Loyalty taxes in retail electricity markets: not as they seem?

A common view in retail electricity markets is that retailers discriminate based on consumers’ loyalty: loyal consumers pay more and switchers can (and do) select the cheapest offers) when they switch. The premium is colloquially known as a “loyalty tax” or “loyalty premium”. Reflecting this understanding Australia’s governments, regulators and consumer advocates have encouraged consumers to switch electricity retailers. Using a sample of 47,114 household electricity bills we test whether consumers that had switched in the previous 12 months (“switchers”) pay less than consumers who remained with their retailers (“remainers”) in the previous 12 months. We find that the annual bills of switchers are expected to be AU$48 (4%) lower than remainers and that the median switcher could reduce their bills by 21% by selecting the cheapest offer. Classifying retailers into tiers however provides some nuance to the main conclusion: the third tier of retailers (the new entrants with market shares of less than 3%) impose higher loyalty taxes than the other two tiers (incumbents and mid-sized retailers). The middle tier of retailers impose the lowest loyalty tax, and in fact for many consumers they may reward loyalty. These findings suggest that the loyalty tax is (typically) smaller than widely considered, it varies across tiers of retailers and even engaged consumers typically do not select the lowest priced offer. This raises the question of whether switchers are motivated by lower bills as well as other factors or whether the main challenge is search difficulties.