We have previously noted a range of new entrants into the electricity retail spaces for small business and commercial and industrial (C&I) supply. In this Chart of the Week we take a closer look at how competition is developing at both a national and local level.
The AER has recently published its Quarterly Retail Performance Report, noting “some positive signs of competition”. At a national level in the NEM (excluding Victoria, which is separately reported), there is a general trend of the Tier 1 retailers (AGL, Origin Energy and EnergyAustralia) losing market share in the residential market while Tier 2 retailers have seen growth. In the five quarters to Q1 (Jul-Sept) 2019-20 all three Tier 1 retailers lost market share, with Origin Energy maintaining its number one ranking but losing the most share (with a fall of 1.3pp to 28.1%).
At the same time, the Tier 2 retailers in aggregate gained 2pp to 18%. However, looking at the statistics on a market share basis masks some of the trends as customer losses by the Big 3 have actually been relatively limited and instead the growth from Tier 2 retailers can also be linked to growth in new meters/ customers. Over the five quarters, total residential customer numbers in ACT, NSW, QLD, SA and TAS have grown by over 150k to 6.49mn.
But the AER is right to assert the signs of improving competition. Using the Herfindahl-Hirschman Index (HHI) – a measure of market concentration – we can see evidence of improving conditions too. A score of 0.25 and above indicates high concentration, while 0.15-0.25 shows moderate concentration. Essentially, the lower the score the less concentration and therefore higher competition. At the two ends of the scale, a score of 1 means a monopoly and a score of 0 is highly unconcentrated industry. On a national basis, over the period, the HHI has fallen from 0.177 to 0.168.
As to be expected, the story at a regional level is quite varied. TAS and ACT are by far the most concentrated jurisdictions at 0.987 (essentially a monopoly by Aurora Energy) and 0.680 respectively. In ACT there have been some small changes for retailers, but there are just six retailers holding customers. The biggest winner in the jurisdiction was Origin (+9.5k customers) with AGL seeing the highest down churn (-6.6k).
The concentration for the remaining three states is relatively similar. SA has 22 retailers with customers and an overall HHI of 0.236 (falling 1.2pp over the period). Only Simply Energy gained more than 5k customers (+6.1k) while EnergyAustralia (-6.9k) and AGL (-6.4k) saw the highest customer losses.
Next up (in ascending order of competition) is NSW with an HHI of 0.230 (down from 0.244). The state saw some significant wins and losses of customers, including gains from Red Energy (+33k) and Alinta Energy (+22.3k) and Origin seeing the highest customer losses (-20.5k).
This leaves QLD as the most competitive state for residential electricity, as measured by concentration, with an HHI of 0.219 (down from 0.230). Alinta gained an impressive 56k, presumably at least partly at the expense of Origin (-31.5k).
These statistics show a positive story for competition across the five jurisdictions last year and with a range of new entrants either recently in the market or soon to join, we would expect the trend to continue. We will take a deeper dive into the subject and extend it to include small business and C&I retail in the next Energy Spectrum Australia.