The most recent Electricity Market Inquiry Report by the Australian Competition and Consumer Commission’s (ACCC) reveals electricity retailers are under pressure due to high and volatile wholesale electricity prices.
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.
Since May 2022, 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.
The ACCC saidwarns that declining competition could result in further increases to energy prices for consumers and businesses.
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. 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 said 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.
ACCC Commissioner, Anna Brakey, said, “In the current environment of elevated wholesale electricity prices, it’s critical that energy retailers have continued access to hedging contracts.”“Well-functioning, competitive markets are also going to be critical to delivering the necessary investment for a renewables-based grid.”
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 per cent 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,” Ms 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.”