Welcome to our new website. Let us know what you think.
The unfortunate paradox of retail energy prices
25 June 2018
This paper outlines the model presented by chairperson, Ron Ben-David, at Australian Energy Week on 11 May 2018. The paper accompanies the slides available below.
The paper presents a model that explores the relationship between competition, retailer costs and consumer prices in the retail energy market. The model is calibrated using data from the Victorian retail energy market and is found to describe the past trajectory of retail prices quite well. The model is then used to peer at the future course of retail electricity prices.
The model foreshadows that as competition deepens, discounted prices will rise rapidly. At the same time, discounts will decline and price dispersion will narrow. The model also reveals an 'unfortunate paradox'. As more customers are encouraged to shop around and switch to competitively priced contracts, the overall prices paid by customers rise.
The paper then searches for cures for the unfortunate paradox. Three strategies are identified:
reducing search costs
improving contract design
altering the market structure.
The paper acknowledges that much work is already underway to lower search costs but goes on to discuss the potential benefits of contractual reform, suggesting that, 'Contract "normalisation" would help break the nexus that currently exists between competition, retailer costs and consumer prices.'