Energy retailers might need a flu shot

Lockdowns to mitigate the spread of the COVID-19 virus are a doubled edged sword for electricity retailers. Households are buying more electricity, but are at greater risk of not paying for it.

Retailers’ ultimate debt collection weapon – disconnection – is challenging in normal times but carries an escalated stigma in the face of escalating unemployment, most people working from home and all this during the depths of winter.

Electricity demand in Australia fell by only around three per cent in April 2020 during the most extreme restrictions on commercial activity and social distancing, well below 10-20 per cent lower demand reported in many other developed economies.

This appears to be the result of falling commercial demand but increased household consumption. Australia’s stock of larger, less efficient dwellings consumed more energy as they ran as home offices during the day. Industrial demand was largely unaffected.

While residential consumers working from home avoid a number of commuting costs, they accrued higher energy bills. That’s for those that still with a job. The net result is more customers struggling to pay higher energy bills.

In March the Australian Energy Regulator basically stopped disconnections for non-payment of energy bills until the end of July. That protected customers, but transferred the problem onto retailers, in particular smaller retailers who may not have the balance sheet to sustain protracted cash-flow shortage created by customers not paying their bills.

Networks have agreed to defer their charges for six months, but this still only deferred the problem. The potential for a second wave of COVID-19 lockdowns and slower economic recovery will continue to escalate pressure on households, and therefore on smaller retailers.

In its 2020 retail market review the Australian Energy Market Commission (AEMC) warned the conventional safety net to manage these risks may end up escalating financial contagion.

It will now review the Retailer of Last Resort (ROLR) requirement which transfers customers of failed retailers to other retailers to ensure all consumers maintain an uninterrupted energy supply.

Shifting thousands of retail customers normally requires strict prudential controls and guarantees, which could escalate cash flow difficulties for receiving retailers. The AEMC wants too slow the transfer process and have the ability to spread the retail book to a number of retailers to  ease the credit requirements of receiving retailers.

More direct measures may be required, including provision for more direct financial assistance, otherwise the increased retail competition built over years of deregulation and  innovation may collapse back into the original starting line up of a small number of large, vertically integrated businesses.