Winter electricity prices are rising – how do we know we’re getting value for money?

Winter is coming to New Zealand and Australia, and with it come those inevitably higher power bills from heating our homes.

But even without that seasonal spike, household power bills were already set to rise by NZ$10 to $25 a month^[1] in New Zealand and up to A$9 a month^[2] in parts of Australia.

This is not, as some might assume, because electricity suppliers are acting uncompetitively. It’s because regulators are increasing charges for long-distance electricity transmission (pylons and substations) and short-distance distribution (poles and wires).

Those charges together make up around 40% of power bills on average, so the price increases matter. In New Zealand, an average 15% of household budgets^[3] is spent on electricity. The proportion going towards those infrastructure costs is higher for low-income, regional and rural households.

To put this another way, these fixed parts of our power bills can equal what a typical household spends on mobile phones, public transport or water services.

Transmission and distribution services are regulated because they are provided by monopolies. Regulators such as the Commerce Commission in New Zealand and the Australian Energy Regulator in eastern Australia try to set reasonable prices while still allowing those firms enough money to provide reliable services.

However, this old regulatory model is being challenged by changing consumer behaviour. Households are increasingly electrifying, switching to heat pumps for space and water heating, and electric vehicles (EVs) for personal transport.

Regulators want to ensure the reliability of electricity supply doesn’t significantly decline. But households that rely on electricity want greater reliability – especially with growing demand for “smart” appliances that can be damaged by outages.

Quality versus quantity

Unfortunately, history is a poor guide to how regulation should ensure these future reliability needs are met. Furthermore, electricity is an unusual “product” – the quantity we consume is often an afterthought, while the affordability and quality of supply are more top of mind.

Importantly, quality means much more to consumers than just reliability. It includes how well outages are planned and communicated, how easy it is to get help and updates when things go wrong, new connection times, and the voltage stability modern appliances require.

What constitutes good service might also include customer charters or other guarantees of minimum acceptable expectations, as well as compensation schemes.

Beyond these options, however, the very basis for regulation is being upturned as households invest in rooftop solar panels, home batteries and electric vehicles (EVs). The competition offered by these new technologies means distribution companies are no longer monopoly providers because households can get electricity in new ways.

This also means households expect new services from those providers – such as being able to sell electricity to others (including to distribution companies themselves to help them maintain reliable supply).

What customers really want

Historically, electricity regulation has responded to emerging challenges like these with “bolt-on” solutions. Each one tries to address a specific issue individually, but not in a coherent and joined-up way.

Overall, how and why we regulate electricity transmission and distribution need rethinking from the ground up, not more rounds of regulatory whack-a-mole. Consumer preferences need to be more than a vague overriding objective. They need to be at the heart of regulation.

New Zealand’s Commerce Commission already exempts many distribution firms from much regulation because they are owned and governed by customers. And regulators in other English-speaking countries, including Australia, increasingly rely on consumer forums and other channels to indirectly and only partially identify consumer preferences.

But neither model obtains directly usable information about what consumers want – from those consumers themselves. Unsurprisingly, customer preferences are not widely or systematically reflected in regulation.

Besides, asking customers about quality and reliability of service assumes they can clearly articulate what they care about and what value they attach to them in ways regulators can use.

Value for money

One solution is to use a direct measure of consumer satisfaction. We developed and applied a version of this in recent research^[5] involving a survey of Swedish electricity customers.

We measured satisfaction by asking consumers to rate the “value for money” they perceived from their distribution firm, ranging from zero (lowest) to five (highest).

Perceptions of quality can vary and are inherently subjective. But value for money can be interpreted as a ratio of quality to price: higher quality means higher value for money, higher price means lower value for money. From this, we obtained an objective measure of overall customer satisfaction levels.

As might be expected, we found value for money tended to be higher for customers of distribution firms owned and controlled by those customers. But directly measuring customer satisfaction in this way could be a good basis for regulation reform in general.

We still need to better understand how customer satisfaction is affected by regulatory decisions. This has always been the case, but it is especially true now that fundamental changes are happening in the sector.

Electricity customers heading into winter might be happier with rising transmission and distribution prices if they were confident regulation genuinely improved their overall value for money.

Business as usual, on the other hand, may offer them only cold comfort.

References

1. ^{^} NZ$10 to $25 a month (comcom.govt.nz)
2. ^{^} A$9 a month (www.aer.gov.au)
3. ^{^} 15% of household budgets (media.umbraco.io)
4. ^{^} Shutterstock (www.shutterstock.com)
5. ^{^} recent research (www.griffith.edu.au)