Electricity price caps may harm new entrants, investment

Electricity price caps may harm new entrants, investment - S&P

By Gavin Evans

Sept. 18 (BusinessDesk) - Retail price caps in the electricity market may disproportionately harm new entrant players while also discouraging investment, ratings agency S&P Global says in an appraisal of the Australian power market.

Interventions in retail practices recommended by the Australian Competition and Consumer Commission run the risk of reducing profitability and may work against the merits of an open and competitive market, S&P says in a 13-page report issued this week.

It suggests greater focus should be on investment in the generation market, given only about 10 percent of the savings the ACCC believes may be available for customers come from retail margins.

“Costs associated with price and environmental regulation could more than offset the savings,” S&P says.

“Also, such a move would strengthen the position of incumbent integrated players in the near-term as reduced competitiveness offsets the risk of a price cap. This is because retail price caps would hurt smaller retailers more than large incumbents due to the former group's limited ability to absorb volatile market conditions and regulatory costs.

“Further, regulating prices could send a negative signal for new investments in the absence of adequate returns, worsening investor sentiment over the long term.”

Meridian Energy is the only New Zealand firm exposed to the Australian retail power sector. Its Powershop business has more than 101,000 customers in the south-eastern states and promotes itself as Australia’s greenest electricity retailer.

But the retail power price cap proposed by the ACCC earlier this year, and put in place in the UK earlier this month, will be considered as part of the electricity price review underway in this country.

Last week, shares in some of the country’s biggest generators jumped after the review’s initial discussion paper said there was no evidence that they, or network companies, were making excessive profits.

But the panel wanted more action on energy hardship and observed that a two-tier market – in which only those that shop around benefit from lower prices - appeared to be developing here.

Panel chair Miriam Dean told journalists the group had drawn on the work of the reviews in Australia and the UK, but she noted that the drivers of those reviews, and the markets themselves, were different from the experience in New Zealand.

UK power and gas regulator Ofgem has set a cap on the most common tariff in order to lower power costs for non-switching consumers. The cap, in place until 2020, will save users on those dual-fuel plans about 75 British pounds a year on average and up to 120 pounds for those on the most expensive plans.

The ACCC has also recommended the imposition of a “default” retail price to ensure non-switching customers pay a price closer to the actual cost of their power. It was also highly critical of the prompt-payment discounts that Meridian last week abandoned here. Last month Contact Energy said it planned changes to make it almost impossible for customers to miss out on the discounts.

The ACCC made 56 recommendations to help lower costs to Australian consumers. But it found the biggest contributors to higher residential power prices during the past decade were loose controls on network investment in some states, higher gas prices, reduced competition in the wholesale electricity market, and overly generous state subsidies for residential solar.

Last week Greenpeace called for the government to provide interest-free Crown loans to install solar panels and batteries on 500,000 homes by 2030. Grants would meet half the cost of installations for 100,000 low-income households.

Unlike New Zealand, Australia’s power generation remains highly dependent on gas and coal. About three-quarters of the power produced in the southern and eastern states comprising the National Electricity Market comes from coal, S&P noted in its report.

While state and federal targets for renewables have spurred investment in wind and solar generation, S&P said that has still been outstripped by the capacity lost through recent closures of large coal-fired plants.

Investment in renewables will continue, but there is an urgent need for investment in flexible dispatchable power – primarily pumped hydro and gas-fired generation – in order to maintain system reliability over time as more coal-fired capacity is retired, S&P said.

It favoured a scheduled closure of the country's coal fleet, and cited Genesis Energy's phased closure of its coal-fired capacity at Huntly as an example

S&P says the scrapping of the Turnbull government’s National Energy Guarantee last month, and a series of state and federal elections during the next nine months, means there is unlikely to be any policy clarity soon.

And it warned that regulatory interventions, if not carefully managed, could hamper investment and reduce competition among generators.

Reduced sector profits and confidence may reduce spending, while a proposal that the government underwrite future generation development may also favour incumbent players, S&P noted.

(BusinessDesk)

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