1. Power prices, climate change and ‘going green’:
changes in the Australian energy market
White Paper – August 2011

2. Power prices, climate change and ‘going green’: changes
in the Australian energy market
Abstract
The retail energy sector has undergone recent extensive change in pricing, regulation and consumption
patterns. Electricity price rises are slated and approved for the 2012 financial year. Patterns of
consumption have been influenced by „green guilt‟, an increased spectrum of alternative energy sources,
and more extensive hardship amongst households battling interest rate rises and price inflation across
many basic household goods and services.
This paper looks at how these various changes are modulating demand, provider switching and bill default
behaviours in the utility sector, with an emphasis on patterns of default in the energy (electricity and gas)
markets. In particular, the demography of bill defaults is explored, with changing patterns traced across a
five-year window from 2006 to 2011.
Several atypical demographic groups are identified as representing a high default risk, and mechanisms
available to utility companies for default mitigation at each stage in the customer lifecycle are outlined.
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3. Power prices, climate change and ‘going green’: changes
in the Australian energy market
The Retail Electricity Market
Regulation and privatisation
Substantive changes have occurred in the structure and regulation of the retail electricity market over the last 2
decades. Privatization of electricity assets has progressively occurred in the states of Victoria, South Australia,
parts of Queensland and most recently NSW, bringing an increased element of competition - but also greater profit
motive - into the sector.
Establishment of the National Electricity Market (NEM) for wholesale electricity supply in 2000 has increased price
transparency, whilst a national monitoring and regulatory entity, the Australian Energy Regulator, was incepted in
2005 to drive efficiency through interstate market and pricing integration.
Figure 1: Key milestones in the Australian energy market, 1998 – 2012
Electricity market pricing
1
Inflation adjusted retail electricity prices have increased by 30% since 2006 , reflecting both a rise in real wholesale
electricity costs and the expectation of future costs resulting from Australia‟s 20% Renewable Energy Target (RET)
2
and hypothecated carbon tax. Although still below the OECD average price , the increase in electricity costs to
households has been significant, outpacing CPI and wage growth. As a result, Australian households who are not
1
Deloitte Access Economics 2011, Assessing the impact of key climate change policies on energy users, report for the Energy Users Association of
Australia, June 2011, pp. ii
2
Deloitte Access Economics 2011, Assessing the impact of key climate change policies on energy users, report for the Energy Users Association of
Australia, June 2011, pp. 12
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4. Power prices, climate change and ‘going green’: changes
in the Australian energy market
taking direct action to reduce their power consumption have seen power bills consume an increasing slice of the
income pie. Over the last 5 years, the annual increase in electricity prices has been on average, 15 times greater
than for the previous two decades; put another way, electricity prices rose by twice as much between 2007-2010 as
they did for the whole period from 1990 – 2006.
Figure 2: Inflation-adjusted energy prices, 1990 to 2011
Impact of the Sustainability agenda
Another significant source of change in the energy markets emerged from the 2007 federal election. The Rudd
government rode to power on the back of a strong green message, spurring the implementation of further
regulatory commitments towards reduced energy consumption and carbon throughput.
A range of emission reduction initiatives have since been implemented at state and
commonwealth level. A national Renewable Energy Target (RET) has been set at 20%
energy from renewable sources by 2020, placing formal pressure on power generation
3
companies to drive emission reducing change . Other sustainability initiatives include
mandatory BASIX compliance for residential development and subsidies for insulation,
solar hot water and photovoltaic panels.
Consumers are also increasingly conscious of the environmental impact of their actions, and this too is altering
energy consumption patterns. "Consumers are making purchase decisions on the back of their concern about
3
Syed, A, Melanie, J, Thorpe, S and Penney, K 2010, Australian energy projections to 2029-30, ABARE research report 10.02, prepared for the
Department of Resources, Energy and Tourism, Canberra, March.
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5. Power prices, climate change and ‘going green’: changes
in the Australian energy market
climate change and marketers need to take notice,” says Synovate‟s head of media research, Steve Garton.
