Deferring the problem

The latest action by the energy market bodies to help the energy sector and its customers through the COVID-19 crisis is the AER’s proposal to allow struggling retailers to defer paying network charges for up to six months. While this could be a useful lifeline for such retailers, they will still need to find the money – potentially with late payment interest added – at the end of this period.

Energy retailers – like retailers of many other goods and services – are doing it tough right now, because so many of their customers are doing it tough. However, energy retailers have been put in a particular bind, as they have been banned from disconnecting customers for non-payment for the time being. Meanwhile customers have been encouraged to ask for help including deferred payment plans, if they need to. So retailers have to keep on supplying energy and paying their bills to the rest of the supply chain, even if their customers stop paying them, or can only pay a fraction of their bills.

Despite much media and political commentary suggesting otherwise, retailers do not earn high margins on average, meaning they don’t have a big buffer against financial shocks. The ACCC, which has been closely monitoring electricity bills and their components for the last few years, reckons the average margin across the NEM was 4 per cent in 2018/19.

 

Source: ACCC November 2019 report

As the chart above shows, network costs are the largest component of the bill in  all regions of the NEM. So they are the obvious place to start in finding ways to save retailers money if they can’t recoup it from their customers. Indeed, the network businesses had already collectively offered a relief package comprising a mix of deferrals of network charges in respect of customers unable to pay in full on time (for large retailers) and rebates for the smallest retailers) for the current quarter.

The networks’ peak body, the ENA, has responded with some scepticism to the proposal, on the basis that it would provide most assistance to those who least need it – the big 3 retailers. Their CEO also recently implied by tweet that it’s ok if some retailers go bust in this situation. The AER have already noted in their rule change request that the proposal could be tweaked to target smaller retailers if that was preferable.

Will this proposal be enough to stave off systematic retailer failure? The answer depends on whether customers are able to pay their bills eventually. There’s surely a high risk that at the end of the year, retailers still have substantial outstanding customer debt but need to somehow find the money to catch up on their deferred network payments.

If more is required, where should it come from? Given the settlement process for the 2nd largest bill component, the wholesale market is subject to the rules, there may be some scope to tweak that. But, the problem may just be passed on to generators in that case, putting them under financial stress instead. And the contract market that overlays the spot price might negate any gains from spot price settlement.

Similarly, relaxing compliance on the submission of environmental certificates that make up another 8 per cent of the bill would just push the problem onto the certificate suppliers – PV installers, energy efficiency providers and large-scale renewable plant.

Finally, there are governments. Hidden away in various parts of the cost stack, usually within network charges are a range of fees and taxes (apart from the obvious one of GST). Depending on the region, these include utility levies, a transmission easement tax, premium feed in tariffs and climate change fund contributions. While these are individually a small proportion of the bill, taking these back on budget would provide modest relief to retailers and their customers. It would be a useful act of self-discipline on governments’ behalf to take responsibility for these costs.