Image courtesy of Pika Energy Island
1 RETAIL ENERGY MARKETS 1.1 Retail products and services The National Energy Retail Law (Retail Law) sets out Figure 1.1 the regulatory arrangements, and confers wide ranging An evolving retail energy market Most energy customers source their electricity and gas regulatory responsibilities on the Australian Energy Regulator through a retailer that buys energy in wholesale markets (AER) (box 1.1). This chapter focuses on the five jurisdictions Energy retail interface CHAPTER and packages it with network services to sell as a bundled where the AER has a regulatory role, and also covers the product. Retailers monitor and bill customers for the energy Victorian market where possible. Western Australia and the they use. Northern Territory operate separate regulatory arrangements Alternative energy providers Authorised or licensed Energy onsellers energy retailers But this traditional retail model is evolving as customers and are not covered in this chapter. Install solar panels and batteries at Buy energy from 1 a customer's premises and sell Buy electricity from authorised retailers and 2 become active participants in the market and take greater generators and sell to The Retail Law operates alongside the Australian Consumer output to the customer. May also onsell to customers in MARKETS RETAIL ENERGY control over their energy use (figure 1.1). Advances in energy users embedded networks Law to protect small energy customers in their electricity support demand response. technology (particularly in the electricity market) and an and gas supply arrangements. It sets out protections for environment of rising energy prices are driving this change, residential and small businesses consuming fewer than opening up markets for new types of energy services. 100 megawatt hours (MWh) of electricity or 1 terajoule Energy customers Examples include: (TJ) of gas per year.2 Small customers make up 98 per • smart meters provide scope for retailers to offer more cent of electricity connections and over 99 per cent of gas innovative products, and for new sellers to offer ‘add-on’ connections, though they account for less than 50 per cent energy management services. of energy sales by volume. Microgrids Households Households with Large retail Embedded network • rooftop solar photovoltaic (PV) systems enable energy (no solar installed) solar panels and customers customers The Retail Law and equivalent arrangements in batteries customers to self-generate electricity, and sell any excess e.g. Apartment Victoria focus on customer protections related to the through small scale May sell excess energy buildings, caravan parks back to their retailer or a third party. traditional retailer–customer relationship. Protections generation and back to their retailer or storage, but may trade • batteries, load control devices and similar technologies are generally stronger for customers supplied through small amounts of demand response. allow customers greater control over their electricity use an authorised retailer compared with, for example, energy with retailers. and the ability to engage in the market in new ways (for customers in embedded networks or entering solar power example, by storing electricity and entering demand purchase agreements. response contracts). State and territory governments regulate electricity prices in Established energy retailers and new entrant businesses are the ACT, Tasmania and regional Queensland. The AER does driving market opportunities for new services. not currently regulate retail energy prices, but from 1 July 2019 it is expected to set a default price that caps standing More customers are also bypassing the traditional energy offers3 for electricity in jurisdictions without state based price supply model, going ‘off grid’ through self-sufficient solar PV regulation. This price will also inform a reference bill from In July 2018, 71 businesses held authorisations to retail generation and battery storage, community based stand- 1.3 Energy retailers which any advertised discounts promoted by retailers must electricity and 28 held authorisations to retail gas, though alone systems or microgrids. Energy sellers include those authorised as retailers under 6 be based.4 not all retailers were active in the market. Since 2017 the Retail Law, and those holding exemptions from the 15 new retailers were authorised to retail electricity, and 5 The Australian Energy Market Commission (AEMC) sets the requirement to be authorised. Additionally, some entities one to retail gas. Two new authorised retailers commenced 1.2 Energy market regulation rules for the energy market. offer energy products and services in markets beyond offering electricity contracts since 2017. Four established Five jurisdictions—Queensland, New South Wales (NSW), the scope of the Retail Law, such as energy management