Australian Energy Market Commission FINAL REPORT 2020 RETAIL ENERGY COMPETITION REVIEW 30 JUNE 2020 REVIEW Australian Energy Final report Market Commission 2020 Retail energy competition review 30 June 2020 INQUIRIES Australian Energy Market Commission GPO Box 2603 Sydney NSW 2001 E [email protected] T (02) 8296 7800 Reference: RPR0012 CITATION AEMC, 2020 Retail energy competition review, Final report, 30 June 2020 ABOUT THE AEMC The AEMC reports to the Council of Australian Governments (COAG) through the COAG Energy Council. We have two functions. We make and amend the national electricity, gas and energy retail rules and conduct independent reviews for the COAG Energy Council. This work is copyright. The Copyright Act 1968 permits fair dealing for study, research, news reporting, criticism and review. Selected passages, tables or diagrams may be reproduced for such purposes provided acknowledgement of the source is included. Australian Energy Final report Market Commission 2020 Retail energy competition review 30 June 2020 EXECUTIVE SUMMARY 1 The Retail energy competition review is an annual review of the state of competition in the retail energy market and the outcomes that consumers are achieving from it. It is an important tool for the Australian Energy Market Commission (AEMC or Commission) to map retail market progress over time and identify priorities for retail market reform. 2 This year's review covers three main topics: 1. The retail market under COVID-19 pandemic (the pandemic) conditions. Using a consumer experience map, the Commission traces through the effects of the pandemic on consumers, retailers and the market as a whole. The Commission recommends changes to regulatory frameworks to improve consumer protections and enhance retail market financial resilience in the immediate term, and in the long term for future shocks. 2. The retail market of the future. The Commission analyses how the retail market is changing based on new technology and digitalisation. The Commission assesses regulatory changes needed to make consumer protections fit for purpose in that future and analyse how electric vehicles are being integrated into the market. 3. Outcomes in the retail market in 2019. The Commission uses a structure-conduct- performance framework to asses the outcomes that retailers and consumers have achieved in the market over the past year. While the retail market continued to become more competitive and consumers benefited from a wider range of products and services, the Commission considers there is a need to closely monitor future progress following the pandemic and major recent regulatory changes. THE RETAIL MARKET UNDER PANDEMIC CONDITIONS 3 In the last four months energy consumers and retailers have been heavily influenced by the pandemic. Figure 1 provides an overview of the Commission's approach to analysing how consumers and retailers have been affected, and how this has been influenced by the regulatory framework and government actions. Based on this analysis, the Commission recommends changes to improve consumer protections and resilience in the retail energy market immediately and in the longer term. i Australian Energy Final report Market Commission 2020 Retail energy competition review 30 June 2020 Figure 1. Overview of the consumer and retail energy market experience during COVID-19 COVID-19: Chapters 2, 3, 4, 5 and 6 of this report look at the retail energy market environment, structure, conduct, and performance for retailers and consumers over the past 12 months. baseline retail The analysis in these chapters is based on market data collected prior to the impacts and market restrictions imposed as a result on COVID-19. These chapters will form the base for future measurements reviews to assess the impacts of COVID-19 on the retail energy market. Impacts Existing New measures Analysis & framework announced Recommendations Commonwealth and The Commission Consumer in Hardship Jurisdictions respond with supports the actions financial distress framework. assists 1. Customer boosts to welfare and taken by the AER and experience: customers with government payment jurisdictional experience Loss of difficulties paying • assistance schemes. governments to Customers have employment / their energy bills. difficulty paying increase assistance to reduced income AER’s ‘Statement of energy bill and Existing vulnerable consumers. • Increased Expectations’, including: contact their energy usage at government Do not disconnect any : home payment Recommendation 6 retailer small customer without Protecting small Shut down of assistance • their permission before 31 customers in businesses. schemes. July. embedded networks. In assessing these Increase volume of ENA’s support package, Retailer payment rule change requests, customers seeking including rebate and processes. the Commission will hardship status. defer network charges Retailers pay consider the analysis for COVID-19 impacted 2. Retailer networks and on risk allocation, Resilience to impacts residential and small wholesales costs financial assistance impacts will differ between business consumers. before receiving measures, the ENA Retailers have retailers: payment from relief package and increased costs and Hedging strategy AER rule change • customers. the AER’s Statement customer debt, and may leave retailers request. Defer network Retailers wear of Expectations. reduced revenue over-hedged 100% of risk of charges for six months. Profitability prior to • cash flow and For the pandemic AEMO rule change Action 1: customer non- AEMC to review the Corporate structure request. Defer 5MS • payment. effectiveness of cash and cash flow. implementation. flow burden sharing. Advanced notice of retailer Risks for Retailer of last distress. participants: resort (ROLR) Recommendation 1: The AER has significantly • Cash flow risk framework Remove requirement increased the frequency • Settlement risk requires for small customers of with which it collects • Market risk designated a failed retailer to be information on the number 3. Retail • Credit risk. ROLRs to supply placed on the default electricity to of customers on payment offer of the ROLR. market plans and hardship Financial customers from arrangements and the financial interdependencies failed retailers. Recommendation 2: level of customer debt. stability in the NEM. NEM financial market Retailers may resilience review - default on Greater risk of Recommendation 4: Recommended changes payments for contagion COAG Energy Council to to the existing Retailer consider short term market of Last Resort scheme. network and spreading among stability measures. wholesale costs retailers. Recommendation 3: Recommendation 5: The ROLR regime to be Advanced notice of retailer removed from the distress. NERL and included in the NERR. ii Australian Energy Final report Market Commission 2020 Retail energy competition review 30 June 2020 The impact of COVID-19 on the economy 4 The World Health Organisation (WHO) declared a pandemic on 12 March 2020. The Commonwealth Government started closing borders in early February, and by mid March jurisdictional governments started closing non-essential services and imposing social distancing measures. The impact of the shut down has led to significant effects on energy consumers: • Residential consumers have faced a combination of higher unemployment and underemployment, lower average incomes and income uncertainty. • Residential consumers have higher consumption, and this is likely to increase over winter months as households require heating loads for longer periods of time while working from home. Victorian distribution businesses recorded a 21 per cent increase in residential electricity demand in April and May 2020 compared to 2019. • Small business consumers have commonly been required to enter hibernation while the shut down exists. The ABS reports that almost three quarters of small businesses' cash flow has reduced. 5 Retailers have also faced direct effects from the pandemic. For example, many have needed to move from operating via large international call centres to remote domestic working arrangements. These changes, at least in the short-term are likely to increase retailers costs. How the broader economic impact effects energy retailers and consumers 6 The most significant effect of the pandemic is an increase in the number of residential and small business consumers which are under financial stress and are therefore likely to face difficulty paying their energy bills. The full extent of this is still largely unknown and will be closely linked to how the health crisis plays out and how quickly the broader economy recovers. The lag between the economic downturn and the effect on the retail market is particularly prominent because most small consumers pay bills three months in arrears. It is therefore only now that many consumers will be having to pay their electricity bill under lower income and higher consumption conditions. 7 The Commission, the Australian Energy Regulator (AER) and the Essential Services Commission (ESC) of Victoria have been working closely with industry to provide up-to-date data on consumer and retailer financial stress indicators. The AER and ESC have issued voluntary data requests to retailers to gather data on consumer debt, payment plan numbers, hardship numbers and call centre enquiries on a weekly basis. The Commission encourages industry to promptly provide this data and for the AER and ESC to publish data regularly to the extent possible. This is