“People see their purchase decisions as a way to combat the effects of climate change and would undoubtedly be
4
open to green products in most categories”.
And these preferences translate to behaviour – 67% of Australians have purchased an energy efficient device in
the last 12 months, 83% have consciously saved power and 59% have purchased green products instead of
5
standard.
A number of utility companies have tapped into the sustainability agenda, offering Green Power products and smart
meters to help consumers regulate and restrain their consumption. Several have made significant investment in
renewables to future-proof demand as fossil fuel sources become less palatable to consumers and more expensive
to operate under a carbon taxed pricing regime.
Informed consumers demand more
As more households become online-savvy, price comparison and consumer
watchdog sites are playing a greater role in consumption choices. A quick Google
of “electricity price comparison” produced thirteen unrelated comparison sites and
four government advisory sites, plus forum, blog and wiki posts discussing utility
providers, prices and options.
More informed consumers with heightened price awareness make competing in the utility sector a tougher ask
today than in the past. Australia has the dubious honour of one of the highest residential utility switching rates,
6
ranging from 11% to 25% per annum by state in 2010 . Switching rates have followed an upward trajectory as new
players enter the market, and this trend is driving increased servicing costs and risk exposure for energy retailers.
In a commoditised and increasingly crowded market, opportunities to reduce the cost associated with non-payment
and customer mobility are becoming increasingly valuable.
Consumer Utility Bill Defaults
The volume of consumer utility bill defaults has followed an upward trajectory for the last 5 years. Whilst an
increase in default was expected during the high interest rate period of „06/07 and the global financial crisis (07/08),
as market fundamentals returned to normal in 09/10 the rational expectation is a reduction in default volume
reflecting economic recovery.
In Australia this has not been the case. Whilst average default amount has remained static relative to inflation, the
volume of defaults has continued to rise. This is an indication that cost of living pressures are becoming a more
salient concern for many sectors of the Australian population. It may also be a reflection of the aggressive
discounting and sales strategies used in Door to Door, telemarketing and „above the line‟ advertising in the
Australian utility sector – this may result in customers switching to a new supplier and leaving unpaid bills for prior
4
http://www.synovate.com/changeagent/index.php/site/full_story/climate_change_and_consumer_behaviour/
5
http://www.synovate.com/changeagent/index.php/site/full_story/climate_change_and_consumer_behaviour/
6
VaasaETT 2010, Utility Customer Switching Research Project: SwitchStats Australia Scheme Report, dated 1 April 2010
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6. Power prices, climate change and ‘going green’: changes
in the Australian energy market
supply, payment for which is often hard to recoup when the retailer no longer has the threat of disconnection for
leverage.
Figure 3: Electricity bill defaults – volume and average value, from 2006 to 2011.
35000 $1,000
# defaults $900
30000 Avg value $800
25000 $700
20000 $600
$500
15000 $400
10000 $300
$200
5000
$100
0 $-
Jul-06
Jan-07
Jul-07
Jan-08
Jul-08
Jan-09
Jul-09
Jan-10
Jul-10
Jan-11
Jul-11
Oct-06
Apr-07
Oct-07
Apr-08
Oct-08
Apr-09
Oct-09
Apr-10
Oct-10
Apr-11
Note: Intermittent spikes in default volume reflect intermittent processing or loading of default data by large utility providers.
The average Australian household spends $2,046 per year to cover electricity costs. Whilst low income
households receive some subsidies, recent price hikes mean that those with moderate household - but limited
7
disposable- income are struggling more now than in the past to meet their financial obligations .
Although the pace of debt accumulation has slowed, aggregate household
8
indebtedness and gearing are at historically high levels. Housing cost
and consumer goods inflation, and upward pressure on interest rates prior
to August 2011, have whittled down discretionary spend margins,
increasing the likelihood that utility price rises will cause payment stress
and ultimately default.
Petrol prices, although a source of much vocal dissatisfaction amongst
consumers, do not have a positive correlation to increased default rates
(see Figure 2).