retailers expanded the markets in which they sell electricity, South Australia, Tasmania and the Australian Capital services, storage products, and off-grid energy systems. and eight commenced offering gas in new markets. Territory (ACT)—apply a common national framework for Only customers of authorised retailers enjoy the full set of While many authorised retailers offer energy services to regulating retail energy markets. The framework applies protections in the Retail Law. all customers, some target specific market segments—a to electricity retailing in all five jurisdictions and to gas retailer may focus on offers for large commercial customers retailing in Queensland, NSW, South Australia, and the 1.3.1 Authorised energy retailers or customers in embedded networks, for example. Some ACT. Victoria has not implemented the framework, but its retailers also have offers that have particular value for regulatory arrangements are largely consistent with the The Retail Law requires an entity to be authorised to operate users with certain characteristics, such as customers national framework.1 2 For electricity, some jurisdictions have different consumption thresholds as an energy retailer. An authorisation covers energy sales to that specified in the Retail Law. In South Australia, for example, small to all customers in participating jurisdictions. Authorised with swimming pools or those with flexibility in when they electricity customers are those consuming fewer than 160 MWh per year. use energy. In Tasmania, the threshold is 150 MWh per year. retailers must comply with consumer protection and other 1 Recent changes to the Victorian framework, including recommendations 3 Standing offers are applied where a customer does not enter into obligations under the Retail Law. In choosing which markets to enter, a retailer considers adopted from the Thwaites Independent Bipartisan Review into the a market contract. The terms and conditions of standing offers are Electricity and Gas Retail Markets in Victoria (August 2017), have seen prescribed in the National Energy Retail Rules. factors such as price regulation (if it applies), market scale, greater divergence between the Victorian and national frameworks. The 4 Commonwealth Treasurer, Josh Frydenberg and Minister for Energy, ACCC’s Retail Electricity Pricing Inquiry (July 2018) recommended Victoria Angus Taylor, Introduction of a default market offer, Letter to the AER, 5 In Victoria, where the Retail Law does not apply, retailers must hold a 6 Details of all businesses that hold electricity or gas authorisations can be adopt the Retail Law. 23 October 2018. licence issued by the ESC or seek an exemption from this requirement. found in the public register of authorised retailers on the AER website.
32 STATE OF THE ENERGY MARKET 2018 33 Box 1.1 The AER’s role in retail energy markets The AER regulates retail energy markets so energy customers (particularly residential and small business customers)
can participate confidently in those markets. We undertake this work in Queensland, NSW, South Australia, Tasmania CHAPTER and the ACT. We aim to empower customers to make informed decisions on their energy use, and protect them when problems 7 arise. As part of this work, we: 3 ACT
•• maintain an energy price comparator website (www.energymadeeasy.gov.au) for residential and small business 1 2
customers that helps energy users understand the range of offers in the market, make better choices about those MARKETS RETAIL ENERGY offers, and be aware of their rights and responsibilities when dealing with energy providers •• monitor and enforce compliance (by retailers and distributors) with obligations in the Retail Law, Rules and 2 Regulations 2 Tasmania •• oversee retail market entry and exit by assessing applications from businesses looking to become energy retailers, grant exemptions from the requirement to hold a retailer authorisation, and administer a national retailer of last resort scheme to protect consumers and the market if a retailer fails 7
•• report on the performance of the market and energy businesses (including information on energy affordability) 20 •• develop hardship guidelines and approve customer hardship policies that energy retailers offer to customers facing financial hardship and seeking help to manage their bills. South Australia From 1 July 2019 we are expected to set a default price that caps standing offers for electricity in jurisdictions without state based price regulation. 26 16 Victoria
