Via Stephen Letts at the ABC:
The Federal Government’s tentative steps towards reregulating the retail energy market have seen power prices rise and competitive pressure between rival suppliers ease.
Less than a month into the new regime, the view of investment bank analysts is consumers will not notice much of a difference and recent price resets show the big generator/retailers (gentailers) still hold the whip hand in the marketplace.
“The period of intense competition through April and May has proven temporary, as prices have reverted back to their levels seen approximately 12 months ago,” was Credit Suisse’s first take on the post-reregulation movements in the market.
Macquarie utility analysts found price discounting has become more limited, while JP Morgan’s team noted there was now less incentive to shop around — particularly among the big players — while some of the cheaper offers from second-tier retailers were heavily conditional.
The centrepiece of the Government’s new regulations, the Default Market Offer (DMO), came into effect on July 1.
Its primary goal was to end the more outrageous “standing offers”, or prices, which consumers who didn’t shop around were saddled with.
Basically, consumer inertia had traditionally been punished with a so-called “loyalty tax”: by staying with a retailer you got “repriced” to its most expensive option.
In effect, the DMO acts not so much as a price cap, but a benchmark to compare prices in the market. It becomes the default, but not necessarily the most competitive price for consumers on the old and expensive standing offers.
While prices may be pitched above the DMO, a retailer is obliged to explain why the offer is higher.
The policy pulled together an idea crafted by the Australian Competition and Consumer Commission and was hastily drawn up just before the federal election.
Victoria’s Labor Government didn’t sign up for the DMO, preferring its variation, the Victorian Default Offer, or VDO.
Which are the cheapest electricity retailers now?
JP Morgan’s Mark Busuttil has identified a number of immediate trends that developed as the Government’s “landmark reforms” came into force.
“The range of offers from the big four [AGL, Origin, Alinta and Energy Australia] is small. This suggests that the incentive to change providers to another of the big four is actually small,” Mr Busuttil said.
Not surprisingly, there is a far greater range of prices from the smaller, second-tier retailers.
“Invariably the highest-offer prices come from smaller retailers. This was expected, as those without vertical integration typically have higher cost bases,” Mr Busuttil noted.
However, the second-tier retailers generally also offered the cheapest prices, although they often came with conditions, such as purchasing electricity three months ahead.
New South Wales
DMO reference price for the central business district (CBD): $1,467 per year.
The offers in the Sydney market ranged from $1,531 a year (4 per cent above the reference price) to $1,220 (17 per cent below).
The big four offered discounts to the reference price in a band of 11 to 13 per cent.
VDO CBD reference price: $1,334 per year, the lowest of the CBD default offers.
The offers in the Melbourne market ranged from $1,520 a year (14 per cent above the reference price) to $1,077 (19 per cent below), which was also the cheapest across the four capital cities JP Morgan studied.
The big four offered discounts to the reference price in a band of 5 to 7 per cent.
DMO CBD reference price: $1,570 per year.
The offers in the Brisbane market ranged from $1,867 a year (19 per cent above the reference price) to $1,319 (16 per cent below).
Three of the big four — AGL, Origin and Energy Australia — are all offering $1,397 a year, or an 11 per cent discount to the reference price — while Alinta is offering $1,381 at a 15 per cent discount.
DMO CBD reference price: $1,941 per year, the highest of the four states studied.
The offers in the Adelaide market ranged from $1,941 a year (the reference price) to $1,650 (15 per cent below).
Unlike the other markets, there was a significant spread in offers from the big four, ranging from a 6 per cent to 15 per cent discount.
It should be noted the CBD postcode was just used as a point of comparison, and didn’t necessarily represent the cheapest price in each state.
Landmark reform or watered-down policy?
Energy minister Angus Taylor described the introduction of the DMO as a “landmark reform” of the energy sector.
“As promised, by 1 July, we will see the end of the ‘loyalty tax’ and the misleading use of discounts to attract customers,” Mr Taylor said at the time.
However, it appears the impacts on the big energy companies’ “record profits” range from immaterial to temporary at worst, according to the utility analysts who mull over such things for investors.
“We are increasingly confident that the long-term impact of the new DMO/VDO regulations that apply to retail prices will be less than feared,” was the assessment from the Credit Suisse team.
