The recommendations from the Australian Competition & Consumer Commission (ACCC) in its recent ‘ACCC Retail Electricity Pricing Inquiry—Final Report’ (the report) are wide-ranging and, if accepted by the Federal Government, will have a huge impact on all energy businesses. We summarise the recommendations at https://www.compliancequarter.com.au/accc-blueprint-to-reduce-energy-prices/.
By Dr Drew Donnelly, Compliance Quarter.
In its Retail Electricity Pricing Inquiry—Final Report the ACCC judges that the existing regulatory framework has failed consumers miserably and is in need of a radical overhaul. Some of the recommendations might seem to create an added compliance burden for energy businesses, such as the recommendation for a new Government-determined ‘default price’ across the National Electricity Market (NEM). However, in this article I want to draw out some ways in the report presents a positive business opportunity for some energy businesses. Specifically, I set out how recommendations in the report could be to the benefit of newer, smaller, retailers. The benefits I consider are: hedging transparency, smart meter support and regulatory unification.
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Hedging Transparency
Central to risk management for any retailer is managing fluctuation in wholesale market prices. This is often achieved by retailers entering into derivative contracts, such as futures, swaps and options.
The ACCC Retail Electricity Pricing Inquiry identified that smaller retailers were at a disadvantage when it came to using derivative contracts for hedging.[1] Much hedging by energy businesses in Australia occurs not through the Australian Securities Exchange (ASX) but in ‘over the counter’ (OTC) contracts traded off-market, directly between two parties. Data collected by the ACCC demonstrated that larger retailers had far more options for hedge contracts than smaller retailers, likely due to the reduced credit risk that a larger business presents.
The ACCC suggests that enhanced transparency of OTC derivatives would better transmit price signals in the market and reduce uncertainty for all participants (including counter-parties considering contracting with a smaller retailer). It recommended that the National Electricity Law be amended to require the reporting of all OTC trades to a repository administered by the Australian Energy Regulator (AER). They would then be disclosed publicly in a de-identified format that disseminates the market information without revealing the parties involved.[2]
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Take-Up of Smart Meters
Smart meters which allow the remote reading of energy data and interval metering have proven to be a useful tool for newer retailers. They allow for the development of innovative, bespoke tariffs sensitive to the precise usage of the customer rather than the clumsier traditional accumulation meters.
Given the benefits that smart meters can present for customers, the ACCC recommends that measures be taken to accelerate and support the roll-out of smart meters. This includes a recommendation that jurisdictions (i.e. states and territories in the NEM) remove all jurisdictional barriers limiting the benefits or full functionality of smart meters.[3]
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Unified Retail Regulation across the NEM
An important part of our work here at Compliance Quarter is supporting prospective retailers seeking to comply with the two distinct retail frameworks in the NEM: the Victorian framework (administered by the Victorian Essential Services Commission) and the National Energy Customer Framework for all other NEM states (administered by the Australian Energy Regulator).
The ACCC argues that the two frameworks create an excessive compliance burden for retailers who operate in different jurisdictions. It also suggests there is a costly burden for retailers who need to comply with different requirements in the different jurisdictions within the NECF (the ‘jurisdictional derogations’).
The ACCC recommends that this compliance burden on retailers be reduced by creating a single customer framework across the NEM, and only allowing jurisdictional derogations where there is some jurisdictional-specific reason for doing so.[4]
It will be interesting to see what the Government’s response to the ACCC report will be and how it will develop any response in tandem with the National Energy Guarantee. Please click here to contact the team or if you would like any specific questions answered.
[1] The report, pp107-109.
[2] Ibid., p122.
[3] Ibid., p190.
[4] Ibid., pp227-228.