competition, the ability to source hedging contracts to body corporate) or (2) in addition to the customer’s primary manage risk and, for gas retailing, whether wholesale gas energy connection. 28 12 contracts and pipeline access are available. NSW At 1 July 2018 over 3000 businesses held exemptions, Table 1.1 lists the 36 authorised or licensed retailers typically to onsell energy within an embedded network selling energy to residential or small business customers (that is, a small private network whose owner sells in southern and eastern Australia. Around 50 per cent of electricity to other parties connected to the network). 3 these retail brands offer both electricity and gas in at least Hospitals, retirement villages, caravan parks and apartment 22
one jurisdiction. Some offer only electricity, while one retailer complexes are examples of entities that might run an Queensland specialises in just gas. A small number of authorised retailers embedded network. The AEMC estimates there are over (not listed in table 1.1) only offer electricity retail services to 200 000 embedded network customers.7 Solar power customers in embedded networks. purchase agreement providers are also covered by the exemptions framework. Only 15 retail brands offer energy products in all the fully contestable markets without price regulation—south east Embedded network customers do not enjoy the full set of Queensland, NSW, Victoria and South Australia. The retail protections in the Retail Law, and have more limited avenues brands of three businesses—AGL Energy, Origin Energy and for dispute resolution.8 But energy ombudsman schemes EnergyAustralia—supply over 66 per cent of small electricity are being widened to allow customers of exempt sellers to customers and 77 per cent of small gas customers in lodge complaints (section 1.8.5). southern and eastern Australia (section 1.7.1). Host retailer (electricity and gas) Host retailer Electricity retailer 1st Energy AGL Energy (ACT Government) AGL Energy Alinta Energy Amaysim Energy Energy Aurora Blue NRG Amaysim Energy M2 Energy TPC Diamond Energy M2 Energy CLP Group Energy Locals Enova Community Energy Queensland Government ERM Power OPTrust Energy Globird Snowy Hydro Mojo Power Government) (Tansmanian Hydro-Electric Next Business Energy Online Power and Gas Origin People Energy ciency Filters Effi AGL Energy Meridian Energy Qenergy Snowy Hydri Living Choice Australia/Sanctuary Energy ENGIE Sumo Power State Power Investment Corporation eld Infrastructure Brookfi Ownership Gas retailer
1.3.2 Exempt energy sellers
An energy seller may apply to the AER for an exemption 7 AEMC, Review of regulatory arrangements for embedded networks, from the need to be authorised if it intends to supply energy information sheet, p. 3. Retailers offering energy contracts to small customers Retailers offering 8 The AER’s exemption guideline sets out the classes of exemption. The
services only (1) to a limited customer group (for example, at .1
AER sets customer protections under each class. Details of all businesses 1 a specific site or incidentally through a relationship such as a that hold a registered or individual exemption can be found in the public Retailer 1st Energy ActewAGL Retail AGL Energy Alinta Energy Amaysim Energy Energy Aurora Blue NRG Click Energy Commander Power & Gas CovaU Diamond Energy Dodo Power and Gas EnergyAustralia Energy Locals Enova Energy Ergon Energy ERM Power Flow Power Energy Globird Lumo Energy Mojo Power Momentum Energy Next Business Energy Online Power and Gas Origin People Energy Pooled Energy Powerdirect Powershop Qenergy Red Energy Sanctuary Energy Simply Energy Sumo Power Energy Tango Gas Retail Tas TOTAL
register of exemptions on the AER website. Table A host areas. servicing only rural and regional excluded as well some retailers at August 2018. Retailers servicing only embedded customers are with generally available offers Note: Includes all retailers that do not take up a market offer. has obligations to supply new customers in a region retailer Energy Made Easy; Victorian Energy Compare. Source:
34 STATE OF THE ENERGY MARKET 2018 35 Figure 1.2 Network costs costs of competing outweigh the competition benefits of Composition of a residential electricity bill efficiency and innovation. The AER regulates network charges, which cover the 0 efficient costs of building and operating electricity networks, Retail costs per customer tend to be lower for the big CHAPTER 36.5 and provide a commercial return to the network owner and three retailers (AGL, Origin and EnergyAustralia) than lenders that fund the business. other retailers. 30.3 Network costs (as a percentage of total retail bills) in Retailers’ margins in Victoria and NSW were more than 29.4 29.6 0 28.3 2017–18 were highest in Queensland and Tasmania and double those in South Australia and south east Queensland 1 26.1 2 also high in NSW. Productivity has been consistently lower (on a dollar per customer basis). The combined retail
MARKETS RETAIL ENERGY 2 23.7 for the (largely still government owned) networks in these costs and retailer’s margin were lowest in Tasmania (as a regions than in the privatised networks in Victoria and percentage of the total bill). 20 South Australia.
