Retail Electricity Prices
Part 4 (Final)
Network Charges
Retailers also pass through the network charges from the local distributor and customers on a flat tariff are charged a flat rate for usage.? A sample of these are:
A retailer then needs to cover the cost of contracts, the residual energy exposure, and the pass-through network charges to break even on energy market and network costs, before considering environmental charges, administrative costs and a profit margin.
Environmental Costs
The commonwealth government is responsible for the Renewable Energy Target which mandates a minimum quantity of energy to be purchased by retailers and large electrical loads connected to grids of 100MW or more (liable entities).? Since 2020 and until 2030, that annual target has been 33TWh per annum, and in 2023 this compels liable entities to surrender certificates equal to 18.96% of their load.[5] Certificates have traded recently around $50 (equivalent to 1MWh of renewable generation), so this equates to around 0.95c/kWh on a retail electricity bill.
The states and territories also have environmental schemes that underpin investments in clean energy, feed-in-tariffs, energy efficiency and energy storage such as can be observed in the ACT, NSW, Queensland and Victoria.? These are usually funded by certificates that must be purchased by retailers such as the Victorian Energy Efficiency Certificates, or through distributors as a levy or added to the network costs.?? These costs may vary but are usually a similar order of magnitude to those under the RET.
Billing, settlement, IT, credit, and other administrative costs
There are many other additional costs in running a retail business.? Credit is needed to ensure that the retailer can commit to short term obligations to the electricity market, networks, counterparties and the ASX.? IT systems are required to calculate, verify, and settle these purchases as well as bill customers.? Retailers also may need to have call centres, and hardship policies on top of the usual administrative costs of running a business.?
The actual cost of this for a specific business is difficult to estimate, but these costs benefit from economies of scale, meaning that large retailers usually have a competitive advantage.?
Observations
Most retailers utilise contracts to hedge their customer load as part of a prudent risk management framework.? Historically, hedging a portfolio with peak and flat contracts was able to significantly reduce the underlying market risk exposure.? This meant that for retailers with enough load and the ability to purchase appropriate contract volumes that they had reasonable confidence about their contract costs and residual hedging risk such that they could quote retail prices to customers with reasonable certainty around the energy portfolio costs.
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In recent times, we’ve seen a few small retailers emerge that due to lack of scale in customer numbers and potential difficulty finding access to hedging contracts, would have found it challenging to hedge their portfolio accurately.? For those offering a fixed price contract, if the retailer was unhedged, we would have seen their typical energy purchase costs triple from around 7-9c/kWh for a household to around 21-23c/kWh.? These high energy costs with retail prices in the range of 20-30c/kWh (inclusive of all costs) drove some of the smaller retailers out of business in 2022 and 2023.
Some retailers who utilised futures contracts would have observed their electricity contracts being deeply “in the money” which meant they faced a choice between continuing to serve their customers potentially at a loss before going out of business if they had purchased insufficient contracts to cover their load, or alternatively they could cancel their retailer registration (and customer obligations) and profitably close their futures position.?
As far as where we expect retail pricing to be now and into the near future, we have observed both contract and spot electricity prices decline since the highs of 2022.? As an example, 2024 flat contract prices are 11.5c/kWh in Queensland, 11.8c/kWh in South Australia and 12.8c/kWh in NSW[6] so retailers should expect their energy costs to be lower than in 2022. As stated previously, retailers purchase their contracts progressively, so a share of their near term contracts may have been purchased at a time when prices were elevated.
It should also be noted that the Default Market Offer (DMO) is a default price that retailers can charge for when customers have an expiring retail contract.? The DMO is set at a level that is meant to be representative of a retailer’s costs including existing hedges set at a level, such that the retailers still have “headroom” to offer a lower price on an alternative offer, encouraging customers to shop around.? The prudent advice, as always, is to shop around to seek a better price and existing market conditions suggest that there should be cheaper offers available.? The commonwealth government maintains a comprehensive website of retailer offers without charging a fee or brokerage at www.energymadeeasy.gov.au …for an unbiased view, we suggest you utilise this site to get a better deal.
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Note: This information is not financial or investment advice, but solely the opinion of the author.