Unprecedented wholesale prices: what should we do about it?

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This week, ReAmped Energy announced that it was no longer able to offer competitive electricity prices. It wants its customers to leave to find a better deal. In QLD, LPE and Discover Energy have sent similar requests to their customer base. This followed the exit of Weston Energy and Pooled Energy.

The response to Reamped’s announcement, from its customers, was overwhelmingly supportive. By now, consumers can see what is happening in the market and the importance of ensuring that they are on the best deal possible.

There is no doubt that this energy situation (or indeed crisis) has some way to go before we reach some form of normality. There is light at the end of the tunnel, but we are not sure if it is a train or sunlight.

What is happening to wholesale prices?

Wholesale prices have risen, quickly and relentlessly. Wholesale prices are those paid by energy retailers for energy consumed by individuals and businesses. Traditionally, they represent around about 30% of an energy bill. The balance of the bill is made up of network costs, environmental costs and other components. If you consider wholesale prices this morning and then divide that number by 1000 (to convert to kwh) you will see that they currently represent much much more than 30% of what you are paying as a consumer.

Retailers sit in between the wholesale market and individual consumers. They take the risk and in return they (usually) make a profit. Retailers manage their exposure to the wholesale market by various contracts with generators and other intermediaries- forward contract. Those contracts operate to limit the exposure of retailers to the wholesale price. However, those contracts all have an expiry date and those contracts typically have a cap on how much electricity (load) is covered. Consequently, if these conditions continue, then existing strategies used by retailers will become less and less effective.

There are a number of reasons for what is happening in the wholesale market and you can follow it all on WattClarity here. One of the (many) reasons for increased wholesale prices is the unavailability of certain coal powered generators. In terms of unavailability of traditional generation assets, where the operator of the asset turns them off, wholesale prices can increase. It is interesting to consider how wide the discretion the operator is and whether further regulation is required. Can an operator simply pull out their risk assessment and say that plant needs to be turned off when there may be other reasons (profit driven) for their decision? Should the operator be required to justify those decisions with independent review available? As generation in that realm is not our core business, we can’t say either way but it is a question to ask.

What about price caps?

The DMO and VDO set caps on what energy businesses can charge for standing offer customers and in other circumstances (including, for example, by the flow on effect under the AER’s Exempt Seller Guidelines where an exempt seller must not charge the exempt customer tariffs higher than the standing offer price that would be charged by the relevant local area retailer).

The consequences of a DMO and VDO being too low (as they either currently are or will be) can be set out in stages:

  • Stage 1) retailers will drive up their market offers above the DMO and VDO,
  • Stage 2) some retailers may go out of business,
  • Stage 3) there will be less consumer choice, and
  • Stage 4) consumers will be encouraged to go onto the DMO and VDO and there will be fewer offers generally available.

As you would have already determined, once we reach Stage 4, we are in a feedback loop. This situation all depends on timing. The timing of expiry of retailers’ hedges, the timing of increases to DMO and VDO and the timing of a return to lower wholesale prices.

What needs to happen?

Regulators including the AER and ESC have published their responses to the situation that is unfolding across the market (here and here) noting that there are a number of protections in place for consumers, particularly those experiencing hardship or financial difficulties.

While some of the factors leading to the current crisis will fade away, there will need to be government intervention. New government ministers have barely opened their laptops for work, and they are already faced with an unprecedented and very technical problem to solve.

The resolution to this problem is going to be complex and expensive. However, it should result in a more resilient energy market, one that is more supportive of distributed energy resources and renewable energy.

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