The not-so gentle art of bundling

The recent announcement by telephony giant Telstra about its plans to become an electricity retailer is not so much new, green or innovative. But it may mark an important inflection point in the evolution the electricity market: the demise of the vertically integrated retailer.

Telstra has been kicking the tyres on getting into electricity since it recruited former Powershop CEO and Greenpeace activist Ben Burge in 2016. Telstra has been increasing its use of renewables and improving energy efficiency. Its energy hungry data centres push it to the 11th biggest scope 2 emitter (electricity consumer) according to the National Greenhouse and Energy Reporting.

The ability to expand into large customer base retail electricity has to date been tempered by the risk of managing naturally volatile wholesale generation markets. Smaller retailers have been mostly able to hedge the wholesale price risk, but most medium and large retailers have needed control over some generation as they scale up.

Electricity and telephony might look similar to customers, but the physics of their supply is materially different. Telephony sells connectivity and data. The critical infrastructure is access and control to the systems of information distribution.

Electricity is a commodity business. Electricity might be invisible, but it is more like a water pipe than a telephone line. Selling electricity puts a retailer on the hook to source and maintain supply to customers, and large volume businesses need control over lots of generation to deliver this.

Its been one of the reasons why major retailers like Coles and Woolworths have explored but ultimately baulked at the lateral move into electricity: they didn’t really want to get into large scale generation and couldn’t use their considerable market power to work around that constraint.

The rapid increase in renewable generation is changing the dynamic in the wholesale market. Expanding solar and wind provides a popular, green product which is more easily installed and contracted.

Selling renewable electricity still requires either owning or contracting firming generation. This market is narrower than renewables, but is likely to evolve as the cost of battery storage falls. Retailers still will need to contract coal and gas generators or pay a premium, but it’s an evolving market.

Telstra hasn’t started selling just yet: the announcement is part of a restructure due to be completed at the end of 2021.

Electricity retail is a grudge purchase, billed and paid for well after the event in most cases, with the amount of electricity varying each month or quarter depending on the weather: cold winters and hot summers can be expensive.

The constant refrain from most electricity consumers is they would like the best deal but most are disinterested in engaging with retailers for something which is the same whomever they buy it from. Bundling of electricity with other core services like telephony and wifi could be one way of simplifying, and therefore enhancing, the customer relationship.

AGL bought Click Energy earlier this year from internet retailer Amaysim which had grand plans to bundle electricity and wifi without great success. Amaysim had acquired Click in 2017 with plans to engage consumers with energy and data use. As it turns out, they’re about as interested in micro-managing electricity as they are their sewage.

AGL bought regional internet provider Southern Phone Company in 2019 and has since been rolling out internet and electricity bundles to its customers.

New Zealand based Vocus has been expanding its internet, telco and adding energy solutions for its NZ and Australian customers via its Dodo brand in Australia. AGL briefly considered a takeover of Vocus last year but withdrew. It then bought Southern.

All this activity suggests everyone can see synergies in bundling the growing suite of dull but critical household utility services, but no one has worked out the formula to make it work yet.

Telstra’s entry will be interesting, particularly if it thinks it can offer low cost, low risk energy “broadband” to its 19 million retail customers.