Future developments in retail market competition

Changes have occurred in the twelve months since the last competition review, but more significant developments are likely to be evident over a longer period of time. Key issues that have the potential to impact the market in the short to medium term are discussed below.

3.3.1 The removal of retail price regulation is expected to drive further competition

Further improvements in retail competition are expected in New South Wales,

following the removal of retail price regulation in 2014. Positive signs are emerging, but the full impact of this policy change is likely to be become more evident over the longer term as it will take time for retailers and customers to respond to new opportunities.

Similarly for South East Queensland, improvements in competition are expected over time if retail price regulation is removed. The Queensland Government has delayed retail electricity price deregulation in South East Queensland for 12 months to enable the Queensland Productivity Commission to undertake a public inquiry into electricity prices. Price deregulation had been due to commence on 1 July 2015. It will be

important that customers are appropriately informed and supported to find a good energy deal and benefit as competition increases in this market. Developments in the wholesale electricity market may also impact the level of competition in South East Queensland, as discussed below.

3.3.2 Changes in wholesale markets may affect conditions in retail markets For competition to be effective in retail markets it is important that there is effective competition in wholesale markets. Price uncertainty and volatility in electricity and gas wholesale markets can raise costs for existing retailers and deter new entry and

expansion. The development of wholesale electricity and gas prices will be influenced by several factors including the developments in domestic and global economies and government policy settings on wholesale markets.

For example, there is a degree of uncertainty about how changes to gas supply and demand will affect wholesale gas prices and volatility. This, in turn, creates uncertainty about retail gas prices in some jurisdictions, and therefore the demand for gas by small customers. Faced with this uncertainty, prospective entrants may delay their entry until the conditions in the wholesale market are more certain.

In surveys conducted in February 2015, retailers in South East Queensland considered entry and expansion in the retail electricity market had become more difficult in the last few months due to the conditions in the Queensland wholesale market, citing higher wholesale purchase costs and a greater degree of spot price volatility at the Queensland reference node. Retailers had different views on what had caused the recent volatility in the wholesale market. One retailer claimed that it was due to rebidding by generators, while other retailers attributed it to the ramp up in Queensland liquefied natural gas (LNG) development, which was claimed to result in relatively cheap gas fired

generation being made available until the LNG plant came online. Whilst retailers had different views on the cause of the recent volatility in the wholesale market, most held

the view that the uncertainty was adversely affecting retailers, including through increasing their hedging costs and reducing their margins.⁵⁶ This, in turn, may affect entry and expansion plans of retailers in the South East Queensland retail electricity market in the short to medium term.

3.3.3 Product and service innovation is expected to increase

Enabling technology and regulatory reforms are creating new opportunities for

customers and retailers alike and will change the way in which energy has traditionally been supplied and consumed. Innovation is increasing as technology advancements enable new products and services to be developed and as customers become more active in the market.

Retailers are increasingly competing through additional service elements such as energy audits and appliance swaps, advice about energy efficiency initiatives, energy cap plans, providing better information about energy usage profiles and providing

‘free’ electricity or gas on certain days of the week.

Further innovation is expected with increased installation of advanced metering technology. Customers with advanced meters will be able to choose from a range of electricity services and pricing options, giving them new ways to monitor, manage and adjust their electricity consumption in response to competitive price signals. With the exception of Victorians, most customers in the NEM have old accumulation meters. One per cent or less of small customers in South Australia, the ACT and Queensland are estimated to have meters that enable time of use pricing. Penetration is higher in New South Wales at approximately 15 per cent.⁵⁷

Benefits that advanced metering is expected to provide to customers include easy access to detailed usage data, real-time consumption information, better management of energy use, time of use pricing, more control of price-sensitive remote-controlled appliances and the ability to compare retailers and switch offers faster. It is also expected to lead to future cost savings through more efficient network investment decisions, lower cost meter reading, remote connections and faster responses to outages.

3.3.4 Conditions are changing in the growing solar market

As part of this review, the Commission has considered whether there are significant differences in customer activity and outcomes for customers with solar panels who are an increasingly large segment of market. Estimates suggest 14 per cent of all Australian households were using energy from solar panels in 2014, which is close to a three-fold

56 K Lowe Consulting and F Swier Consulting, AEMC 2015 Retail Competition Review: Retailer Surveys - Report for the AEMC, June 2015, p37.

57 These figures are derived from confidential AEMO data provided to the AEMC in September 2014.

The data may underestimate the number of interval meters in some jurisdictions due to the way in which meters have been progressively integrated into AEMO’s Market Settlement and Transfer Solution (MSATS) system and the consumption thresholds used to define a ‘small’ meter.

increase in three years.⁵⁸ Fifteen per cent of respondents to the Newgate customer survey stated they had solar panels and nine per cent had solar hot water installed.

The Commission has not identified differences that are significantly impacting the effectiveness of competition in this segment of the market, but this may change over time as a result of any changes in technology or regulatory arrangements. Subsequent competition reviews can continue to monitor these issues, including the impact of

‘exempt energy suppliers’.

