that saw more price spikes, suggesting the so-called “energy crisis” in South Australia was a result of a severe lack of competition in the state’s energy market.

Dylan McConnell and Mike Sandiford from the Melbourne Energy Institute found 41 occasions in 2015 when the Snowy Hydro’s Angaston diesel generator withdrew supply, pushing up spot prices. Combined, those 41 occasions delivered an additional $30.3m to the owners of generators across the market.

If you live in NSW, Queensland, the ACT, South Australia or Tasmania, then you can go to the Australian Energy Regulator’s ‘Energy made Easy’ website.

This is the energy comparison site you should be using

Market manipulation

If you’re thinking of using an energy comparison site to switch to a cheaper provider, hold on: you are about to enter a confusing, opaque world absolutely teeming with conflicts of interest.

But what you may not know is that you can avoid all this by simply using the government’s own comparison website, which is just as good, free to use, and has no commercial conflicts.

In a damning report on the energy market this week, consumer watchdog the ACCC found commercial comparison websites are rarely what they seem, often misleading customers about the best deals on the market.

If you live in NSW, Queensland, the ACT, South Australia or Tasmania, then you can go to the Australian Energy Regulator’s ‘Energy made Easy’ website.