“In particular, we see the watering down of the final version of the rules as significant, as it limited the regulated reference price to apply to only a small minority — around 10 per cent — of customers that were on standing offers.
For the record, Origin originally estimated the new DMO/VDO regulations would cost it around $120 million. AGL hasn’t publicly released a figure, arguing it wasn’t large enough to be material.
Credit Suisse forecasts 2019 will turn out to be the nadir for AGL and Origin’s retail profits.
It also told its clients AGL and Origin’s margins will bottom out in the 2020 financial year once the transitional impact of the DMO/VDO regime passes through and they reap the benefits of lower customer “churn” and cost-cutting initiatives.
Deeper discounts unlikely
Director of the Victoria Energy Policy Centre at Victoria University, Bruce Mountain, said it is a bit too early to assess the impact of the DMO/VDO policies.
“The DMOs and VDO are not pitched at the lowest end of the market, nor the dearest end … they are certainly not pitched as the price to beat,” Professor Mountain said.
“As a regulatory measure, they offer some form of escape from high-priced standing offers, but not many people were on the worst deals, or knew they were on the worst deals.
Professor Mountain’s point is retailers will still be able to market “discounts” from the new benchmarks.
Offering discounts has always been a powerful marketing tool for retailers, even if they were largely meaningless.
Sure, the discounts won’t appear as grand as the old discounts from the punishingly overpriced standing offers, but a 40 per cent discount from nosebleed territory to just plain expensive was arguably not a bargain in the first place.However, a smaller discount of say 10 per cent from a lower but still lofty DMO/VDO may not leave you much better off than before.
Macquarie’s take is the “normalisation of discounting” offered under the DMO regime will deliver AGL and Origin as much as an $80 million windfall.
The tougher VDO means discounting in Victoria is now “near non-existent”, Macquarie noted.
“Discounting across the three largest retailers looks to be reset to lower levels,” Macquarie told its clients.
It added the costs associated with “churn” — or losing customers to competitors — and either growing, or maintaining the customer base, will also fall.
Not exactly the dynamics of robust competition.
Retailers not passing on cost cuts in full
So just how punishing is the new era? Not very, according to Credit Suisse.
Wholesale prices — having punched higher on supply issues, such as the closure of the brown coal-burning Hazelwood plant in Victoria — are now moderating and Large-scale Renewable Energy Certificates (LRECs) are cheaper, keeping a lid on retailers’ costs.
On Credit Suisse’s figures, by basically keeping prices for “market offer” customers flat, AGL and Origin have trousered a reduction in costs equivalent to $30 to $55 million, or roughly 1-2 per cent of their costs.
“While small at 1 to 2 per cent, it is emblematic of the freedom of repricing that will ultimately lead to a recovery of retail margins, and arguably raises the question as to whether a fall in wholesale electricity prices and LREC prices will be passed through in full,” Credit Suisse said.
History can be instructive in such things. Five years ago, when network costs fell substantially, only about 60 per cent of the savings were passed through to customers.
However, Credit Suisse gives Origin at least some benefit of the doubt, noting it has redirected some savings to voluntarily move its high-price market offer customers down to the DMO reference price.
An examination across different regions is perhaps a more compelling example of the big gentailers’ muscle and where competition, and thus market-pricing signals, is breaking down under the new regime.
Credit Suisse cited the example of the urban NSW AusGrid network. Regulated network charges for residential customers on the network decreased 15 per cent from July 1.
On the investment bank’s calculation, when combined with some other cost increases, the result should have netted out at an 8 per cent price cut. However, customers essentially ended up paying what they paid the year before.
The situation in South Australia was basically reversed.
“So some customers did better, others worse, with the retailers free to assess which customers could bear this, and how scrutiny might be brought to bear by media and regulators,” Credit Suisse noted.
So, is it possible for governments to mandate a very cheap electricity price for consumers? Yes, is the short answer.
Is it a good idea? Probably not, according to Professor Mountain, who has wrestled with this issue for years.
“If you drive prices down to a point where retailers are not making money, the smaller firms, the ones who had been innovating and bringing lower prices, would be the first to leave,” he said.
“That’s the nub of the problem. It’s a very difficult balance and there are no easy solutions.”
Not much point getting cheaper gas if the retailers won’t pass on the savings.
He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.
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