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Client Update: ACCC makes 56 recommendations for sweeping energy sector reform

11 July 2018

In brief: The ACCC today released its final report on the Retail Electricity Pricing Inquiry. The report finds the national electricity market is not functioning effectively and that extensive reform is required to bring down prices and restore consumer confidence. It makes 56 significant recommendations aimed at boosting competition in generation and retail markets, lowering supply chain costs and improving consumer and business experiences and outcomes. Partners Kon Stellios (view CV) and Robert Walker (view CV), Senior Associate Sophie Matthiesson and Associate Darcy McLennan report.

ACCC's key recommendations

In The Retail Electricity Pricing Inquiry – 'Restoring electricity affordability and Australia's competitive advantage' (the Report), the ACCC calls for a 'reset' of the National Energy Market (NEM), noting that the policy, regulation and promotion of competition in the electricity sector has not worked well for consumers.

The Report concludes that electricity prices have reached an 'unacceptable and unsustainable' level, and that this has largely been caused by poor government policy.

The ACCC does, however, endorse the National Energy Guarantee, which it considers should assist in promoting affordable electricity throughout the supply chain, provided adequate safeguards are put in place.

The key recommendations contained in the Report are to:

  • limit companies with 20 per cent or more market share from acquiring more generation capacity;
  • improve the Australian Energy Regulator's (AER) powers to investigate and address market manipulation and increase penalties for serious wrongdoing;
  • voluntarily write down network overinvestment (gold-plating), or establish equivalent rebates to be passed on to consumers;
  • improve transparency of over-the-counter contract trading in wholesale hedging by requiring reporting of these trades to a central registry;
  • introduce government support to promote investment by new players in generation capacity to help commercial and industrial customers and drive competition;
  • restructure Queensland generators into three separately-owned portfolios to improve competition;
  • abolish retail 'standing offers' and replace them with a 'default offer' that is consistent across all retailers and is determined by the AER;
  • require retailers to link discounts to the 'default offer' price and prohibit the inclusion of pay-on-time discounts in the headline discount claim;
  • establish a mandatory code for comparator websites that offers are recommended based on customer benefit, not commissions paid; and
  • require state governments to fund premium solar feed-in-tariff schemes (rather than electricity users generally) and phase out the small scale renewable energy scheme.

ACCC's key conclusions

Retail market concentration is a significant issue
  • The concentration of retail electricity providers is having negative effects on retail competition, and consequently the experience of retail electricity customers
  • Residential customers have faced a real increase of 35 per cent in their bills and a price increase of around 56 per cent in real terms over the past 10 years
The customer experience in retail electricity is poor
  • The costs of attracting new retail customers are high, particularly for smaller electricity providers, due to limited competition in the retail market. These costs are largely borne by customers that do not switch between providers
  • The advertising and application of headline discount rates is problematic, and restricts the ability of customers to accurately compare offerings
  • Discounts for paying bills on time effectively represent penalties for customers that do not pay on time, including by customers experiencing financial hardship
  • Small businesses face similar challenges to retail customers, and reforms are required to improve their experience of acquiring electricity
Wholesale market concentration and generation shortage
  • Market concentration in the NEM has increased (due to a combination of acquisitions and asset closures)
  • Reduced diversity of generation ownership, coupled with increased demand in the NEM, has contributed to wholesale electricity prices exceeding efficient levels
  • Failures in policies aimed at reducing carbon emissions have exacerbated the generation shortage in the NEM
  • State government moratoria on on-shore gas exploration, coupled with LNG export trade, has stifled the availability of low priced gas (which may have otherwise alleviated pressure on electricity supply caused by asset closures)
Generator behaviours alleged to aggravate these challenges
  • Generators are in a position to manipulate the operation of the NEM, eg in relation to their bidding behaviour
  • The landscape surrounding wholesale hedging contracts is opaque, to the advantage of large incumbents (particularly major vertically integrated gentailers)
Network costs are excessive and entrenched
  • In NSW, Queensland and Tasmania, there has been substantial over-investment in state-owned electricity networks, ultimately resulting in increased costs to consumers
  • Excessive reliability standards imposed by governments have contributed to increased network costs
  • The AER has been afforded limited scope to intervene and constrain excess spending by network owners, and regulatory decisions have been subject to lengthy and expensive appeals, creating significant uncertainty around network pricing

Next steps

The ACCC's report has been provided to Scott Morrison, the Treasurer. We expect the Government to issue a response to the report in the near future.

For further information, please contact:

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