Commercial risk a burden for consumers

Energy Retailers Association of Australia executive director, Cameron O’Reilly provides Energy Source & Distribution an energy retail market outlook for 2010.

The Energy Retailers Association of Australia (ERAA) may be a national association, but as we enter 2010 member companies have anything but a national retail market to operate in. The wholesale National Electricity Market (NEM) may be 10 years old but retailers are still waiting for the day when they can operate seamlessly across borders under a common price and non-price regulatory framework. As it is, an energy retailer in 2010 will face differing levels of commercial risk depending on the price setting arrangements in each state, while having to comply with inconsistent retail codes in each jurisdiction. This compliance burden inevitably has a cost to consumers.

Through the Ministerial Council on Energy (MCE) a National Energy Customer Framework (NECF) administered by the Australian Energy Regulator (AER) has been under discussion for nearly five years but as we enter 2010 there is still no agreed implementation date. Meanwhile the objective of phasing out the “transitional mechanism” of retail price regulation remains as elusive as ever, with only Victoria having taken this step. At the same time the amount of new “green” regulation, whether in the form of feed in tariffs or energy efficiency schemes, continues to stretch retail resources and increase costs.

QUEENSLAND

After the sale in 2007 of the government owned retailers and the start of Full Retail Contestability (FRC) in Queensland on 1 July that year, fierce competition was apparent in the retail market. A public and media backlash about price increases arising from higher generation and network charges then saw intervention in the subsequent year’s price setting process. That intervention was subsequently challenged successfully by retailers in the courts. By then the damage was done and many new entrant retailers chose to exit or cease marketing in Queensland. In 2009 a more hands off approach from the Government coupled with a new price setting methodology proposed by the Queensland Competition Authority (QCA) has provided positive signals to industry. As such there is a possibility competition may pick up in 2010.

NEW SOUTH WALES

This year is supposed to see the completion of the NSW energy privatisation plan, which has a long history going back to 1997. It is expected that the government owned retailers, Energy Australia, Country Energy and Integral Energy will be bought by existing players. Whether this ownership change will be accompanied by more retail competition will depend on the three year price path to be implemented from 1 July next year and by the outcome of the so called sale of generation trading rights. This sale must ensure there is liquidity for new entrant retailers to enter the NSW market.

AUSTRALIAN CAPITAL TERRITORY (ACT)

While a small market dominated by the incumbent retailer, ActewAGL, the ACT had always had a degree of retail competition. In a market in which there are no price caps for gas, the local regulator said in 2007 that price regulation was not required in electricity. The ACT Government has chosen not to accept the regulator’s view and as a result little changed in 2009. In 2010 the ACT will be subject to an effectiveness of competition review by the AEMC. This may be the catalyst for price deregulation.

VICTORIA

For a decade and a half Victoria has led energy reform, and nowhere more so than retail. As of 1 January, 2009, retail price regulation for all customers was phased out and replaced by a regime of transparent price monitoring by the Essential Services Commission of Victoria (ESCV). Since then the vigorous competition for customers between more than a dozen active retailers has continued unabated, with up to 25 per cent of Victorian customers switching throughout 2009. This makes it the most active retail market in the world. Expect similarly fierce competition in 2010.

TASMANIA

The small Tasmanian market continues to be dominated by the incumbent Aurora Energy. There is competition for large customers but the implementation of FRC is still subject to review by the State Government. With an election in 2010 it is unlikely clarity on FRC will be apparent in the short-term.

SOUTH AUSTRALIA

Along with Victoria, South Australia had been one of the most competitive retail energy markets in the world. That led the Australian Energy Markets Commission (AEMC) to recommend in 2008 a phasing out of retail price regulation in South Australia. The State Government chose to reject that recommendation just as a combination of reduced liquidity and higher wholesale costs made conditions tighter for retailers in the state. As such competition dropped away in South Australia in 2009. As we enter the election year of 2010 there are few signs competition is likely to revive in the short term.