Would a single buyer scheme help electricity consumers with more competitive pricing?

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.

Potential risks 

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.



One thought on “Would a single buyer scheme help electricity consumers with more competitive pricing?

  1. A single buyer scheme is basically a return to the pre-market days of the 90’s and would be an experiment with no real clear understanding of the consequences. It would also be, in effect, conceding that a competitive market has not worked. Nothing could be further from the truth.

    If we’re talking options why isn’t anyone discussing dismantling the vertical integration in the market. This would achieve all the things mentioned in the article regarding customer engagement, retail innovation etc. It would also go a long way to addressing the issues on the energy side of the market. Issues on the distribution side are vast and contribute to the current situation. Breaking the vertical integration of the market would trigger a wave of innovation that would start to bypass networks with the consequence being that networks, too, would have to finally innovate and sharpen their pencils (despite their monopoly positions) to retain their own market share.

    The issue that isn’t actively being addressed, however, is policy certainty. Without certainty we’re going nowhere fast. The origin of this can be traced back to the election of Tony Abbott as opposition leader that created a divergence of policy between the major parties. Until a convergence of policy can be agreed between these parties (Coalition & ALP) the market will continue to struggle to find equilibrium and a fair price for retail consumers. The PM and Energy Minister should be meeting with their opposition counterparts instead of the CEO’s of the largest energy companies to nut out an energy policy they can get their respective parties to sign up to. Until this happens the political leadership in this country will be failing the energy consumers and investors in the energy market.

    The irony is that the design of the National Electricity Market (NEM) took the day-to-day policy and regulatory burden away from governments and into the hands of the AEMC and AER. The consequence of this has been the failure of governments and political parties to remain current with energy policy, to apply Band-Aid / knee-jerk solutions when issues arise and for market reform to stagnate and stall under the inefficient processes inherited by these regulatory bodies.

    So the ball is squarely back with governments to resolve the current crisis. On recent form I can’t see this happening any time soon.

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