7
Australian Institute of Health and Welfare, 2011, Housing Assistance in Australia 2011. Cat. no. HOU 236. Canberra: AIHW.
8
Reserve Bank of Australia 2010, Household and Business Balance Sheets, sourced 7/08/2011 at
http://www.rba.gov.au/publications/fsr/2011/mar/html/house-bus-bal-sheet.html
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7. Power prices, climate change and ‘going green’: changes
in the Australian energy market
Figure 4: Relationship between inflation, petrol price, borrowing costs and utility default
35000 14.0
# defaults Annual CPI inflation
30000 Petrol price ($/L) Indicator lending rates 12.0
25000 10.0
20000 8.0
15000 6.0
10000 4.0
5000 2.0
0 0.0
Jul-06
Jan-07
Jul-07
Jan-08
Jul-08
Jan-09
Jul-09
Jan-10
Jul-10
Jan-11
Jul-11
Oct-06
Apr-07
Oct-07
Apr-08
Oct-08
Apr-09
Oct-09
Apr-10
Oct-10
Apr-11
Segments under pressure
The effects of utility price rises are not equitable. As a share of household income,
utility expenditure is 59% higher amongst old age pensioners than the average.
The unemployed (33%) and single parents (26%) also find utilities costs a
disproportionately large burden, paying 33% and 26% respectively above the
average wage to utility cost ratio. These groups traditionally experience bill
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payment stress, and market data indicates that they continue to do so.
The rising cost of living is also taking its toll on highly leveraged households in
more affluent segments of the population, driving increases in non-payment across
formerly „safe‟ demographics. Analysis conducted by Veda examined patterns of
utility bill default by income, household composition, property value and home
ownership.
Results were further filtered by applying Veda‟s Landscape geodemographic segmentation to elicit the
geodemographic characteristics of bill defaulters. Seven clusters of defaulter were identified as sharing common
geodemographic characteristics, including income level, property value and similar lifestage attributes (measured
using Landscape geodemographic profiles).
9
Dufty, G., 2008, EWOV – Hardship, where are we on the journey? Cost Trends for Essential items – implications for Victorian Households, presentation
to CUAC Consumer Roundtable, October 2008.
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8. Power prices, climate change and ‘going green’: changes
in the Australian energy market
These defaulter clusters can in turn be grouped into three typologies: low-income „strugglers‟, cash-constrained
retirees and highly leveraged urban families. The latter two groups are not typically seen as „risky‟ but have
experienced significant increases in payment difficulty over the last five years resulting in increased propensity to
default.
Figure 5: Default clusters within the Australian energy market, FY11
$500
Struggling
$480 Suburbia (CL2, CL5)
CL5
$460
CL2 Cash-strapped
$440 Retirees (CL3, CL4)
Leveraged young
families (CL1, CL6, CL7)
$420 CL3
CL7
$400 CL4
CL1
$380
CL6
$360
$340
$320
$300
Low: <$18,199 High: >$104,000
Household income band
The increased presence of these atypical defaulter cohorts highlights the need for energy retailers to apply
quantitative and behaviour based filtering at point of acquisition and the value of implementing proactive default
management across their existing customer base.
Mitigating Default Risk
A conscious approach to payment risk management across the customer lifecycle can bear significant dividends in
the form of improved retention, reduced servicing costs, and reduction in days outstanding, collections activity and
incidence of bad debt write offs.
Pre-screen and filter acquisition targets
Various targeting and credit risk pre-screening measures can be used to eliminate prospective customers with a
high likelihood of default. Off the shelf credit risk models such as Veda GeoRisk provide a privacy compliant way of
identifying less risky prospect households, or offering risk-appropriate contracts, payment plans and bond levels.
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9. Power prices, climate change and ‘going green’: changes
in the Australian energy market
Where more precision is required, bureau based pre-screening may be applied to cold prospects, or bespoke
models developed to reflect specific risk policies.
