Deregulated Energy Markets and Safety Nets: Early Experiences from South Australia

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1 QCOSS Deregulating Energy Prices: Finding Common Ground October 24 th, 2013 Deregulated Energy Markets and Safety Nets: Early Experiences from South Australia Andrew Nance

2 TOPICS Safety nets What Public Policy says Deregulation, debt and disconnection Lessons for Queensland

3 SAFETY NETS Energy policy relies on the safety nets to provide a basic capacity to pay for energy The Key safety nets are: Income Support (the General Safety Net) Energy Concessions and rebates Emergency Energy Payment Schemes (such as QLD s Home Energy Emergency Assistance Scheme) State-wide pricing (tariff equalisation schemes) But, safety nets tend to be developed by Social Policy departments and Treasuries with little or no link to energy market outcomes.

4 SAFETY NET SETTINGS Energy Concessions: $165 pa (SA) vs $ (electricity), $65.58 (gas) Increasing evidence of hardship amongst low-paid workers often ineligible for concessions (Relative Energy Poverty in Australia to be released soon) EEPS (SA): up to $400 (once every 3 years) HEEAS (QLD): $720 over 12m (max 2 consecutive years) As reference: QLD residential electricity supply charge c per day (+GST) = $202 pa SA: average 70-80c = $ pa Concession = 140% vs 60-65% of fixed supply charges

5 PUBLIC POLICY Energy White Paper (2012): Ensuring that consumers, particularly those who are most vulnerable, are able to manage energy costs effectively is also increasingly important. The continued provision of adequate assistance to vulnerable consumers remains critical. Such assistance should be transparent and not undermine competitive pricing structures, which reflect, as efficiently as possible, the underlying costs of supply. It is more efficient for assistance to be provided through properly targeted social policy settings, rather than energy policy settings, to ensure that energy market signals are preserved.

6 PUBLIC POLICY Energy White Paper (2012): concerns about energy cost impacts on low-income households are most efficiently addressed through mechanisms such as transparent community service obligation payments or through various social safety nets, rather than through market or price regulation Australian Energy Market Agreement (2011): social welfare and equity objectives will be met through clearly specified and transparently funded State or Territory community service obligations that do not materially impede competition.

7 PUBLIC POLICY Energy Retailers Association of Australia Hardship Policy (online, 2013): Makes a distinction between temporary and chronic hardship and states: Energy retailers provide hardship programs for people who are having temporary difficulty paying for their energy consumption The role of an energy retailer is not to administer social welfare policy: this is a core function of Governments. Hardship is best addressed through comprehensive social welfare policies, because after all, if someone is having difficulty paying their energy bills, then they are also probably having trouble paying their other bills and debts.

8 PUBLIC POLICY SUMMARY Energy Policy perspective is that markets will deliver efficiency and Social Policy settings need to keep up Safety nets are important but not the role of energy policy to provide Retailers geared for temporary hardship only Chronic hardship should be dealt with by government Adheres to traditional public policy silos rather than the integrated approach that is needed

9 SAFETY NETS AND DEREGULATION Energy policy basis for deregulation is that competition provides the best consumer protection and that price regulation must not be used for social equity So, energy policy becomes even more reliant on the safety nets to provide a basic capacity to pay In SA, deregulation was accompanied by the introduction of NECF Initial data from AER under NECF paints a disturbing picture for vulnerable consumers

10 DEBT AND DISCONNECTION Key indicators of the health of the safety nets are levels of debt and disconnection. Disconnection statistic of interest is the reconnection rate excludes skippers. In SA, around 0.6%: 10-year average is around 0.5% In QLD, just over 0.6% but as in SA, different retailers have very different performance

11 SAFETY NETS AND DEREGULATION EXAMPLE - Comparison of AGL vs Origin in SA 2011/12: Disconnection/Reconnection Rate: 0.84% vs 0.13% Instalment plans: 0.77% vs 6.6% Hardship program participants: 0.57% vs 0.95% EXAMPLE - Comparison for QLD 2012/13: Origin; AGL;Ergon Disconnection/Reconnections: 0.2% vs 0.9% vs 0.9% Hardship program participants: 0.5% vs 0.4% vs 0.6% Relative differences are consistent in VIC too Will NECF deliver convergence around best practice?

12 COMMERCIAL REALITIES? EXAMPLE AGL Energy Financial Statements (FY13 Full Year Results from agl.com.au) Strong credit focus and close management of debtors: Total Bad debt expense now at 0.7% of revenue (slide 24). On the potential value of the planned purchase of independent energy retailer Australian Power and Gas, AGL identified the opportunity to deliver superior debtor management (page 29)

13 DEBT AND DISCONNECTION NECF commenced in SA on Feb 1 st 2013 only one quarter of AER performance reported so far but disturbing trends in customer debt. 6% of electricity customers had debt (ave $622) 2.4% were on a payment plan to pay off the debt 0.8% were on a hardship program debts grew while on hardship programs

14 CUSTOMER DEBT Source: AER Retail Energy Market Update January to March 2013 Weighted by customer numbers, the combined debt on entry was c$8m, debt on programs was c$14m, an increase of c75%

15 CURRENT CONTEXT - PRICES Several years of price rises expected to moderate soon Average prices will stabilise BUT next wave of reform will deliver changes to pricing structure Some households will be better off, some worse off Many changes linked to the functionality of smart meters Aim is to expose consumers to underlying costs : Fixed supply charges Time of day Across the seasons Key impact expected from cost-reflective pricing is increases in fixed charges (and lowering of consumption charges) How will safety nets react to this?

16 SAFETY NETS AND DEREGULATION Disconnections/reconnections are high and rising Energy costs are rising faster than incomes Customer debt is growing CONCLUSION: Safety Nets are under pressure expect disconnections to rise further Implications for policy: focus resources on concessions or emergency payments?

17 IMPLICATIONS FOR QLD QLD and SA vie for NEM s highest disconnection / reconnection rates but largely due to influence of particular retailers: AGL in SA and Ergon in QLD Deregulation context outside of SEQ very different Transparency of data very important, NECF is providing new insights into debt and disconnections but can it solve problems? Market momentum is toward more fixed charges, QLD settings appear well placed but, like SA, not indexed