The Australian Energy Regulator (AER) has published the 2022 State of the Energy Market Report. The report examines the rise in wholesale energy prices from June 2022. Here we look at some of the findings and explain our views on possible futures.
Increased wholesale prices
When examining the impact of wholesale pricing on retailers, the AER notes ‘ A retailer’s level of exposure to the very high electricity and gas prices during 2022, and the extent to which these prices will be passed on to its customers, will depend on different factors. These include the sufficiency of the retailers’ hedging contracts to protect against the high prices, and expectations around the prices it expects to pay in the future for electricity and gas, including for further hedging or risk mitigation techniques. Contract markets show sharply increased prices for energy derivatives, as well as reduced liquidity in the market. This creates further challenges for retailers to manage their price risk and increases their exposure to the high spot market prices. At the same time, their ability to increase their revenue from their customers is limited until retail contract prices are renegotiated.’
While the DMO and VDO have not yet been adjusted to take into account the dramatic increases in wholesale costs, ultimately increased costs will be borne by consumers. The AER notes that ‘...many consumers’ energy bills will likely show the impact around October 2022‘
Consumers are responding to the increases they are seeing on their bills and the media coverage of the energy market turmoil by installing solar PV. The AER notes ‘Households and businesses have continued to install record volumes of rooftop solar capacity every year since 2015, reducing the volume of electricity households need to buy from the grid and contributing to a record minimum National Electricity Market (NEM)-wide demand of 13,924 MW set on Sunday 17 October 2021, almost 9% lower than the record in 2020.‘
Impact on retail competition
The AER notes that Growth in the number of alternative retailers (Tier 2 retailers) supports effective retail competition because it provides more options for consumers, which in turn applies downward pressure on both retail costs and margins. During the year in question, the AER notes that the retail energy market continued to attract new entrant retailers.
The changing market has and will continue to reduce consumer choice with 8 retailers entering the Retailer of Last Resort scheme since 1 May 2022, resulting in approximately 22,000 customers moving to standing offers with default retailers. The AER notes that continued high wholesale energy prices may have this effect, stating ‘ This could lead to Tier 1 retailers increasing their market share because they are the default Retailer of Last Resort retailer in some jurisdictions.‘
Impact on embedded networks
Embedded networks continue to proliferate. The AER notes that as at August 2022 over 3,600 businesses were registered in the AER’s public register of exemptions, typically to onsell energy within an embedded network.
Embedded network operators face a range of regulatory reforms with reviews and inquiries underway in Victoria, NSW and in NECF.
Other changes of note
Disconnections by energy retailers have significantly decreased, largely as a result of retailers’ decision to not disconnect customers during the COVID-19 pandemic in line with the AER’s Statement of Expectations. The number of disconnections over time is set out clearly in the following figures from the report:
The future
It is our view that future failures of existing tier -2 retailers is a material risk to the effectiveness of the energy market. Unlike in other jurisdictions such as the UK, there has been no government intervention to ease pressure on energy retailers.
The last retail authorisation approved by AER was in June 2022. While there are a large number of retailers in the market, unless new retail authorisation applications are approved, there will be less and less consumer choice over time, more market concentration, and less incentive for retailers to compete on price.
Increased wholesale pricing, resulting in higher retail pricing, will bring consumer disadvantage into sharp focus. One question to be determined is whether the number of disconnections of residential customers will now increase. All signs point to yes. Disconnection of a customer’s energy supply can only be used as an absolute last resort/ response to non-payment. As wholesale prices go from representing approximately 30% to 100% of a retail bill (meaning every kwh sold by a retailer is at a loss), more retailers will be under financial pressure.
Those consumers who cannot afford to install solar PV will be most impacted. The AER is aware of this and has developed and used a number of mechanisms in seeking to reduce the risk to vulnerable consumers.
Anecdotally, we are seeing a substantially increase level of interest and investment in large-scale generation. Investment in large-scale renewable generation, energy storage and market reform will be critical to avoiding a gloomy future. Industry, consumer advocates, government, and regulators will need to work together to address this difficult chapter in the history of the NEM.
