Customers on older plans significantly better off on their retailer’s best offer

Some residential electricity customers pay significantly more for their energy. The amount of potential savings they could realise varies depending on the customer type, the customer’s retailer, the amount of electricity used, and the age of their plan. 

Customers on older plans have the highest potential savings compared to their retailer’s best offer. Retailers can increase tariffs for customers on retail energy contracts once per year. This is common practice, and customers are notified when this takes place. Over time, these annual price increases move old contracts move further away in price from new, more competitive market offers.

The potential savings for some customers compared to their retailer’s best offer are up to:

• $730 for customers receiving payment difficulty support (PDS)
• $1,200 for customers paying more than 50 per cent above the Victorian Default Offer (VDO)
• $950 for customers on plans over 10 years old

While the total number of customers in these circumstances is relatively low, cost-of-living pressures currently facing households put heightened importance on enabling customers to realise these savings.

Energy Consumer Reforms

This article provides data and evidence for two reforms currently being considered:

1. Customers experiencing payment difficulty be automatically placed on their retailer’s best offer
2. Additional protections for customers paying higher prices

These reforms seek to promote effective competition that delivers more efficient pricing and equity in essential services.

Customers receiving payment difficulty support could save up to $730 per year

Around one per cent of all Victorian electricity customers receive payment difficulty support and could save on their retailer’s best offer. 

While many are on lower-priced offers, around five per cent of them have not changed plans for over five years and could save by switching. 

The savings available for PDS customers increases the older their plan is (Figure 1).

PDS customers on plans aged 10 years or more could save the most by switching to their retailer’s best offer (up to $730 per year). PDS customers on plans aged two years or more could achieve more modest savings (up to $440 per year).

Figure 1: Annual savings for PDS customers compared to their retailer's best offer, by plan age

^{Source: ESC analysis of customer billing data}    

Customers who have not changed plans for ten years could save around $950 per year

Around 66 per cent of Victorian electricity customers could save on their retailer’s best offer. 

Over a quarter of these customers have not changed plans with their retailer for over two years. Additionally, nine per cent have not changed plans or retailer in over five years.

Potential savings for customers who switch to their retailer’s best offer increase the longer they have been on the same plan (Figure 2). 

This is because customers on older plans tend to pay higher prices than customers who have changed plans or retailer recently (up to 10 cents higher per kWh on average).

Customers who have not changed plans for 10 years or more could save the most (up to $950 per year). Customers who have not changed plans for two years or more could achieve more modest savings (up to $410 per year).

Figure 2: Annual savings for customers compared to their retailer's best offer, by plan age

^{Source: ESC analysis of customer billing data}    

Why are some customers on older plans?

Some customers stay with their electricity provider and plan, even when there are cheaper options available. These customers are often referred to as ‘sticky’. 

Sticky customers search less for lower-priced electricity or gas plans with their current retailer or others.

Barriers like search and switch costs, effort required to switch, consumer inertia (a preference for the status quo), and loss aversion (perceived risks of switching outweigh the potential savings) drive this behaviour.

In essential service markets, low consumer confidence can cause customers to be less willing to engage with alternative providers, even when switching would be in their best interests.

Customers paying more than the VDO could save up to $1,200 per year

Retailers set their best offers below the VDO. However, a small number of customers are on plans that are more expensive than the VDO. These customers could save as much as $1,200 on their annual bill if on their retailer’s best offer. 

Potential savings for customers grow the longer they have been on the same plan (Figure 3). This is clearest for those paying at least 50 per cent more than the VDO.

Figure 3: Annual savings for customers paying more than the VDO compared to their retailer’s best offer, by plan age and per cent above VDO

^{Source: ESC analysis of customer billing data}