State-of-play: How did the retail energy market deliver last year, and what lies ahead?

ARENA, AER, AEMC

By Michael Bradley, Acting Executive General Manager of Retail and Wholesale Markets, AEMC

When you look at the retail energy market over the past year, a mixed story emerges with a few twists and turns.

On the one hand, there have been some real gains for consumers. The number of retail competitors has increased, market concentration is down and there are signs of some real innovation, particularly in the retail deals being offered to electric vehicle owners.

There are now some 40 retail brands – and 35 companies – in the market, including new global players Nectr and Ovo Energy.

Satisfaction is up too.

While coming off a low base, customers’ satisfaction with their electricity service value for money has reached a four-year-high of 57 per cent. And gas customers rate the value of their service even higher – at 68 per cent.

Complaints have continued their downward trajectory over the past three years, with another drop of four per cent in the past 12 months. And consumers were the most satisfied they have ever been with their access to energy information, with 55 per cent saying they were able to access information that was easy for them to understand.

Enter, COVID-19.

What this might mean for the retail energy market has featured heavily in the Australian Energy Market Commission’s 2020 Retail Energy Competition Review. To some degree the impact is still a spectre hanging over the market. And it’s one that will only sharpen in focus when customers begin to receive their first energy bills since the pandemic changed the face of our economy in March.

But there are a number of things we know – and measures we can put in place – to promote market resilience both now in these trying times, and to protect against future shocks.

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First, what we know. We looked at data around hardship customers and found that the proportion of consumers on hardship payments rose only marginally in the past year. The level of debt that customers were experiencing when they entered hardship schemes dropped over the course of the year. But more recent data tells us that since December, this number has jumped by 15 per cent, and retailers have flagged that they expect their bad debts to double. This is something the Commission will monitor very closely.

Pre-COVID, retailer profits were already down, falling by around a third since 2017−18. In ordinary economic times, this represents good value for customers. But in the lead-up to the pandemic, this could have compromised the resilience of some retailers’ financial position. To date though, no retailers have left the market – which can be disruptive to their customers – and the ‘Big 3’ market leaders AGL, Origin and EnergyAustralia appear financially strong.

The Commission is concerned about the overarching financial position of the retail sector and its ability to withstand COVID-19 impacts on the economy, particularly given the severity and duration of the impacts is uncertain. Electricity retailing carry the credit and cash-flow risks for the entire sector, and it is a relatively high-volume, low-margin business. We are concerned to have mechanisms in place that can prevent financial contagion in the market. Although the probability of contagion is uncertain, it is a possibility if a large retailer or multiple smaller retailers fail, forcing large numbers of hardship customers onto existing retailers of last resort (ROLR), who in turn could fail, creating a market domino effect. The result would threaten consumers’ ability to access power and set the market back years in terms of healthy competition.

To this end, the Commission is recommending a number of measures to safeguard the market now and into the future. These will complement jurisdictional measures already in place.

We are currently considering a request from the Australian Energy Regulator to let retailers defer some network charges.

Also, we have proposed tightening up the ROLR mechanism to ensure customers affected by retail failure are given competitive market offers rather than the current default of placing them on a standing offer. We have recommended spreading the risk across the market by making it easier for retailers other than the Big 3 to register as retailers of last resort. And we have proposed giving the Regulator information-gathering powers to identify risks in the market and establish a system to report monthly to energy ministers on retailer revenue and cost risks, so they have more time to act on large or multiple retailer failures.

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As well as pandemic-related affects, the retail market is also adjusting to some major reform: price regulation, regulating conditional discounts, the prohibitions on energy market misconduct and new initiatives such as the New Energy Tech Consumer Code. The mix and recent timing of change makes it difficult to assess the impact of any particular change. For example, while price regulation has removed the most expensive market offers, some jurisdictions have experienced an increase in the median market offer below the default offer. While that is notable, it is too early to assess the longer-term impact on consumers. We also see less price dispersion across the market and a five per cent drop in switching rates. But whether that is due to increased customer satisfaction or less incentive to shop around can’t be unpacked yet.

Undoubtedly next year, with the benefit of further data on prices, a longer exposure to recent reforms and experience of how the market responded to recession will make some illuminating reading. In the meantime, one of the many interesting pictures to emerge from this year’s AEMC competition review is the state of innovation around electric vehicle energy retail offers.

We found that despite the small size of the EV market in Australia, there is already a diverse range of related energy products and offers available, including those promoting an element of demand response to incentivise smart charging outside peak demand.

The Commission is working alongside multiple organisations on the efficient integration of distributed energy resources into the grid. We see huge potential for EVs to be a central tool in our future power system, with localised benefits (stored energy for household use, lower household energy bills) and systemic benefits (security and reliability, and lower emissions in both the energy and transport sectors). We are concerned to get the settings right so that we realise the opportunities that EVs present and ensure they don’t just increase peak demand and costs to consumers.

The COVID-19 pandemic has impacted our thinking and our work in many ways, but we are pressing ahead with key reforms that are important to the power sector of the future. As we continue our work on DER integration, we will be seeking your input and expertise to inform the decisions we make. We look forward to continuing the conversation.