Date posted: 6/02/2019 10 min read

Why are businesses still paying too much for power?

The theory was unbundling electricity monopolies would increase competition and bring down power prices. It didn’t happen.

In Brief

  • Having a small number of large power generators, and an income guaranteed by the energy regulator, means retail electricity prices aren’t as competitive as they could be.
  • Increasing electricity costs have reduced the capacity of some businesses to grow or even survive.
  • Small businesses can be paying a higher rate for their electricity than domestic customers, so accountants can play a role by suggesting the business switch plans.

By Donal Curtin

People sometimes wonder if economists ever visit the real world. But if you want a vivid example of how economics affects your everyday life, open your electricity bill.

Electricity has been transformed by new economic thinking. It used to be that our power was delivered by a monolith integrated operation that did everything from generating the stuff to chasing you up if you didn’t pay the bill.

This was before economists spotted that the monolith could be unbundled into bits where competition could work for customers’ benefit (generation, retailing) and bits where it couldn’t (the high-voltage transmission network and the lower voltage local distribution lines that connect to your place). Those natural monopoly elements would be regulated, also on economic principles.

That was the well-meaning theory. In practice, it’s brassed off a lot of people. It was even one of the banana skins that sent Malcolm Turnbull skidding out of the Australian prime ministership. And it’s led to big inquiries everywhere – the UK Competition and Markets Authority’s Energy Market Investigation in 2016, the Australian Competition and Consumer Commission (ACCC) inquiry into retail electricity pricing in June 2018, and New Zealand’s Electricity Price Review in September 2018.

Of the three, Australia’s inquiry unearthed the most issues. That’s not to say everywhere else is perfect; New Zealand, for example, has the fatuity of 29 local lines businesses for 4.8 million people, a population of the size of Melbourne. But it did come as a surprise, as Australia has generally made a good fist of economic reform. A lot of people would say that the big bang reforms of the Hawke/Keating years, and incremental progress since, have been an element in what is now the developed world’s longest running economic expansion.

The illusion of electricity market competition

What’s gone wrong? In the ACCC’s view, the wholesale market – the real-time market where the generators’ supply gets matched with demand – isn’t what it might be, because of an over-concentrated market (a small number of large generators). The energy distributors managed to beat the regulator and install gold-plated networks. (The higher the value of their network, the more income they are guaranteed by the energy regulator.) And competitive retailing markets aren’t helping consumers as much as they should.

Others have come to the same conclusion. In February 2018, the International Energy Agency’s review of Australia’s energy policies said that “Despite ongoing reforms, the signs of stress in the Australian energy system have grown. Since the last IEA in-depth review, energy prices have remained continuously high against low levels of competition in gas and electricity markets and low consumer choice, pointing to structural challenges.”

If you thought that it’s only uninformed households being charged over the top, and that sharp-pencilled businesses are paying lower prices, think again. Have a look at this graph from the ACCC’s Retail Electricity Pricing Inquiry – Final Report (Figure 1). Small business customers using the same amount of electricity as the median residential household are paying more for their power. The NEM mentioned in the graph is the National Electricity Market, which connects all the electricity networks bar Western Australia and the Northern Territory.

This, to put it mildly, is something of a problem. As the ACCC report says (on page 336), “Increasing electricity costs have reduced the capacity of some businesses to grow or to stay competitive, and consultation with the business community has indicated that passing on electricity costs to their customers is frequently not possible.”

Too many businesses are on relatively expensive pricing plans. Here’s another graph from the ACCC (Figure 2). There’s an enormous range of prices – the worst plans are roughly twice as expensive as the cheapest – and businesses, on average, are paying about 30% more than they would if they were on the cheapest plan.Why does this happen? The short answer – from all three national inquiries – is that, as yet, nobody really knows.

You’d think people – households and businesses – would have a strong incentive to find the cheapest supplier of what is often a sizeable component of their expenses. Instead they sit there like puddings. And the longer they sit, the more their suppliers realise, “We’ve got a fleece-able one here, lads”, and show them even worse rates.

Businesses can be on worse power prices than households

So there’s a big opportunity either for businesses to help themselves, where retail competition is available (Victoria, New South Wales, South Australia, South-East Queensland in Australia, and everywhere in New Zealand) or for their accountants to give them a hand. It’s possible that accountants may be working on the assumption that their clients have already taken the time to suss out the best offers. The facts say otherwise.

It’s easy for economists to preach the benefits of using competition to your advantage, but do I eat my own cooking? I used not to. I used to sit there like a pudding, too. No longer: I’ve switched my electricity supplier, and saved myself some 20%.

Donal Curtin is an Auckland-based economic consultant. He served for 12 years on the New Zealand Commerce Commission, and was previously chief economist at BNZ.