Avoiding a new era of retail electricity rip-offs

People already encounter traps in signing up to electricity contracts, so opening the market to more complex retail offerings, incorporating products like solar, batteries and smart appliances could be overwhelming. Mobile phones offer some lessons.

Those heavily engaged in the energy sector and reducing carbon emissions can sometimes get carried away in the excitement about new energy gadgets that could lower our carbon footprint while increasing the efficiency of our energy supply.

But we can sometimes forget that more of the population are worried about what will be the special ingredient for the next MasterChef cook-off than they are about how to lower their kVA load on the power network.

Judging by the level of complaints the Australian Competition and Consumer Commission has received in recent times about power company sales tactics (they’ve sanctioned just about every major power retailer), people already encounter trouble understanding what’s on offer when prices are relatively simple and based on just two components: a fixed charge per day and a charge per kilowatt-hour of electricity consumed. 

Now, imagine companies bombarding them with a range of rates and contract terms depending on things like:

– whether they install a battery package or consent for power to be drawn down from their future hybrid-electric car when required;

– whether they install devices to regulate their air-conditioner’s power usage;

– how many volt-amps they draw from the grid on days above 35 degrees, or even;

– the orientation of their solar panels.

The Consumer Action Law Centre – a body which seeks to support consumer rights – has delivered a healthy reality check for the tech enthusiasts in its report Smart Moves for a Smart Market.

The report considers the likely difficulties consumers will encounter in understanding and intelligently taking advantage of the emerging range of technology offerings and possible power tariffs.

Now, the Institute of Public Affairs and senators David Leyonhjelm and Bob Day might like to believe consumers are capable of doing multiple net present value calculations simultaneously in their head while also reading through a 30-page set of terms and conditions. However, most of us are less gifted than that.

There are a multitude of bad products (particularly financial products) that consumers, for some reason, continue to elect to sign-up to even though they are a manifestly bad deal. Also, there can be some very good products out there that large numbers of consumers seem to continually pass-up on because they find them too complex.

The report Smart Moves for a Smart Market acts as a bit of warning against the possibility that electricity becomes too complex a product, where consumers’ constrained brain power and emotions can be exploited to their disadvantage. It argues that the following elements are required for consumers to be able to effectively and intelligently participate in a future smart technology enabled electricity market:

1) Information must be clear and relevant: Contract terms and conditions, technology costs in bundled contracts and product information sheets must be simple, accurate and engaging. Disclosure of information about product attributes and use will also be essential.
2) Flexibility will be essential: Long lock-in contracts and undue exit fees will not allow consumers to realise benefits as their situations or understanding change.
3) Increased standardisation of products and services will be necessary: This should not be so onerous as to limit innovation but undertaken to ensure maximum comparability of products and services for consumers.

We can see how these kinds of issues have played out in mobile phones for some guidance on the potential consumer minefield that could emerge.

In its initial evolution, each mobile carrier structured its tariffs in different ways that made it very difficult to compare one against the other. In addition, shiny new mobile phones were offered which could act to lure customers into signing on to long-term contracts without properly considering what can be incredibly expensive call rates.

Yet, at the same time, allowing providers flexibility in their offerings and the ability to secure long-term contracts has brought benefits for consumers. Being able to roll the cost of a mobile phone into an overall contract has made mobile telephony more accessible. It has also probably increased the speed at which enhanced smartphone functionality could be exploited.

If electricity providers are limited to, say, a maximum of a two-year contract then we’ll destroy the viability of electricity being bundled with a range of energy control equipment and services. For example, solar and battery systems involve significant upfront costs, of thousands of dollars, which can’t be recouped within the space of a two-year contract. Yet as explained in the article Are households the wrong people to be buying power stations?, consumers could be better served having such products selected for them by a business focused on lowering their electricity bill, rather than just selling a piece of kit.

Also, if we were to force retailers to charge for electricity based on, say, just two components – units of energy consumed and peak network capacity demand – we’ll also constrain potential for valuable innovation.  As an example, a retailer might offer you a fixed monthly plan just like what most people do with their mobile. This gives the householder enhanced predictability about their costs. In addition the electricity provider is then incentivised to work out how they might improve the energy efficiency of your home.

Cheap solar power, electric vehicles, batteries and internet-enabled smart appliances are opening up incredible possibilities for increasing the efficiency and reducing the unintended damage of energy use. But half the trick of exploiting these technologies will be how they are marketed to consumers. 

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