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Call to avert domino-effect collapse of energy retailers

New rules are urgently being considered to head off the threat of a cascading failure of cash-strapped electricity retailers due to COVID-19 that could lead to less competition between the surviving players and therefore higher bills.

The changes proposed by the Australian Energy Regulator come as some industry sources highlighted that smaller retailers – which are reliant on small business customers – may be less than two months away from collapse.

The proposals would place a six-month hold on some network charges for affected retailers, which are being squeezed by obligations not to disconnect customers that can’t pay their bills due to the pandemic.

John Pierce, chairman of the Australian Energy Market Commission, the rule-maker body for the industry, voiced concern about a potential “domino effect” in the industry if a large retailer or a number of smaller ones go out of business in a short space of time, putting pressure on others to service larger numbers of hardship customers.

He said urgent action was needed because the purpose of the proposal would be negated if it doesn’t happen rapidly.

“If you accept that financial contagion in the market from multiple retail business failures is a plausible risk, then we have to adopt the fastest statutory timetable,” he said.

The rule change, which would apply from July 1, would build on voluntary support measures by grid owners including Jemena, Ausgrid and AusNet this June quarter under a networks industry relief package.

The issue of bill non-payment and rising bad debts has been cited by the country’s two biggest power and gas retailers – AGL Energy and Origin Energy – as a factor weighing on the profit outlook for their retail businesses, which have already been affected by the partial re-regulation of prices.

But these larger players are more likely to withstand the squeeze than smaller rivals, who may not have their own generation capacity.

The AEMC estimates that wholesale electricity and network access typically makes up nearly 80 per cent of a retailer’s costs.

AER chairman Clare Savage said deferring network charges for six months would provide a buffer for retailers providing extra assistance for customers affected by the pandemic, supporting competition.

“If an energy retailer ceases operation as a result of extending its support to COVID-19-impacted customers, it could result in less competition in the market,” she said.

“This means fewer options for customers and possibly higher prices, as well as adding to Australia’s increasing unemployment rate.”

Jason Stein, chief executive of Meridian Energy’s Australian operations, which includes the Powershop retailing business, said it supports the intent of the rule change but noted it doesn’t materially shift the burden from retailers and thus from customers.

“It is important to us that the industry continue to collaborate to ensure that the right customer outcomes are achieved and that innovation and competition still exists for customers in a post-COVID-19 world,” he said.

Amaysim chief strategy officer Alex Feldman likewise called the proposal as “a partial and quite limited solution, albeit helpful”, noting it doesn’t cover the non-network part of the bill for affected customers, nor those customers who just won’t pay.

“This just buys us time to implement something a bit more fulsome,” he said, suggesting that a government-sponsored bad debt fund is needed.

Mr Feldman estimated that some smaller retailers focused on small- and medium-sized businesses could be less than two months away from collapse, while others focused on residential customers had a few months more leeway.

Submissions on the proposal are due by June 25, ahead of a decision by the AEMC by July 23.

The AEMC also announced new rules enabling customers in remote areas to access off-grid energy from their network without compromising on consumer protection, retail deals or reliability.

The reform means distributors can choose standalone power systems – usually involving solar, batteries and a back-up generator – to supply customers rather than the main “poles and wires” grid.

It said the cost saving to networks would be relatively large because getting power to a small group of customers was disproportionately expensive.

Source: Financial Review