CONSUMER CONFIDENCE IN A SUCCESSFUL ENERGY TRANSITION

By Dr Ron Ben-David, Professorial Fellow, Monash University

Ahead of the National Electricity Market’s (NEM) 25th anniversary, Ron Ben-David, previous chair of the Essential Service Commission (VIC) from 2008-2019, and current Professorial Fellow with the Monash Business School, discusses the increasing need to ensure Australian consumers are not only protected, but they also have confidence in the paramount decisions that they are being asked to make.

Assumptions about consumers

For many years, the NEM was the poster child of the 1990s microeconomic reform era in Australia. Frequent reviews by the market’s regulators lauded the NEM’s success. But there was only one hitch. Consumers weren’t very good at being consumers.

A second energy revolution, the so-called ‘energy transition’, is now underway. These days, regulators are more anxious to emphasise their fealty to consumers through their commitments to consumer empowerment and consumer-centred market design. In this environment, regulatory placations come easily. As the chair of the Australian Energy Regulator said, “Consumers need to feel confident that Australia's transitioning energy market is working for them.”1

These are certainly noble sentiments but they cannot compete with regulatory enthusiasm for flexible demand, price signals, tariff reform, value stacking, virtual power plants, two-sided markets, vehicle-to-grid services, and so on. Enthusiasm for these innovations is almost always framed in terms of the system benefits they offer. Consumers’ acceptance, adoption and efficient use of these technologies is just assumed to happen.

Incomprehensible contracts

For most of the past 25 years, consumers have had to negotiate a retail electricity market constructed around a single decision variable, namely, the price of purchased electricity. The emerging consumer-facing electricity market is looking very different. Future contracts could, or will, involve multiple decision variables, such as:

» The prices of grid supplied electricity and electricity exported to the grid

» Consumption and export thresholds, and penalties for breaching thresholds

» Control of onsite electricity production, storage, consumption and export

» Price, access, ownership and control of electricity stored offsite

» Payments for ancillary system services

Contracts may be further complicated by:

» Dynamic decision variables which change in real time rather than having set values specifiable in a contract

» Indistinguishable financing arrangements and payments for energy services

» Customers relying on multiple suppliers providing interacting services

It is now well-established that customers have not been particularly effective in navigating a retail energy market involving just one decision variable, namely, price. This invites the obvious question: how can consumers be expected to navigate a labyrinthine market consisting of all the decision variables noted above?

Not a single report from the regulatory community has explored how things might go wrong for consumers in this new electricity market. Yet at the same time, nary a report fails to emphasise the importance of consumer trust, confidence, social licence, fairness or consumer-centred regulation. The disconnect is glaring.

It has been claimed that innovative service providers will create simple-to-understand products for consumers. Unfortunately, 20 years of experience with retail competition suggests otherwise. It has also been suggested machines or algorithms will do the work for consumers by optimising across multiple decision variables in real time. But this misses the point. How will consumers compare the value of all the different machines on offer? How will they monitor whether an algorithm is delivering the value it promised? All but the most knowledgeable consumers will be overwhelmed.

And let’s not forget a sobering statistic regularly cited by the AER, which states that 44 per cent of Australians lack sufficient literacy skills to understand even the most basic contracts, let alone the complicated contracts described above.2

Alienating consumers

Exposing consumers to risks they are not well-equipped to identify, evaluate and manage will undermine their confidence in the energy transition. Regulators who simply talk about ‘putting consumers at the centre’, while facilitating a complex and incomprehensible consumer experience, will see their social (and political) licence eroded. They will no longer be trusted to oversee the energy transition. Rightly so.

If a loss of consumer confidence puts a successful energy transition at risk, and if it is perfectly foreseeable that consumer harm will result in this loss of confidence, then minimising the risk of harm must surely become the central objective of energy market regulation.

In this context, ‘harm’ is not limited to concerns about affordability, financial vulnerability, bill shock or rising prices. Harm includes any process, treatment or outcome that undermines a consumer’s confidence in the electricity market and how it is governed.

Dutiable care

If managing the risk of harm is a necessary condition for a successful energy transition, then the cornerstone of a new approach to regulation must be a theory of harm. This ‘theory’ would openly identify and transparently assess the financial and other detriments consumers could incur from entering misjudged contracts for the supply, sale, storage or management of their electricity. The theory would identify and evaluate the sources, forms and impacts of harm, as well as consumers’ susceptibility to those harms. As energy markets are not an instrument of social or redistributive policy, the theory’s assessment of harm cannot be contingent on income or wealth.

This theory of harm would inform a new harm minimisation objective which would make clear that consumers should not be exposed to risks they are not ready to manage. This objective would govern how regulators design and administer the rules, processes and methodologies governing the NEM during the energy transition. It would prohibit regulators from allowing consumers to be exposed to risks they cannot reasonably be expected to identify, evaluate and manage properly. The harm minimisation objective would precede, but not replace, the current national electricity objective with its exclusive focus on efficiency.

Service providers would remain free to offer consumers alternative (risky) contracts subject to strict risk disclosure obligations. Consumers would be free to enter an alternative contract if they conclude it is in their interests to assume the risks associated with doing so.

Most importantly, relevant service providers must be subject to a positive duty of care requiring them to act in the best interests of the customer. The duty would:

» Apply to any service provider who has (or is seeking) a contractual capacity to control, constrain or prevent the flow of electricity to, around, or from a customer’s premises or assets

» Make service providers responsible for working with their customers (or prospective customers) to confirm the provider’s offering is compatible with the customer’s interests 3

Bold solutions

The above approach will seem counterintuitive, and probably unholy, to many practitioners of the current regulatory regime. But new problems need new solutions. Applying old ways of thinking to new consumer risks will just produce the same tired solutions that regulators have been touting for the past 25 years – more choice, more disclosure, more switching. Yeah, nah. Those solutions have not worked well for consumers in the past. They certainly won’t work in the future.

It does not need to be this way. Energy market regulation can be re-invented.

The UK’s Financial Conduct Authority (FCA) is reforming how it regulates the entire British financial system. Our energy regulators should draw inspiration from the FCA’s willingness to be bold, imaginative and unapologetic as it pursues a modernised approach to regulation.

If the energy market evolves as rapidly and dynamically as the pundits expect, then now is the time for new ways of thinking about how to regulate our consumer-facing energy market. Now is the time for bold energy market regulators. After all, if not now, when?

Further Reading

Ben-David, Ron, May 2022, Energy market uncertainty, consumer protection, and a new duty of care. Available online via AER.

Ben-David, Ron, November 2022, Minimising consumer harm for a successful energy transition. Available online via LinkedIn.

Ben-David, Ron, December 2022, Submission to the Australian Energy Regulator’s review of consumer protections for future energy services. Options Paper.