Australia / Press Releases
IBISWorld analyses ACCC’s recommendations
by IBISWorld Media team
Jul 12 2018

This week, the ACCC released an extensive report that blasted the failure of successive governments to address a multitude of issues within the Australian energy market. Industry research organisation, IBISWorld, believes that the ACCC’s recommendations will lower energy prices, as long as the National Energy Guarantee is quickly implemented with appropriate regulatory provisions.

The release of the ACCC’s report follows the decision by the Australian Energy Regulator (AER) to cut allowed fees for electricity transmission network operators, and comes just weeks ahead of the planned vote on the Turnbull Government’s National Energy Guarantee.

“Australians pay some of the highest energy costs in the world, despite having an abundant supply of coal, natural gas, wind, and solar capacity. In recent years, South Australian consumers have paid the highest average price in the world for electricity,” said IBISWorld Senior Industry Analyst, Jason Aravanis.

 

According to the ACCC, residential consumers faced a 35% increase in their bills over the decade through 2017-18, significantly eclipsing growth in wages and inflation over the same period. IBISWorld explains that the increase in consumers’ bills has been driven by growth in electricity generation, transmission, and retail margin costs. However, the underlying drivers of growth in each of these areas are different, and reflect the multiple structural problems within the Australian energy market.

 

Source: Australian Energy Statistics 2017

Generation

IBISWorld analysis of the recommendations found that a tightening of energy supply has been brought about by the exit of several large coal-fired power stations. In response to this exit, new energy assets (such as renewables) were developed, however this capacity has been unable to make up for the energy shortage left behind by coal stations. The significant increase in gas prices has also prevented gas-fired stations from providing replacement capacity for coal during this transition, contributing to a lift in wholesale prices across the national energy market.

The ACCC has found that existing power generation firms lack an incentive to invest in new generation capacity, as they currently benefit from disproportionately high wholesale prices. In addition, the frequent changes to Australian environmental and energy policies over the past decade has increased the perceived risk for private investment, contributing to greater risk premiums required to incentivise new investment in generation assets.

 

According to IBISWorld, vertical integration between energy generators and retailers is common in Australia. In such cases, the energy generation division of a firm sells energy to the retail division through an internal mechanism known as a transfer price.

 

“In theory, the internal transfer price should be close to the market wholesale price of electricity. However, the ACCC has found that vertically integrated players apply a premium of between 26% and 42% to wholesale prices. This allows these players to increase generation margins, while maintaining the appearance of low margins at the retail level. Internal transfer prices tripled in some states over the three years through 2017-18,” said Mr. Aravanis.

 

In order to reduce generation prices, the ACCC has recommended that the market shares of energy generators need to be limited to less than 20% in any state or region, and the AER should be given stronger regulatory powers to combat anti-competitive behaviour.

 

The ACCC has also strongly endorsed the National Energy Guarantee, provided that it encourages new generation firms to enter the market and does not provide protections for entrenched incumbents. Furthermore, the ACCC has opted not to recommend the break-up of vertically integrated firms. Instead, lowering barriers to entry and preventing the further dominance of entrenched firms is expected to restore competition at the generation level. By improving competition in the wholesale market, vertically integrated firms are likely to face greater pressure to offer competitive wholesale rates, or risk losing market share. IBISWorld forecasts that this could exert downward pressure on internal transfer prices.

 

Transmission

The ACCC report has also found what many have already suspected. The overinvestment, or ‘gold plating’, of monopolistic energy network operators has delivered excessive return to transmission companies, while leaving consumers with higher electricity bills. According to the ACCC, 38% of the growth in power bills over the past decade is attributable to growth in transmission costs.

 

“In response to this trend, the AER has moved to reduce the amount of revenue that network operators can charge customers. However, the AER has been rebuffed through legal challenges,” said Mr. Aravanis.

 

This month, the AER delivered new guidelines that would reduce transmission revenue by 13% over the next five years, leading to lower prices for consumers. The ACCC has recommended state governments to write down the value of energy transmission networks, in order to reduce the allowed capacity for network operators to recoup costs. IBISWorld expects this would provide welcome relief to households, as electricity bills would be reduced by approximately $30 to $40 per year. However, this reduction alone will not alleviate electricity pricing pressure.

 

Source: Australian Energy Statistics 2017

Retail

In terms of the retail market, the ACCC has found that competition has been less than optimal, with an increasing gap between the lowest and highest costs to consumers.

“Many customers have been unable or unwilling to switch between providers due to unnecessary complexity, particularly in regards to comparing discount prices between providers. Retailers have commonly offered tariff rates that are discounted against an independently set reference price, rather than a constant benchmark across the market. In addition, retailers have adopted substantial late-payment penalties that have further clouded the relative value of electricity contracts,” said Mr. Aravanis.

 

According to IBISWorld, a clear indicator of the failure of competition in the retail market is the profit margins of electricity retailers earned from household bills. According to the ACCC, the retail margin of an average bill is over 10% in Victoria and New South Wales, representing the highest margins in the world. In response to these findings, the ACCC has developed a suite of recommendations to streamline the consumer experience, and standardise pricing comparisons across retailers. IBISWorld expects new regulation will force retailers to benchmark their discounts against a market tariff, and restrict the discounts and penalties associated with late payments.

 

Future outlook

 

According to IBISWorld, the ACCC’s recommendations are likely to deliver greater efficiency and lower prices, if adopted by state and federal governments.

 

“5,300 megawatts of energy generation capacity is expected to enter the market over the two years through 2019-20, including 4,000 megawatts of renewable capacity. As a result, power prices are expected to fall from their 2017-18 peak as greater supply reduces price tension,” said Mr. Aravanis.

 

“The implementation of the National Energy Guarantee is a critical component of the plan to address energy affordability in Australia, and its potential implementation next month represents a turning point in the energy landscape,” Mr. Aravanis concluded.

 

IBISWorld Industry Reports used to develop this release:

 

For more information, to obtain industry reports or to speak with an analyst please contact:
McKenna Moroz 
IBISWorld Media Relations Representatives – Anne Wild & Associates Pty Ltd
Tel: (02) 9440 0414
Mobile: 0431 781 445
Email: mmoroz@awassociates.com.au