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Electricity and the power of choice - for whom?

Electricity prices are a hot topic. Prices have skyrocketed in recent years and politicians have finally realised that people are struggling to pay energy bills. Power of Choice, an Australian Energy Market…

Australian household energy use increased by more than 30% in the past two decades. ctandjung/Flickr

Electricity prices are a hot topic. Prices have skyrocketed in recent years and politicians have finally realised that people are struggling to pay energy bills.

Power of Choice, an Australian Energy Market Commission report, focuses on measures to assist all consumers better manage their demand for electricity. It was requested by the Federal, State and Territory Ministers responsible for energy.

There is much to commend here, although for many this report will be as complex as the composition of electricity prices and the reasons for price increases. It reflects how complex the regulatory regime has become for Australia’s electricity market.

Demand-side participation

According to conventional economic theory, consumers should be able to exercise choice in a market and have information on which to base those choices. Australian electricity consumers are, in the main, able to choose their electricity supplier but then the choices become much more limited.

Power of Choice sets out a number of ways that consumers can exercise “demand-side” participation in the electricity market. Different electricity tariffs at different times and in different locations to discourage electricity use at peak times is one proposal. Another is to permit big power users to buy electricity from the wholesale market and for consumers to sell their generated electricity (such as from solar panels) to parties other than their electricity supplier. It is also proposed to pay companies to reduce their demand at peak times.

All sounds pretty sensible. If consumers can exercise their choice and change their demand for electricity, the need for more investment in “poles and wires” will be reduced and hence prices will not need to rise, and consumers will be able to reduce their bills. Everyone should be better off. But will they?

The biggest consumers of electricity are industrial users such as aluminium smelters. The top 20 use more than all households put together. Households use about 25% of Australia’s electricity. The balance of electricity demand is taken up by smaller industrial and commercial users.

So the Commission’s recommendations, if agreed to by the responsible Ministers, will be obviously beneficial to the big industrial and commercial users of electricity.

What about households?

There are about 9 million Australian households and their energy use grew by 33% from 1990 to 2010.

Australian households have the highest rates of ownership of refrigerators and air-conditioners in the OECD. Bureau statistics show that nearly 75% use space cooling and 57% have a clothes dryer - both big energy users. And more than 80% of households have a home computer.

About 40% of Australian households have an after-tax weekly income of less than $700. That’s 3.5 million low-income Australian households. These households include older Australians, the unemployed, those disabled or with a long term illness, and those with young children. These are vulnerable consumers with limited financial resources.

Electricity costs account for 75% of all household energy bills. But low-income households spend higher proportions of income and expenditure on their energy than the wealthier. They also have less ability to adjust their electricity demand as they spend more time at home and have insufficient financial resources to make their home more energy efficient.

Power of Choice acknowledges that households have different “capacities”. It says not all will benefit from time-varying pricing because they are unable to adjust their demand and this “could lead to financial distress”.

To manage the impacts for vulnerable customers of the proposed “demand-side” changes, the Commission’s report suggests they have the option of choosing to stay on an electricity price with a flat network charges (that’s for the poles and wires). A (long overdue) review of state government energy concessions which vary across Australia is also recommended along with targeted advice to help the low-income manage their electricity consumption.

The missing link

Disappointingly, Power of Choice doesn’t recognise the further disadvantage for vulnerable low-income households inherent in the report’s main recommendations. The thrust of the report is about giving consumers choices and better information to manage their electricity use. And where will we find that information? The internet.

Yet around 1.5 million low-income Australian households do not have home internet access.

Last month the Federal Minister for Resources and Energy announced the release of an electricity prices fact sheet. This six-pager clearly explains what has been going on with electricity prices and what the Federal Government is doing. But it is only available from the website of the Minister’s Department.

Twelve months ago the same Minister announced the release of fact sheets by the Australian Energy Regulator (AER) to better inform consumers of their rights and the services available to them. These fact sheets are only available from the AER’s website. Websites also are the primary means by which electricity companies provide information to their customers about prices, products, payment methods and energy efficiency.

So for some electricity consumers the Commission’s proposals will be of considerable benefit. But for around 1.5 million low-income households there will be no choices to be made. Choices require information from the internet which they don’t have access.