It may be cold comfort in a bleak winter of soaring energy prices, but as the old adage goes, “it pays to shop around”.
- Paying on time can halve the impact of the July 1 price rise
- Victoria has the highest level of discounting, NSW catching up, Queensland & SA fairly static
- ACCC may look at discriminatory pricing in its industry review
The headline price rates published by the big retailers, to kick in from the start of this month, pointed to average bills rising between 16-to-20 per cent.
Looking at it more broadly, investment bank Morgan Stanley found the range to be more like 5-to-25 per cent.
However with a bit of haggling, ringing around and making a commitment to pay on time prices can be whittled back.
A survey from Credit Suisse’s energy analysts, following the July 1 price resets in New South Wales, South Australia and Queensland, found a spate of discounted offers in May will result in realised average price increases well below that announced in the media.
While Origin Energy and AGL duly delivered the 16.1 per cent average increase to NSW residential bills, many customers who took up the May conditional pay-on-time discount could see the impact of price hike halved.
Origin increased its discount offer from 15 per cent to 24 per cent, while AGL’s pay-on-time discount rose from 18 per cent to 22 per cent.
“As such, while the July price is around 16 per cent above the June price, it is only 8 per cent above the average market offer that prevailed for the average of the 2017 financial year,” the Credit Suisse team wrote in a note to clients.
“Similarly, for AGL the actual increase in its market offer versus the average observed in FY17 was approximately 12 per cent, not the headline 16.1 per cent.”
Power prices in Queensland, New South Wales and South Australia increased on July 1. (Supplied: Morgan Stanley Research)
Discounts not necessarily a sign of competition
However, Credit Suisse pointed out the discounts are not necessarily a sign of margin-slashing efforts to rope in a greater market share.
“Victoria shows us that a market with the highest percentage discounts can also be the market with the most attractive retail margins,” the report noted.
Indeed, it appears the discounting results from a redistribution of prices, with customers sticking to standing offers, and not shopping around for better market offers, being slugged for their inaction.
“For example, in FY17 AGL increased its standing offers by an estimated $29/MWh versus $23/MWh for its market offers.”
As Credit Suisse pointed out, such discriminatory pricing behaviour may well be a focus of the current ACCC inquiry into retail electricity prices.
The inquiry’s draft report is due out before October
Discounting varies significantly between states
It seems New South Wales consumers are now stumbling onto something those south of the Murray have known for years.
The proportion of customers on some sort of discounted rate in New South Wales has been steadily climbing at around five per cent a year.
Four years ago only 40 per cent of residential bills in New South Wales were discounted, now it is closer to 80 per cent.
That is shadowing a similar trend established in Victoria where the proportion of customers on discounts grew from 46 per cent to 89 per cent between 2009 and 2015.
Perhaps the curiosity in those figures is why has it taken so long, given retail contestability was introduced in both Victoria and News South Wales in 2002.
Discounts from the big three players AGL, Origin and Energy Australia have plateaued in Victoria over recent years at around 30 per cent below the standing price. Some smaller retailers offer more.
“What’s notable is that the discount in NSW has been increasing since prices were deregulated in July 2015; from roughly 14 per cent in FY15 to 19 per cent by the end of FY17,” Credit Suisse said.
“Discounts in Queensland have remained crimped by the regulatory cap on prices which was only removed July 2017.
“South Australian discounts offered remain stable for the big three but have increased substantially for most other retailers given the sharp increase in prices in that market and the lack of liquidity in contract markets.”
Price rises may increase the low churn rate between retailers
Morgan Stanley’s energy team surveyed consumers in the wake of the price rises and found, while there is evidence of a small increase in “churn” — customers switching retailers — it has yet to become significant.
However, that may change according to lead analyst Rob Koh, given cost is the main driver of churn.
“Reasons to churn have increased across the market year-on-year, so we think discounting activity takes on greater importance this year,” Mr Koh said.
Mr Koh argued the largest utilities — AGL and Origin — will continue to dominate through a strong comparative advantage.
Both have long-standing hedging practices which help smooth things over when pool prices rise.
Smaller, less-hedged players tend to be more nimble and discount more heavily in times of falling prices.
Mr Koh says the survey shows some of the smaller players, particularly in Victoria, face a tough year of tightening margins.
Will governments intervene?
Another key finding from Morgan Stanley’s research is AGL and Origin are more likely to selectively discount in different areas rather than discounting head-to-head.
The big imponderable on energy prices is just how big a political issue have they become and to what extent, if any, are governments prepared to intervene.
The Queensland Government has already ordered one of its state owned generators to bid lower wholesale prices into the National Electricity Market, while the New South Wales opposition has promised to cap retail electricity prices if elected.
Mr Koh noted there are multiple reviews of energy markets going on at the moment, with the ACCC review being the most immediate and perhaps influential.
“We think governments will not pre-empt the reviews, and will favour disclosure requirements and minor market reforms over price controls, yet the Federal Government has not ruled out re-regulation,” Mr Koh observed.