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What can the electricity sector do to enable good consumer outcomes and build trust in the transforming electricity market? – Power Transformed Update 1

The Power Transformed report will look in detail at the risk of consumer and market detriment in the current energy market transformation, and ask the fundamental question:

What can the electricity sector and its stakeholders do to most effectively enable good consumer outcomes and build trust in the transforming electricity market?

For more information contact Claire Maries – (03) 8554 6907

Consumer Decision Making and Detriment

The Demand-side Energy Reference Group held its third meeting on 29 July 2015.
The meeting focused on:

  • better understanding the way consumers make decisions about energy in the face of complexity, recognising that complexity and high volumes of information are both known to undermine rational decision making; and
  • the types of detriment consumers may experience in the transforming energy market, recognising that this may come from personal decision making, marketing or market structure, and acknowledging that many consumers may reap benefit from the opportunities in the new market.

The outputs from this meeting will be used to underpin a discussion in the next meeting about strategies to mitigate consumer detriment, enabling good consumer outcomes and building trust in the transforming energy market.

1. Consumer Decision Making

Presentations were given by both CSIRO and RMIT on energy consumer behaviour and decision making.

The presentations highlighted that many people don’t make decisions about energy based on the price alone, but rather because of the utility it provides including health and wellbeing (via temperature regulation, washing etc), communication, and care of family members. Energy consumption is a secondary consideration in the lives of many busy people, including families who may not have the choice about what time they use energy (as it is dictated more by the needs of children), and it will be important in energy market reform to consider strategies which best meet the needs of people.

The presentations highlighted the well-established finding that people’s decision making deteriorates with more information and added complexity. People use predictable shortcuts when faced with decision-making, especially in complex markets, which include a strong preference for the status quo over other options, even when other options may materially benefit them. Other predictable shortcuts include relying on trusted information sources rather than on novel assessment of information (ie. following recommendations rather than weighing up all the options), avoiding perceived risk, and conforming to societal norms. Understanding these shortcuts can be a tool for better policy and communication.

This is relevant to energy market transformation because of the complexity of the emerging energy market and the volume of information that consumers may be required to assess to find the best deal for them in the market and understand the risks associated with decisions (eg. the decision to go off-grid). Simplicity of consumer experience will be important.

2. Consumer Detriment

Many consumers will benefit from the opportunities that arise from innovation and greater competition. However the new market will create challenges for many consumers and the potential for detriment is high.
The Reference Group discussed potential types of consumer detriment arising under three categories:

1. Personal detriment: the consumer is personally affected by product and service attributes that lead to poor outcomes. For example, door-to-door sales leads a consumer to sign up to a retail offer with high pay on time discounts, but the consumer is unable to pay on time, or a consumer installs solar panels but the installation is poor and generation is not optimal.

2. Class detriment: particular groups of consumers experience detriment as a result of the way they are able to participate in the market. For example, renters may be unable to install technologies in their home, low-income consumers may be unable to afford technologies and people without internet may be unable to compare products and services.

3. Structural detriment: detriment occurs to consumers through inefficiencies in the market. For example, inefficient price signals lead to installation of residential-scale battery storage when community-scale storage was more efficient, or a distribution business invests in network infrastructure to a rural area when taking the community off-grid is more efficient.

Potential types of detriment identified include:

– Inflexibility: Long lock-in contracts for products and services, including solar financing arrangements and ‘set and forget’ technologies, may not be responsive to changes in life circumstances or needs, preventing consumers from exercising choice in the new market.

– Reliability of supply: Consumers able to rely (more heavily) on small scale generation and storage technologies may experience an unexpected decrease in reliability of their electricity supply if equipment fails or their needs are greater than the system they installed. Conversely, those consumers left reliant on traditional grid infrastructure may suffer a decrease in reliability if fewer people on the grid leads to lower maintenance.

– Barriers to access: Some consumers may not be able to access new technologies and services due to factors out of their control, including wealth, literacy, life stage, home ownership, ethnic background, or geographic location (including being within an embedded network). The benefits of competition will not flow to these consumers, who may miss out on lower prices, but may even be exposed to higher prices and changing reliability of supply.

– Costs: New technologies and services may include hidden fees and charges, or may be provided through complex financing products that seem attractive but end up costing consumers more than an outright purchase. Those consumers left completely reliant on the traditional grid with little access to technologies to manage energy demand may also be exposed to very high network costs.

– Poor decision making: technical complexity may lead to consumers making decisions that are not in their own interests, with the potential to create financial detriment or at worst, unreliable supply if off-grid systems are inappropriately sized or positioned. The same outcomes may come from misleading sales conduct or poor targeting of products to particular consumer segments. Consumer decision making also degrades with the complexity of information explaining products and services – this will exacerbate other drivers or poor decision making.

– Provision of basic consumer protections in an evolving market: different consumers may end up with different access to basic consumer protections around access to supply and hardship, depending on the combination of technologies and services they choose for their energy supply. Those people leaving the grid may lose fundamental consumer protections altogether. Detriment may arise if consumers are not informed of the risks of their choices or where different products and services provide inconsistent protections due to inconsistencies in licensing and exemptions.

– Inconsistent access to dispute resolution: under current arrangements, different products and services fall under different consumer protections. This will lead to confusion about where to get access to justice in the event of a dispute. With more market participants providing energy products and services, the potential for ‘buck passing’ between the many companies that may be involved in supplying energy to a premises is high.

– Inefficient investment: consumers may unknowingly invest in generation or storage technologies in response to price signals that don’t reflect the real costs of alternative supply, and existing infrastructure is under-utilised. Networks may over-invest in conventional technology when there are better community-centred or consumer-centred alternatives, such as distributed generation.

– Poor transition: consumers have invested in the current stock of appliances and services in good faith in response to market prices and regulated prices. Changes in costs of technology are risks (and opportunities) for all, but rapid changes in regulated prices may unduly penalise those investments.

This information will be the primary input to discussions about strategies to address detriment and enable good consumer outcomes in the next meeting of the Demand-side Energy Reference Group.

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