Government plan to reduce energy prices could leave businesses worse off

In 2018, as part of the federal government’s ‘big stick’ energy policy, energy retailers were told to deliver fairer pricing to their customers — or else. 

A flurry of reviews and reports from the many players, statutory and other industry bodies with a stake in this most complex of markets followed. Now this month, in response to resulting recommendations, energy retailers will put in place the new default pricing measures for small-market business and residential customers.  

While only one of a raft of measures required to address volatility and surging prices in the energy market, these new measures will directly affect both customers and the market as a whole. The questions on everyone’s mind are how will this work and are they the best solution?

These questions are intensified by the fact Victoria’s default pricing measure (the Victorian Default Offer or VDO) has been developed based on different methodology from the measures to be adopted in most of New South Wales, South Australia and South East Queensland, known as the Default Market Offer, or DMO.

We don’t know which approach will best fulfil its goal of protecting energy customers who are not actively engaged in finding the best price to suit their needs, which is a notoriously complex process.

However, we do know what business and other energy customers can do to ensure they are getting the best energy deal at all times. And, we can predict the challenges and opportunities of the new pricing systems for retailers, in particular, smaller retailers.

Default price doesn’t mean best price

First and foremost, default prices don’t necessarily mean the best prices. Rather, the underlying requirement of the VDO and DMO pricing measures is fairness, which means they’re likely to be a better value than previous standing offer plans.

If you’re a customer who doesn’t actively or regularly review your energy pricing plan, there could be an easy win by electing for a default offer.

However, the downside of default offers is they could potentially encourage complacency, rather than consumer empowerment.

For customers who take the time to investigate offers, there is more advantageous pricing to be gained in what is an active and competitive market with more than 20 Australian energy retailers. These retailers will compete for your business, and there can be better rates available to you than either the VDO or DMO.

To find what plan best suits your needs, customers should use their usage profile. In other words, how much power you use and at what time of the day. As electricity rates can be set according to peak, shoulder and off-peak times, having access to your usage data and matching it with an optimum pricing plan can make a significant difference to energy costs. 

The catch here, however, is you need a smart meter. For consumers and small businesses, unlocking the benefits of your smart meter can be a quick win.

Smart meters can overcome data visibility challenges 

The rise of smart meters — mandatory in Victoria, although not in other jurisdictions — means accessing and acting on accurate usage information is easier than ever before. If you’re a household whose family members are out all day at school or at work, you could source a very good off-peak rate and potentially combine this with some solar and battery storage. 

Further, many small-market customers, such as some hotel chains, restaurants and retailers, have access to smart meters but won’t be able to access the benefits of off-peak pricing, because they’ll be defaulted onto a flat-tariff structure. 

These customers should check if they have access to a smart meter and, if so, determine the benefits of switching to a multi-tariff arrangement. You can then simply review your usage behaviour to see if savings can be made. For example, running your pool filter after 11.00pm instead of 5.00pm. 

Addressing competition in the market 

When it comes to the impact of new default pricing offers on the wider retail market, we expect some key factors to come into play.  

The VDO has been calculated using a ‘bottom-up’ analysis of retailing costs and profitability which, in effect, places a margin cap of 5.7% on retailers’ earnings. This could be advantageous for large retail players with the benefit of scale and a greater ability to make savings elsewhere. It’s also unlikely there will be many variations between VDO pricing options. These two factors, in the near term at least, may in practice reduce rather than increase competition.

The DMO, on the other hand, has been calculated somewhat differently, taking the 50th percentile rather than the bottom one as its starting point. This could see greater variation in default rates available and greater savings for businesses or consumers who shop around, even within the default offer universe. 

In both cases, second-tier and other smaller retailers, who lack the scale and generation capability of the major players, may opt to play in the more niche markets, looking to give more specialised value-added service to companies with particular usage profiles, in certain industries or geographic areas. For businesses who focus on gaining accurate usage data, there can be significant advantages in dealing with these more nimble providers.

The reality of default market offers?

Default offers as they stand are not, by their nature, going to deliver the kind of value that comes from having accurate usage data and the expertise to find a plan that matches it.

But there will be a renewed focus from retailers on the customer and improving the customer journey, by providing them with the tools to access their data and help them choose the best possible solution for the shape of their consumption. Be it solar, battery or a default offer. 

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