Carrot, not stick, will win change
PUBLIC concern about climate change has in recent years translated into higher sales by Australia’s clean energy retailers. Customers of accredited ‘‘ GreenPower’’ grew by 6000 a week in the final quarter of 2007 and by the end of the year some 724,000 customers were connected to GreenPower — translating into 349,000 megawatt hours of generation.
Many of those customers pay a premium to support cleaner energy, reflecting a willingness to voluntarily contribute to the fight against climate change. Those customers amount to around 8 per cent of potential users. Growth continues unabated.
Hidden in the national figures are some striking outcomes. In Victoria over 265,000 households, or nearly 15 per cent of residential customers, have connected to GreenPower. By contrast in NSW, despite its higher population, the figure was 189,000 households. Rather than being a reflection of heightened concerns in Victoria, it is more likely that the difference stems from the more competitive retail market exists in that state.
Retailers under policies of Full Retail Competition ( FRC) must actively compete for market share as all customers are contestable. In Victoria this competition has seen up to 25 per cent of customers switching supplier each year.
The switching, or ‘‘ churn’’, is largely in response to extensive industry marketing to customers. Through that marketing, suppliers can distinguish themselves by offering lower prices, better service or more environmentally conscious ‘‘ green’’ products. Victorians have more retailers bringing Greenpower to their doorstep.
While to date the response by households to supporting cleaner energy has been voluntary, the National Emissions Trading Scheme ( NETS) is about to revolutionise the generation sector in favour of cleaner sources. As a result, all households will be supporting cleaner energy, and in the process paying higher prices.
Through the creation of the National Electricity Market ( NEM) and the development of competition in generation and retail, the economic direction of earlier reforms was in favour of the lowest- cost energy sources. That energy architecture will remain in place, but the identity of the lowest- cost energy source will change once the new carbon market is established.
By putting a price on carbon, the NETS will overnight alter the competitive position, or the dispatch order, of generators operating in the NEM. Coal- based generators will find a price on carbon emissions takes away their competitive edge against lower emission sources such as gas and wind.
Most will welcome this development as the price to pay for responding to climate change. It does mean, however, that the distributional impacts of the NETS will be uneven. There will be winners and losers in the generation sector and the higher level of overall prices will hit lower- income households hardest. This has been acknowledged by Government climate change adviser Ross Garnaut.
For retailers it will be a challenge to explain the rising prices to customers caused by the NETS. As they do with wholesale prices, retailers will help consumers manage the volatility of carbon markets but passthrough mechanisms will be crucial. Such mechanisms will make retail price regulation increasingly illogical.
Higher prices are likely to translate into more focus on energy efficiency to offset the overall impacts of more expensive energy. Retailers through their customers have the best understanding of energy efficient practices, although they do not influence the appliance purchasing and building design decisions that customers take.
Nevertheless, in a world of more expensive energy the role of a retailer is likely to change from marketing GreenPower to one of helping customers adjust. Market incentives for energy efficiency rather than costly and prescriptive government programs will achieve the best outcomes in this new world of energy retailing.
Cameron O’Reilly is Executive Director of the Energy Retailers Association of Australia