Who pays the loyalty tax? The relationship between socioeconomic status and switching in Australia's retail electricity markets

Abstract

The liberalisation of retail electricity markets aimed to benefit consumers through innovation and lower electricity prices. However, well-functioning retail markets require active consumers who are motivated to switch between offers for financial savings or better tailored products. Policymakers did not adequately consider the behavioural biases, market complexities and switching costs that have led to customer disengagement. This can have significant welfare implications, particularly if many of the disengaged customers are also vulnerable. In this article, we investigate the relationship between socioeconomic status and customer engagement using household survey data covering the three largest cities in Australia. We find that lower socioeconomic status is associated with lower engagement. Unemployment, lower educational attainment, and lower income are all associated with lower switching rates. Solving this issue is complex and requires a suite of solutions however it is critical that vulnerable, disengaged customers are brought along because the costs of disengagement are likely to increase with digitalisation and the renewable energy transition.