C 1.4.2 Gas bills 1 Environmental costs The composition of retail gas bills is opaque. Unlike in Environmental costs include payments to fund the 10 renewable energy target, feed-in tariffs for solar PV electricity, there is no systematic annual reporting of this data. Figure 1.3 shows estimates of the composition of retail installations, and state government operated energy gas bills in 2017. efficiency schemes. Costs associated with the large scale renewable energy target made up around half of all On average, gas pipeline (transportation) charges make 0 environmental costs. State government premium feed- up over 40 per cent of a retail gas bill. Distribution charges NS A T S A T NEM in tariff schemes were the next largest contributor to represent the largest component, at around 35 per cent of N E R R R environmental costs in most regions. While these schemes retail gas bills, with transmission costs making up around kWh, kilowatt hour. are closed to new entrants, eligible households continue to 7 per cent.10 Wholesale gas prices, which account for Note: Data are estimates for 2017–18. Average residential customer prices excluding GST (real $2016–17). Retail costs and margin are combined for the ACT and Tasmania due to data availability. receive payments under the schemes. around one third of a typical gas bill, have risen sharply since Source: ACCC, Restoring electricity affordability and Australia’s competitive advantage, Retail Electricity Pricing Inquiry—Final report, June 2018, p. 8; ACT data 2015 (chapter 4). Retail costs and margin accounted for the from AEMC, 2017 Residential Electricity Price Trends, final report, December 2017, p. 111. South Australian and ACT customers face the highest environmental costs. South Australian costs flow from remaining 25 per cent of retail gas bills. the state’s premium feed-in tariff scheme, given the high Regional outcomes varied. Victorian residential gas prices 1.4 Components of energy bills • the retailer’s margin (profit)—8 per cent of the bill penetration of rooftop solar PV. South Australia’s energy were the cheapest on a unit basis—largely due to lower (figure 1.2).9 efficiency scheme also has the largest per customer cost. network costs given a high level of gas use per customer Retail customers’ energy bills cover the costs of producing ACT costs were largely related to the government’s feed-in and connection penetration. In Tasmania and Queensland, The contribution of the different components of retail and transporting energy, costs related to environmental tariff scheme for large scale solar developments. where gas use is less widespread, network costs account schemes, and retailers’ costs and profit margins. electricity bills varies across regions (figure 1.2). Environmental costs were lowest in Queensland, following for over 60 per cent of gas bills. Wholesale costs a state government decision in 2017 to recover premium Retail costs also varied across regions. On a unit basis, 1.4.1 Electricity bills feed-in tariff costs through the tax base rather than Queensland retail costs were almost double those The energy retailers sell to customers is purchased in electricity charges. Additionally, Queensland does not elsewhere, which may reflect economies of scale in A typical residential electricity retail bill in 2017–18 wholesale markets. But prices in the wholesale market can operate an energy efficiency scheme targeted at small servicing larger customer bases. Retail margins were comprised: be volatile, while the prices retailers charge customers are electricity customers. highest in Victoria and NSW.11 The Thwaites review found • retailers’ wholesale costs of buying electricity in spot generally fixed. To manage this risk, retailers lock in firm retail costs in Victoria were higher than in an efficient and hedge markets—34 per cent of a bill prices for electricity they need to buy or sell by entering Retail costs and retailer’s margin or regulated market.12 Gas retailers likely face many of forward contracts (hedges or derivatives). Alternatively, they • network costs for transporting electricity through the same customer acquisition and retention costs as might own generation assets, or enter demand response Retail costs fall into two main categories. Costs of transmission and distribution networks, and electricity retailers. contracts to manage these risks (discussed in sections 1.7.2 servicing customers include managing billing systems and metering—43 per cent of a bill and 1.8.4). debt, handling customer enquiries, and compliance with • the costs of environmental schemes for promoting regulatory obligations. These costs do not vary significantly Wholesale costs in 2017–18 were highest in South Australia. renewable generation and energy efficiency, and reducing across regions. carbon emissions—collectively 6 per cent of a bill This reflects both the generation portfolio in the state (which is reliant on higher cost gas powered generation and has Customer acquisition and retention costs—marketing to • the retail costs of servicing customers (including relatively concentrated ownership), relatively peaky demand gain or retain customers—are highest in Victoria. These meeting regulatory obligations) and acquiring and and limited interconnection with other regions. costs tend to be higher in jurisdictions with high rates of retaining customers—9 per cent of the bill 10 Oakley Greenwood, Gas Price Trends Review 2017, March 2018, p. 158. customer switching. This outcome highlights a risk that 11 Oakley Greenwood, Gas Price Trends Review 2017, March 2018, p. 225. 9 Based on earnings before interest, taxes, depreciation and amortisation competition may increase energy bills for customers if the 12 Thwaites, T, Faulkner, P, and Mulder, T, Independent Review into the (EBITDA). electricity and gas retail markets in Victoria, August 2017, p. 23.
36 STATE OF THE ENERGY MARKET 2018 37 Figure 1.3 Figure 1.4 Composition of a residential gas bill Spread of electricity costs for residential consumers 0 CHAPTER 6.4 0 2