Smaller electricity retailers are finding it harder to manage their exposure to high and volatile wholesale electricity prices, and declining competition in the retail market could further increase energy prices for consumers and businesses, the ACCC warns in its latest Electricity Market Inquiry Report.
The report presents new analysis on electricity hedging contracts, which are the longer-term, fixed-price contracts that retailers enter with generators so they can on-sell electricity to households and businesses. Hedging contracts protect against the risk of price fluctuations in the day-to-day spot market.
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Since May this year, six electricity retailers have formally exited the market and others have either urged their customers to switch retailers or are no longer seeking new customers.
“In the current environment of elevated wholesale electricity prices, it’s critical that energy retailers have continued access to hedging contracts,” ACCC Commissioner Anna Brakey said.
“We understand that much higher energy prices are already hurting Australian households. We’re drawing attention to the challenges facing smaller retailers, because we know if we lose retail competition everyone will pay more for electricity over the long term.”
“Well-functioning, competitive markets are also going to be critical to delivering the necessary investment for a renewables-based grid,” Brakey said.
Higher prices for consumers
The flow-on effect from the higher spot market and hedging contract prices has been that consumers choosing a new energy provider now have a smaller range of more expensive market offers to choose from.
Market offers are the varied energy deals that retailers advertise to attract new customers, sometimes offering conditional discounts, as distinct from the regulated, default offer that provides a maximum price for consumers who can’t or don’t shop around. About 90% of Australians are on market offers.
Between April and October this year, the estimated price of new market offers increased by about $300 per year, or 23%, based on the median annual bill of a typical residential customer.
With fewer discounted market offers available to residential customers, there is now little price difference between market offers and price-capped default offers.
In October this year, the typical range of market offers across all National Electricity Market regions was within eight per cent of the default offer average. Many smaller retailers currently do not have any market offers below the default offers.
“There may be customers on market offers who are unaware that they’re now paying more than the default offer. We’d encourage everyone to enter the electricity usage from their most recent bill into Energy Made Easy or Victorian Energy Compare as this will find you the best available offer,” Brakey said.
The benefits of competition
The ACCC’s analysis of retailers’ cost data shows that average retail margins have been declining since their peak in 2016-17, which coincides with a period of increasing competition between electricity retailers.
In 2016-17, the average annual retail margin across the National Electricity Market per residential customer was $145 in inflation-adjusted (real) terms. In 2021-22, the same annual margin was down to $35 per customer.
Retail margins fell by 33% in real terms between 2020-21 and 2021-22.
“The trend of declining margins is exactly what you expect to see as retail competition increases,” Brakey said.
“We don’t want to lose the competition gains we’ve made in recent years because increasing market concentration is in no-one’s interest, other than the big three energy companies.”
Recommendations
The ACCC’s report makes five recommendations to address the impact of current market conditions on competition in wholesale contract and retail markets for electricity.
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These include regular monitoring of contract markets to provide crucial insights into the strength of both electricity generators and retailers. As retailers’ hedging costs have increased significantly this year, the ACCC also believes that regulated retail prices (default offers) need to accurately reflect retailers’ actual operating costs. To achieve this, the Australian Energy Regulator should have the flexibility to adjust the default offer in the event of unforeseen circumstances outside of the annual price setting decision.
The ACCC has also recommended a mandatory industry code of conduct for third-party energy price comparison sites that requires them to operate in the best interests of consumers.
