Sparked by rapidly increasing power prices, the Victorian Government commissioned an independent review into whether retail energy markets are working in customers’ interests. The review panel has recently reported its findings and has made a series of wide ranging recommendations.
Whilst the potential reintroduction of price regulation has dominated the debate, another recommendation to have collective bargaining through a single buyer scheme has so far received little discussion.
Under a single buyer scheme, the regulator or another public entity is responsible for sourcing electricity from the competitive market on behalf of customers. This could be, for example, by auctioning the right to supply customers or by sourcing energy directly from the wholesale market.
The objective of single buyer schemes is to allow customers to benefit from a competitive price for electricity without having to shop around. The effectiveness of such a scheme depends on whether it is able to reduce costs in the energy supply chain either through helping customers avoid certain retail costs such as marketing or providing more competitive discipline on the wholesale market.
While a single buyer scheme has the potential to provide customers with easier access to lower priced electricity, whether the scheme is successful will depend on how it is designed, who it is aimed at and what it is trying to achieve.
The fundamental design question for a single buyer model is how to create the financial payment flows between customers and the single buyer. In the countries where this approach is used, the local distributor acts as the default supplier and is responsible for billing customers. However, in Australia the billing function has been devolved from distributors to retailers. If retailers are involved in the payment flows then it will be less effective at reducing costs.
A single buyer scheme could have substantial impacts on wholesale markets and the current competitive and investment environment. It could also create regulatory risks if the single buyer is tasked with achieving additional policy outcomes. Such wider market issues should not be ignored.
A risk with single buyer schemes is that they make customers less active, resulting in less retail innovation, entry and choice. In the US state of Maine and in Italy over 80 percent of customers are supplied on the default contract organised with the single buyer with limited scope for new entrants to compete. Despite the widespread roll-out of smart meters in Maine, very few customers have benefited from new products that smart meters bring.
A single buyer scheme would create new costs, e.g. for the establishment of a new entity and related administrative costs. If not implemented carefully, such costs could outweigh any potential benefits.
Assessing the costs and benefits of a single buyer scheme for Victoria would require detailed consideration of how such a scheme could be implemented and whether it would lead to lower wholesale and retail costs. In considering this recommendation, the Government needs to be clear on what the problem is that they are trying to solve, and whether introducing a single buyer would reduce prices for customers.
KPMG supported the panel with a review of international approaches to retail energy market regulation to inform the panel’s considerations. We identified a number of markets that have implemented a single buyer scheme, including Maine and Italy.