Taking into account regulatory intervention, ongoing rule changes and market entry, the energy retail sector in Australia is undergoing a significant shake-up.
Following concerns over retailers charging disengaged households and small businesses higher rates, and generally rising retail prices, two default tariff schemes were implemented at the start of July.
A Default Market Offer (DMO) has been rolled out in NSW, SA and South East QLD. The DMO is a price cap for customers on standing offer contracts and serves as a safety net for disengaged and sticky customers. The Victorian Default Offer (VDO) differs slightly, as the rates are set by the Essential Services Commission (the DMO is set by the Australian Energy Regulator) and the VDO uses a different cost-based methodology.
Based on annual consumption of 4,000kWh as a proxy, we have calculated that the best tariffs on offer by retailers to households in Victoria range by as much as $250 (see Fig.). But all these tariffs are below the VDO for this consumption level ($1,344/yr) when conditional discounts are netted off.
There are some major ongoing rule changes in the NEM for retailers too. The first is focused on conditional discounts. Conditional discounts are offered by some retailers e.g. to avoid late payments or to ensure payment by direct debit; these discounts averaged 30-40% in 2018 according to the AEMC. If the rule change is successful, a retailer offering discounts will be restricted to the reasonable cost savings that it expects to make from the consumer satisfying the conditions for the discount. It has some cross-over with changes under the DMO and is currently under an open consultation.Similar concerns over disengaged customers led to the introduction of retail price caps in the UK in the past couple of years. Several pros and cons have been discussed but there was also a major unintended consequence: retailers have tended to seek wholesale contracts for 6-12 months in line with the price caps, resulting in reduced wholesale market liquidity further down the curve (12-36 months), limiting opportunities for longer-term hedging/ trading for other parties.
The second is an attempt to reduce customer switching times, down to two days potentially. It aims to remove the current issues which hold up customer transfer, including meter readings and retailer notification periods.
But the increased regulatory intervention and rule changes do not appear to be discouraging new entry, with a number of new players either in the process to enter or have entered the market. According to the AER, there are 76 authorised electricity retailers across ACT, NSW, SA, QLD and TAS (with three new players in the past four months). There are a further 10 who have applied for a licence, including Ovo Energy, a self-proclaimed disruptor that has established itself in the UK as the largest household retailer outside the incumbents.
A further notable name considering a move into the domestic retail market is Shell. The company already has a trading business for C&I and has recently acquired ERM Power subject to court and shareholder approvals.