The impacts of price regulation on price dispersion in Australia's retail electricity markets

Abstract

Price deregulation in Australia's National Electricity Market has led to increased competition and greater price dispersion in retail electricity markets. However, recent increases in electricity prices and concerns around disengaged customers have led policy makers to impose a ‘default offer’ to cap retail electricity prices. In this article, we develop a model that demonstrates the mechanism through which a price cap leads to the withdrawal of the lowest priced offers from the market, in effect reducing the benefits available to customers that ‘shop around’. We calculate a measure of actual price dispersion showing that a compression of offers since the price cap was imposed has reduced the returns from search by 2.3 per cent, or $37 per year on average. We argue that the important issue of vulnerable, disengaged customers on high priced offers is best addressed through non-price regulation policy options, such as an auction for the right to serve customers that are both vulnerable and disengaged.