The energy market is an ever-evolving landscape, dictated by a complex interplay of market forces, consumer behaviours, and regulatory interventions. The ‘State of the Energy Market 2023‘ report, published by the Australian Energy Regulator (AER), provides a comprehensive evaluation of the market’s current state, offering valuable insights into the retail energy markets, market regulations, energy affordability, and the role of the energy retailer.
The Role of Energy Retailers
Energy retailers sit at the crucial intersection of the energy supply chain, linking energy generation, distribution, and end consumers. They purchase electricity and gas either directly from suppliers or through wholesale markets and sell it to residential and small business customers.
As noted in the ‘State of the Energy Market 2023’ report, “Retailers are exposed to financial risk through spot price volatility in wholesale electricity and gas markets. To manage this, most retailers purchase hedging contracts that limit part or all of the wholesale price they pay.” This risk management practice enables retailers to offer consistent prices to consumers, providing predictability in energy bills and insulating consumers from the volatility of wholesale energy prices.
Retailers do much more than simply manage wholesale risk, they are also able to facilitate the integration of storage and generation in the market, they also educate and support consumers. Retailers are the providers of an essential service, and have a critical role in assisting consumers interface and understand the energy market. That role will only increase in importance as we seek to respond to climate change.
The Current State of the Retail Energy Market
The AER report notes the significant increase in retail electricity offers across National Energy Market (NEM) regions during period ending 30 June 2023, marking the largest increase since 2012–13. This rise was largely driven by material increases in wholesale energy costs of both gas and electricity experienced from June 2022. While wholesale prices have stabilised, structural challenges remain.
Alongside price increases over the relevant period we also saw a number of energy retailers go out of business and that could have a more lasting impact on the energy market. The AER report notes:
Between 1 May 2022 and 31 July 2023, 11 Tier 2 retailers exited the market through the Retailer of Last Resort scheme, impacting approximately 34,000 customers who were (at least initially) transferred to Tier 1 retailers.
As a consequence of the design of our market, competition plays a critical role. As IPART note:
In a competitive market, businesses need to find new ways of doing things to gain customers – either by becoming more efficient to reduce prices, or by offering a better product or service. If a business increases its prices above what it costs to supply the service (including a reasonable profit), then they will be outcompeted and lose customers.
Although retailers constantly face competitive pressure to either lower their prices or develop new and better products, this does not mean that price rises will not occur in competitive markets. Even efficient, competitive retailers must respond to external cost pressures they can’t control (though we would expect retailers may have different ways of responding). In electricity markets, this can include the network costs faced by retailers, or increases in the cost of energy itself.
However, over the long run, we would expect competition to deliver lower prices and more choice compared to a situation without competition, where retailers face no incentive to adapt to consumer preferences for lower prices or innovative products.
The ACCC noted in their 2022 Inquiry into the National Electricity Market that:
Competition in retail markets is essential for ensuring consumers’ best interests are supported and promoted. Over the last decade, retail competition has increased as new retailers have entered the market and won market share away from incumbent retailers. The threat smaller retailers pose improves value for consumers and incentivises product innovation. That said, the big 3 retailers (AGL, EnergyAustralia and Origin) retain substantial market share and continue to have significant cost advantages over smaller retailers.
As noted in the ‘State of the Energy Market 2023’ report:
Growth in the number of alternative (Tier 2) retailers contributes to effective retail competition by providing a more diverse mix of offers in the market. Since winter 2022, the significant growth in the number of Tier 2 retailers – observable from 2017–18 – has slowed (Figure 7.16). While Tier 2 retailers continue to improve market share, they are doing so at a slower rate.
Towards an Inclusive Energy Market
The complex interplay between market forces, consumer behaviours, and regulatory interventions will continue as we seek a stable market with appropriate protections in place. That will require a more inclusive market that addresses relevant risks and that encourages participation at all levels.
The AER has led and implemented a number of measures designed to create a more equitable energy market. In 2022, AER launched the ‘Towards energy equity – A strategy for an inclusive energy market’. This strategy focuses on reducing barriers to participation, supporting consumers experiencing payment difficulty, ensuring the consumer voice is heard in sector reforms, and improving affordability by reducing the cost to serve energy consumers.
A significant number of important reforms have recently been made to the regulatory framework led and implemented by the AER (and the ESC in Victoria) including those improving protections for consumers affected by family violence, the development of a toolkit to help consumer-facing energy businesses identify vulnerability, and advocacy for sector-wide ‘game changer’ reforms.
The energy market continues to face challenges and changes, from price volatility to affordability issues and the need for regulatory reforms. As a critical player in this landscape, the role of the energy retailer is pivotal in managing these complexities and ensuring consumers have access to affordable, reliable energy services.
The ‘State of the Energy Market 2023’ report serves as a valuable resource for understanding the current state of the energy market, offering insights that can guide both industry stakeholders and consumers in navigating this complex landscape. It underscores the importance of ongoing monitoring, regulatory intervention, and innovation in shaping a more equitable and efficient energy.