Blog icon

The challenge

Impending introduction of cost-reflective tariffs

There is growing momentum to transition electricity consumers toward more 'cost-reflective' tariffs, where the price paid for electricity more accurately reflects the true costs of generation and supply at time of use. The Australian Energy Regulator is interested in network tariff reform under the National Electricity Rules.

Yet there has been little large-scale systematic research to examine likely uptake rates of cost-reflective pricing among everyday Australian consumers, and which factors may influence their response to these kinds of tariffs.

Our response

A nationwide survey-experiment

To better understand the relative appeal of different tariff offers, we conducted a nationwide survey-experiment with a large sample of Australian households.

Is customer energy use influenced by cost-reflective tariffs? ©  Maxim Kravtsov

We drew on key principles from psychology and behavioural economics to examine which types of cost-reflective tariffs might be preferred, and which features of each 'offer' might be more or less appealing to consumers. We wanted to answer some questions:

  • What are the likely rates of consumer uptake of various cost-reflective tariffs?
  • What are the psychological and behavioural barriers to uptake?
  • Do 'risk relievers' like a money-back guarantee or free automated device increase the appeal of cost-reflective tariffs?
  • Does acceptance of cost-reflective tariffs depend upon certain socio-demographic characteristics of the consumer/household?

Answering these questions, and particularly understanding the behavioural elements — how consumers think, feel and act, and why — will play an important role in designing Australia’s future electricity systems.

The results

A better understanding of consumer responses to future electricity tariffs

We found that survey respondents generally preferred traditional 'flat rate' tariffs to all forms of cost-reflective pricing. Simpler, more familiar and seemingly lower-risk tariff offers appeared to be more appealing. Broadly speaking, 'risk relievers' like a money-back guarantee or free automation device increased the appeal of cost-reflective tariffs, but consumers still favoured flat rate tariffs offered on the same terms.

In the end, however, the greatest barrier to uptake of cost-reflective pricing appears to be consumers' aversion to making any kind of choice — the status quo bias. Indeed, in our study we found that the vast majority (approximately 93 per cent) of households did not even respond to the survey.

Overall, our results suggest that active consideration of a new electricity tariff is likely to be limited to a very small proportion of the population. Among the still smaller proportion who accept a new tariff, it seems that consumers will prefer simpler, less dynamic and more familiar schemes that offer risk relief.

Our study focused on likely uptake of cost-reflective pricing. What still remains is the challenge of ensuring optimal usage (that is, appropriate demand response) among those who do accept cost-reflective tariffs. In all policymaking around electricity pricing, it is important to distinguish between what might promote customer uptake as opposed to optimal usage — both are essential requirements to yield the desired benefits of cost-reflective pricing.

The future of electricity tariffs is a huge topic with far-reaching social, economic and political implications. A decisive factor in its successful reform is widespread consumer acceptance and optimal usage.

This project was co-funded by Energy Consumers Australia as part of its grants process for consumer advocacy projects and research projects for the benefit of consumers of electricity and natural gas.

Do business with us to help your organisation thrive

We partner with small and large companies, government and industry in Australia and around the world.

Contact us now to start doing business

Contact us

Find out how we can help you and your business. Get in touch using the form below and our experts will get in contact soon!

CSIRO will handle your personal information in accordance with the Privacy Act 1988 (Cth) and our Privacy Policy.

First name must be filled in

Surname must be filled in

I am representing *

Please choose an option

Please provide a subject for the enquriy

0 / 100

We'll need to know what you want to contact us about so we can give you an answer

0 / 1900

You shouldn't be able to see this field. Please try again and leave the field blank.