Energy markets face further turbulence within weeks as more retailers decline to take on new customers and others exit the industry, a situation the New South Wales energy minister, Matt Kean, warns will render a decade of increasing competition “null and void”.
Since 24 May three retailers have failed, requiring the Australian Energy Regulator to activate its “retailer of last resort” provision that transfers customers to backup suppliers. That provision could soon be used a lot more.
Of particular concern is what happens after 1 July when new default market offers kick in across most states and territories. While these lift the standard electricity offer by as much as 20% – a sizeable increase by historic terms – that’s likely less than the wholesale prices many retailers are paying.
While retailers might seek big price hikes – the WATTever website counts at least three planning to double their tariffs – customers can ask to be transferred to the default price with a much lower rise. Under the market rules, the retailer must comply.
Kean said he had discussed with his federal counterpart, Chris Bowen, a possible exodus of retailers – and what that might mean for market confidence and competition.
“I suggested we consider a government guarantee, or some sort of underwriting,” he said. Bowen said “he would look at that, amongst other options, but he was certainly alert to the issue”, Kean said.
“We’ve done so much to try and build up competition in that space, so it would be terrible to undo it overnight.”
Bowen has had a testing first month as federal energy minister. High energy prices, triggered mostly by disruption in international markets after Russia’s invasion of Ukraine, have been exacerbated by local shortages of gas and then electricity as coal-fired plants went offline during an extended early winter cold spell.
For now Bowen is hoping conditions settle – including the resumption of trading in the national electricity market starting from Thursday – before weighing into the looming issues in energy retailing and what he might do to tackle them.
Asked about Enova Energy, a small retailer with about 13,300 customers in NSW and Queensland that went into voluntary administration this week, Bowen said: “[Enova’s demise was] disappointing for them and for their customers, they are a good company. We continue to monitor the situation very, very carefully.”
The AER confirmed customers could ask to be put on the default offers rather than automatically pay the higher charges that retailers may ask for. Victoria, which offers its own statewide default offer, works in a similar way.
The regulator said the extent of the effect on retailers would depend on how much hedging they have taken out to protect themselves from spiking wholesale prices.
“Retail customers are largely protected from the wholesale market as many retailers buy insurance against very high prices, through the contracts for supply when prices were lower,” an AER spokesperson said.
“This provides some buffer against the prices we are now seeing. The AER is closely monitoring the situation in both the wholesale and retail markets and ensuring all participants are complying with the law and the rules. In this current environment, it is especially important that customers engage with their retailers to ensure they are on the best energy plan for their individual circumstances.”
The owner of the WATTever retailer research service, David Hiley, said between five and 10 retailers could go out of business in the next six months.
“We have another five or so that have told all of their customers to leave,” Hiley said. “And then another few on top of that have effectively doubled all their prices for existing customers and also with respect to new customers.”
Envoa’s failure was a warning sign for the industry because the community-owned retailer had strong customer loyalty. The Byron Bay-based company came out of anti-coal seam gas protests in northern NSW.
“If they’re giving up, I suspect any other unhedged retailer won’t make it either,” Hiley said.
Rather than an immediate crisis, consumers are likely to see a “slow burn that’s going to happen over the next 12 or 24 months”, he said. “Will it lead to be a drop in competition? Absolutely. Will that lead to higher prices? Absolutely.”
Victorian energy users are told on their power bills if the default retail offer is lower than the plan they are on – so consumers in that state will see the difference more starkly. “You would expect that more customers would shift” than elsewhere, Hiley said.
Tennant Reed, a senior energy policy expert at AiGroup said the big three electricity producers – AGL, EnergyAustralia and Origin – were likely to reclaim some of the retailing market they had lost as competition in the industry flourished.
“The best hedging of all is for electricity retailers to own their own generation assets,” Reed said.
“So the little electricity retailers, who don’t have assets like that, will likely stick around as long as their financial hedges cover them. If there are any who didn’t hedge well, then we’ll discover that pretty quickly.”
