Key considerations for energy retailers – So, your business has decided to obtain an energy retail authorisation? We have seen unprecedented interest from businesses wanting to obtain retail authorisations over the previous 6 months and wanted to share our experience to help these businesses decide if they are ready.
By Connor James, Compliance Quarter.
Why become an energy retailer?
There are a number of drivers of the newfound interest in becoming an energy retailer. Firstly, a retail authorisation allows you to trade energy in the NEM, an option not available to those ‘behind the meter.’ Secondly, energy retailing is seen as a profitable business. While the barrier to entry is high, revenue is all but assured with energy being an essential service. Lastly, energy retail can be a natural extension of an existing successful business model.
So, what are the key considerations for energy retailers?
Key One: It’s All About the Business Plan
The energy market in Australia is in dire need of new innovative business models. A new way to pay bills (online) is not innovative. While 80 percent of the market is managed by three retail businesses, that 80 percent will remain with their existing provider unless there is a new compelling offer.
Your business plan must be realistic and well researched. Assumptions should be identified and tested.
The Australian Energy Regulator states:
“Business plans provide the context for many of our information requirements and are essential to our assessment of both an applicant’s organisational and technical capacity and their financial capacity. In broad terms, your business plan should describe the business (including the market in which it operates), its objectives and the strategies to be used to achieve those objectives. The business plan should clearly set out operating forecasts for the first years of the business, including anticipated customer growth. It should include revenue and expenses (including all relevant assumptions) and a cash flow analysis based on your operating forecasts.”
How much money do you need? You will need to be able to have sufficient cash in the bank (or easily accessible) to fund your business over 12 to 18 months on the assumption of no revenue. This means paying for customer acquisition, wages, taxes, and energy costs, with no revenue coming in.
Your business plan needs to then permeate throughout the whole of your application. Your documentation, i.e. compliance policies need to be drafted to be consistent with your business plan.
Key Two: It’s All About Compliance
Energy retail is the most heavily regulated industry in Australia. Everything that a retailer does must be compliant with the legislation, the rules, the law and the relevant guidelines.
Compliance is as much about documented processes and policies as it is about culture. If you think that you can leave compliance to one side, find a different industry. From Day One you will need to understand and apply relevant obligations. This means that every board member and executive team member needs to read, understand and apply regulatory obligations.
Your retail authorisation application needs to demonstrate this dedication and understanding. Furthermore, as you grow your business, compliance needs to be embedded in decision making.
One of the first tasks you will have in preparing a retail authorisation application is to identify the regulatory obligations that will apply to your business. You will then need to develop and map controls to each.
Key Three: It’s All About The People
You need experience to run an energy retailer. That experience can be internal or from external contractors, but it needs to be comprehensive. Ideally, you want someone who has done it all before. When assessing candidates, particularly at a senior level, examine the compliance performance of their previous retailers (for example, look at the ESC’s published audits). The energy industry is small and a bad reputation will follow an individual around for life. If you are hiring an individual to manage to lead your energy business, start off on the right foot, hire someone with good experience and with a good reputation.
Key Four: It’s All About Money
As noted above, there is an expectation that you will have sufficient financial resources to meet your liabilities over one year assuming that you have no revenue. This makes sense. A key risk to the retail market is the failure of retail participants. There is a comprehensive framework in place (the ROLR framework) to manage this.
In developing your financial model, you need to consider the financial strains placed on retailers. Customers don’t pay. Many experience short and long-term financial hardship and you need to have robust strategies in place to manage their accounts- and you cannot simply disconnect them.
Key Five: It’s All About Timing
Expect the assessment of your retail authorisation application to take some time and be prepared to develop patience. The Australian Energy Regulator (or Essential Services Commission) has the task of assessing your retail authorisation application. The Australian Energy Regulator typically take 3-4 months to complete an assessment (including the public consultation period). The only way that you can influence this timeline is by providing a comprehensive and complete application in the first place. Do not call the Regulator after you have submitted, or email them, asking for updates. The only thing you will achieve is to take up their time and delay your assessment.
Once you have been issued a retail authorisation also consider that you will have to wait for EWON approval (if you are operating in NSW) and have to wait until you tick all of the other boxes (such as an agreement with the Department of Human services to pass on concessions and rebates, AUSTRACLEAR membership and Market Participant status with AEMO.