Our findings suggest that solar customers are more active and satisfied than non-solar customers. Analysis of feed-in tariff arrangements across jurisdictions highlights that most solar customers do not face additional barriers to switching. Customer surveys also found that few solar customers cited barriers to switching that were specific to having solar panels. Details of these findings are set out in Appendix E.

Submissions from retailers and consumer representatives highlight the emergence of new business models providing solar energy, which compete for a proportion of traditional retailers’ sales and may not be subject to the same customer protection requirements.⁵⁹ Some energy suppliers that sell energy to small customers in retail electricity and gas markets are exempted from the full range of obligations on retailers under the NECF, which currently operates in NSW, the ACT, South Australia and Tasmania and will operate in Queensland from 1 July 2015. The AER generally grants exemptions where it considers such sellers have a ‘lesser’ involvement in the market, in accordance with its Exempt Selling Guidelines.

Exempt energy suppliers include some solar energy suppliers and embedded

non-network energy suppliers. Some other solar businesses are not captured by NECF because they do not supply energy to their customers, rather they supply solar equipment.

As a result of exemption from NECF or because it does not apply, solar businesses are generally not required to comply with the suite of obligations that apply to energy retailers under the NECF. Together these are referred to as ‘alternative energy suppliers’.

Similar issues are arising in Victoria and Queensland, where the NECF does not currently apply.⁶⁰ In these jurisdictions solar businesses selling under a power

purchase agreement model are able to obtain an authority or licence to provide energy services. The licence conditions broadly mirror the conditions of exemption from authorisation as a retailer under the NECF.

Submissions from retailers and consumer groups argue that the AEMC should consider these energy suppliers in conducting this and future reviews of competition in retail energy markets.⁶¹ Origin Energy considers that alternative energy suppliers are

increasing the level of competition for energy services and opening up new markets for

58 Note that this increases to 19 per cent if solar hot water is included. ABS, One in five households now use solar energy, media release, December 2014.

59 See the following submissions on the AEMC 2015 Retail Competition Review Approach Paper: Alinta Energy, p3; CALC, p1-2; CUAC, p3; EnergyAustralia, p3; ERAA, p1 and Origin Energy, p5.

60 The NECF is scheduled to be implemented in South East Queensland from 1 July 2015.

61 See the following submissions on the AEMC 2015 Retail Competition Review Approach Paper: Alinta Energy p3, CALC p1-2, CUAC p3, EnergyAustralia p3, ERAA p1 and Origin Energy p5.

energy products.⁶² Origin and others therefore consider that it is important to look at the impact on competition of such emerging business models and technologies.⁶³ A number of consumer groups agree that new business models and technologies are likely to impact competition and should be considered in future competition reviews in order to provide a more comprehensive understanding of competition in energy markets.⁶⁴ There are currently around 50 exempt energy sellers that offer or intend to offer solar power purchase agreements to customers.⁶⁵ There is no public information regarding the number of customers of these exempt energy sellers. As at 7 April 2015, the Clean Energy Regulator had recorded 1,209,977 solar PV systems installed on rooftops in NEM jurisdictions and participating in the Small-scale Renewable Energy Scheme. It is likely that only a small fraction of these solar systems are provided to customers by exempt energy sellers under a power purchase agreement.

Additionally, these alternative energy suppliers have not replaced all of the services offered by ‘traditional retailers.’ An increased uptake of energy storage technologies could result in these businesses having a greater impact on retail energy markets over time.

The AER is currently considering the regulation of alternative energy suppliers in the NECF. In particular the AER has consulted on whether a retailer authorisation or a retail exemption is required for the business activities of certain new and emerging business models.⁶⁶

The Council of Australian Governments (COAG) Energy Council is also consulting on a review of New Products and Services in the Electricity Market. This consultation seeks to consider the impact of new products and services on retail energy markets and whether the regulatory frameworks that govern the NEM are appropriate in the context of new products and services being offered to small electricity customers.⁶⁷

The Commission does not intend for this review to duplicate the AER's work on the regulation of innovative energy selling business models or the work of the COAG Energy Council's review of New Products and Services in the Electricity Market. The current market definition is appropriate for this review, but may be expanded for future competition reviews, subject to developments in the market.

62 Origin Energy submission on the AEMC 2015 Retail Competition Review Approach Paper, p5.

63 Ibid.

64 See the following submissions on the AEMC 2015 Retail Competition Review Approach Paper: CALC pp1-2 and CUAC p3.

65 AER public register of retail exemptions, available at: http://www.aer.gov.au/node/11037.

66 AER 2014, Issues paper - Regulating innovative energy selling business models under the National Energy Retail Law, AER, 18 November 2014, Melbourne.

67 For more information on the COAG Energy Council New Products and Services in the electricity market project see:

https://scer.govspace.gov.au/workstreams/energy-market-reform/demand-side-participation/ne w-products-and-services-in-the-electricty-market/.