Cost of living pressures: switching retail providers can unlock savings and improve competition

Energy bills are currently front and centre in the public debate on cost of living. One way to reduce cost-of-living pressures is to actively lower prices of essential products and services – and at least one government is currently paying consumers $250 to do so. This may sound simple, but the devil is in the details.

In markets with healthy competition, customers can reduce costs by testing the market and comparing competitors’ services. For example, in Victoria, 70 per cent of Victorian residents can save money by using the Victorian Energy Compare website, and the Victorian Government has forecast a typical annual household savings of $330 on energy bills just in the first year.¹

However, there are costs and barriers to switching, and the decision is not just a financial one. This is where behavioural economics can play a role. There are information costs in finding and comparing plans, transaction costs in switching and overall uncertainty of whether a change will pay off for a specific individual’s circumstance.  

Governments across all states and territories need to work towards reducing informational barriers to improve competition across a range of sectors. A 2021 study by the Australian Government’s Behavioural Economics Team found that out of 14,000 Australians surveyed, only nine per cent of respondents had switched energy retailers in the past year and only a further 24 per cent said they had considered doing so. This study recommended simplifying the length and layout of energy bills and improving clarity to reduce the information costs of switching.

In a demonstration of how great the non-financial costs of switching are perceived to be, the Victorian Government is offering consumers $250 per household just to compare plans via the Victorian Energy Compare website, with the hope that this incentive pushes people to seek better energy offers. The portal, which went live on 1 July 2022, can even reduce the time it takes to compare by using a copy of a provided electricity bill, pre-filling relevant information and showing whether there are better offers in the market.

In an average week, energy expenditure is overshadowed by the largest expenditure for households: housing costs (rent, interest payments on mortgages, council rates etc.). If a 0.50 rate rise in the cash rate is fully passed down to households, that would see a $151 a month increase in repayments on a $500,000 mortgage.² While some households may be renting or have fixed rate mortgages, many do not – historically around 85 per cent of people have a variable rate mortgage. The potential benefits of shopping around for a better deal is even greater, yet consumers can be just as reluctant to change providers due to switching costs. Even in the banking market, the federal government has been pushing reforms to introduce open banking through the Consumer Data Right. This opt-in service has the potential to provide consumers with better ways to compare products and services, and then switch providers with greater ease.

While there are systemic issues and broader measures required to reduce cost-of-living pressures over time, there is a role for consumers to play maintaining competitive pressures on businesses and for governments to reduce the barriers of switching.