Privacy compliant risk models – both generic and bespoke – can also be used to manage and score inbound
applications, ensuring appropriate bond and contract terms are offered to minimise likelihood of default.
Proactive default management and prevention of bill shock
Energy companies are obliged to offer payment plans to consumers who have been identified as experiencing
financial hardship. Such hardship measures minimise the likelihood of delinquencies resulting in debt write-offs.
However, by taking a proactive approach to hardship measures, utility providers can gain further cost efficiencies.
Risk models and behavioural triggers can be implemented to identify customers „at risk‟ of hardship well in advance
of default behaviour. Pre-emptive measures utility providers can deploy include the proactive offer of payment
plans to potentially risky customers, promoting Smart Meter systems and online usage tracking, and educating
consumers in risky groups about peak/ off peak pricing structures and ways to manage their power costs.
Emphasis on early collections
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A UK study by Bain & Co. suggests that the continued high rate of utility defaults is more symptomatic of lax risk
management procedures on the part of suppliers than on continued affordability stress amongst consumers. In
particular, the report highlights the absence of aggressive early collections activity, which results in a higher
proportion of 60 and 90 day overdue accounts and default write offs. Effective early collections practices reduce the
incidence of debt write offs and also reduce the cost associated with recouping funds through external collection
agencies.
Future outlook
Economists forecast that both wholesale and retail electricity prices will continue to rise across 2011/12 and
2012/13, reflecting the expected imposition of carbon tax, greater investment in renewable source infrastructure
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and increased cost of network services to support growing consumption demand.
Although consumers are expressing clear intention to reduce their individual consumption levels, the net level of
consumer demand will continue to rise, driven by population growth, increased household formation rates and
smaller average household size.
Unless significant shifts occur in building construction or dwelling size, consumption reductions will only occur on
readily controllable items such as lighting, hot water and air-conditioning use. Coupled with the anticipated retail
price rises, it is improbable that default volume will decline organically – reduction will require proactive debt
management strategies on the part of utility suppliers.
10
Bain & Company, 2011, Winning good customers, losing bad debt, Bain Brief, published April 7, 2011 sourced at
http://bain.com/publications/articles/winning-good-customers-losing-bad-debt.aspx
11
Australian Energy Market Commission 2010, Future Possible Retail Electricity Price Movements: 1 July 2010 to 30 June 2011, Final
Report, 30 November 2010, Sydney.
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10. Power prices, climate change and ‘going green’: changes
in the Australian energy market
There are substantial opportunities for energy retailers to boost profitability through effective default risk
management, using the strategies outlined in the previous section. There is also opportunity for retailers to assist
customers in self-selecting appropriate contract and usage patterns to fit their budget. Smart meters, interactive bill
management and alternate payment models such as prepayment, direct debit, flat rate plans or shorter bill cycles,
may provide considerable bottom line benefits when used in conjunction with appropriate risk management tools.
Conclusion
Default risk remains a substantial problem in the Australian energy market, however overseas experiences
illustrate ways in which proactive, data driven customer management can serve as an effective counterpoint. In the
current economic climate, bill defaults are no longer restricted to the stereotypical „risky‟ customer, and the
application of behaviour based risk management tools across the customer lifecycle are essential to ensuring
profitability.
From fully bespoke solutions to off-the-shelf models, there are a host of tools that utility managers can apply to
improve profitability irrespective of budget. If you aren‟t doing it, what‟s your excuse?
Author: Anna Russell, Veda Data Solutions Group
Veda is Australasia’s leading data intelligence and insights company and holds the largest,
most comprehensive pool of consumer and business data across both Australia and New
Zealand. Within Veda, the Data Solutions Group specialises in translating this vast pool of
data into pragmatic and robust marketing tools for campaign management, optimisation,
targeting and analytics. These tools include the Landscape consumer segmentation model, GeoRisk credit risk profiling,
Residential Movers database, and a pool of over 200 geodemographic and behavioural profiling variables.
For further information, visit veda.com.au or email the author on anna.russell@veda.com.au
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