Week's Top Letter #1: Consumers should switch retailers when price plan goes sour

The Open Electricity Market will allow you to switch to a retailer at a price plan that best meets your needs, or opt to continue buying electricity from SP Group at the regulated tariff.

The Open Electricity Market (OEM) is currently being rolled out across Singapore to increase market competition in the industry and, thus, lower the electricity price.

While the motivation and mechanism of such a market are sound in theory, the outcome may be different.

The OEM may, in fact, drive the wholesale market price - the price to generate power - down while inflating the retail market - the kWh price consumers pay monthly.

This is the inconvenient truth seen in mature markets in the United Kingdom, Australia, New Zealand and United States.

For businesses, it is not just legal to maximise profits, but also a requirement that shareholders enforce. The long-term outcome for consumers is obvious - a more expensive electricity bill.

Of course, short-term cheap plans will be offered to secure customers before the harvest.

For example, the profit margin for electricity retailers in the Australian state of Victoria increased to around 13 per cent in 2017 - more than double what it was when regulators set prices.

To control the inflation of prices, the Energy Market Authority needs to impose a cap on profit margins.

This is a tricky business, and the optimal equilibrium can only be found in a trial-and-error manner.

Consumers should also not just blame retailers for price increases, as they are equally responsible.

For example, UK retailers found that their customers are generally inactive in switching retailers.

This is as consumers are put off by the fine for contract termination and switching costs, despite them knowing that the long-term loss outweighs the short-term expense.

This led to price discrimination in the UK. For example, companies offered cheaper prices in new untapped locations while ramping the price in established areas.

Consumers should enjoy the short-term cheap electricity bills, but need to be proactive in switching retailers. They should treat the OEM retailers as stocks and not as bonds, and switch when the price plan goes sour.

Jimmy Chih-Hsien Peng (Dr)

Join ST's Telegram channel and get the latest breaking news delivered to you.