This is the second post inspired by Ron Ben-David’s call for structural revolution in our approach to retail energy services: the first is on why the electricity market is not a market.
The customer is always right
Marshall Field in Chicago and Harry Selfridge in the UK are famed for championing the slogan “the customer is always right” in their department stores in the early 20th Century.
While the slogan contains elements of sales pitch and advertising, an industry notorious for creating the “needs” that its products solve, like all durable sayings and proverbs is built on a kernel of truth.
That truth we touched on in the first post in this series, that the customer is searching in the market for the right solution providing the combination of utility and price that satifies their need. The customer is searching for the purchase that is right – if the salesperson can convince them they have found it, so much the better for the salesperson.
A simple way to think about utility is to take money out of the equation – think about a barter society. You and I meet and have things to trade – if I find utility in you chicken and you find utility in my spade we’ll agree to a trade. But what if I don’t want to trade a whole spade, or you just want a hole dug? I can offer my time digging with the spade instead. The market facilitate a trade, and we are both better off as a result.
In familiar terms, if a telco salesperson can convince me that a phone/contract combination is the right one that lets me enjoy live sports while texting friends on my train commute, I am satisfied with the utility I have purchased. The market has facilitated a satisfying trade and happy with my purchase I am, as close as reality allows, the economically rational actor home economicus of economic textbooks.
So what's the problem in the electricity "market"?
At its simplest, the retail market does not satisfy its customers.
Since its introduction in the 1990s an enormous amount of effort has gone into advertising energy retailers, regulatory monitoring of customers switching between retailers, academic and government research into people engaging (or not) the “market”, their behaviours, motives, and thoughts about energy retailers. Time after time we find people are simply not interested and do not think about it, and most of us feel ripped of to some degree and are not inclined to trust energy retailers.
How can this be so after 25 years?
The consumer is unable or unwilling
In general the energy sector response, government and industry, is that “consumers are unwilling or unable“.
The energy market design is premised on neo-classical economic principles – there are suppliers and consumers that meet in a market and make rational decisions for their own maximum well-being weighing utility and price. If optimum outcomes do not result, that is because of “market failures” across a range of possible categories for causes.
In the energy sector the focus tends to fall on two, again and again:
- “information asymmetry” – a retailer knows more about an energy contract, especially the risks that we’ll return to in another post, the consumer doesn’t know enough to understand the differences between what is on offer and so is likely to just pick one at random.
- “transaction costs” – it just takes time and effort to find a new retail deal, so you don’t do it.
Again and again there are reforms to make more information available to consumers (did you know your retailer must tell you on your bill if you would be better off on another tariff?) and easier to search information (see compare.energy.vic.gov.au) and act on a decision to change (and the internet has been a boon hasn’t it!)
But despite this focus, reform after reform on information and transaction costs, it hasn’t worked.
So of course these energy sector responses won’t work – we don’t make decisions that way.
But as a retail customer in the energy system, where I am seeking out the utility from energy that I want, how does it make me feel to be told I am “unwilling” or “unable” to do what they want me to do?
Customer support is critical to the energy transition
This goes to the central motive for Ben-David in his paper. Customers are the heart of succeeding in the energy transition that will decarbonise our electricity system, decarbonise our homes, our businesses, industry and ultimately the whole of society. The energy sector exists to satisfy demand, so customer demand drives the changes that add up to the energy transition. It won’t be easy, so customer willingness is critical.
That’s why it matters, and why talking about structural reform matters.