The ACCC Investigation

- Ben Chester, COO, Co-Founder LPE

 

It is not very often that someone from a particular industry, actually not just an industry but a very particular piece in a supply line of the industry, is singled out for an ACCC investigation. I can also say that it is very rare that a director of a company that is about to be part of said investigation would actively encourage the investigation…. Well here it is, I am becoming an active proponent of the proposed investigation.

I cannot speak for others, but I am sure that a few other electricity retailers are also in support, that said I am sure there are quite a few that are in crisis mode right now. Both the media and the government miss, when labeling an entire sector as “unacceptable and unsustainable”, is that it is complex, extremely complex. The electricity eco-system places a consumer retail transaction very near the end of a huge line of transactions. As politics go, the retailer has a logo on a bill and it is easy to point and say there is your problem. This is so wrong for so many reasons.

As politics go, the retailer has a logo on a bill and it is easy to point and say there is your problem. So wrong for so many reasons.

 

A De-regulated Market

A genuine retailer is just the administrative link between the ‘market and the customer’, yet the customer, for the most part, is totally isolated from the very many risk factors and volatility that occur behind their meter. In fact, the customer must be isolated from that exposure, it is a retailer’s obligation to ensure that this happens.

The most difficult part of the whole discussion is that the energy market is de-regulated. De-regulated does not mean without regulation, it is actually one of the most regulated corporate segments in Australia, I would suggest more than, or at least as much as, the financial sector. De-regulation means, without government control or direct influence.

De-regulated does not mean without regulation, it is actually one of the most regulated corporate segments in Australia, I would suggest more than, or at least as much as, the financial sector. De-regulation means, without government control or direct influence.

It is actually a more politically correct way of saying “privatisation”, with the big caveat that the government didn’t actually sell the assets, it shifted them (slightly, to arms-length) and allowed private money to invest and enter the sector.

 

Retailer, Wholesalers and 'Gentailers'

The main call of focus is not really on the retailers, it is on the ‘Wholesalers’ (not an official entity) who are consistently referred to incorrectly. All electricity is purchased from the National Electricity Market (NEM), this gets confusing because the market is both a legal fiction and a physical thing. Best explained, the electricity is live and can’t be stored (*see footnote), there is no consumer arbitrage i.e supply must equal demand and demand must equal supply.

The NEM is also the largest (by physical size) interconnected pole and wire network in the world, so everyone participating in the market, and in turn supplying to their customer, is connected to it.

So what is a Wholesaler? Well, as the NEM is a free market entity. Retailers (for the most part) buy electricity from the market, this could be called 'wholesale purchase' but it does not make them a Wholesaler. Where they are talking about ‘Wholesalers’ they are actually talking about Retailers who also operate or own Generators, we call them 'Gentailers', now this is where it gets fun. A Retailer has consumers, a Generator produces electricity.

A Retailer has consumers, a Generator produces electricity.

 

Market Manipulation

This is where the concept of “gouging” is spruiked by those who don’t really get it; a Gentailer can use their own supply, within the rules, and everyone else i.e 90% of other retailers cannot. See where this is going? When they talk about “market manipulation”, this is it. If you have the ability to control both sides of a market you make your money in the middle (arbitrage), add to this fact you can also cross-subsidise across the whole business.

When they talk about “market manipulation”, this is it. If you have the ability to control both sides of a market you make your money in the middle (arbitrage), add to this fact you can also cross-subsidise across the whole business.

We can’t exclude the government’s part in all this. It was, in fact, the Queensland Government (Palaszczuk / Bailey) that directed their companies (CS and Stanwell) to manipulate the market and when called out about it directed them to stop. Thus the confirmation bias of shouting about the reduction, and forgetting they caused the spike in the first place. They tried redemption by ‘distributing dividends’ of the obscene profits already garnished from their constituents. Now that it is seen that private organisations are following a state government's lead and distributing profits to their shareholders, we need an ACCC investigation.

Now that it is seen that private organisations are following a state government lead and distributing profits to their shareholders, we need an ACCC investigation.

This is a fine line, if we continue to broad blanket the sector reacting to every politician’s ill-considered and uninformed sound bite, using the Australian Energy Regulator (note: the AER is an arm of the ACCC) to adjust legislation, we will end up back in a regulated space. If we can learn anything from history it is that governments are not good business operators, and if you are worried about cost overruns, no one does it like a Government.

In conclusion I am going to follow this with the greatest of detail, actually participating. From the onset, my focus will be on the genuine motivation of this, because I know there is as close to zero left on the table for a retailer, can’t want to find out how a report is going to theorise on reforms that will “bring prices down”.

 

 

*Footnote

Just yesterday alone (11 July 2018), an ordinary, normal mid-winter Wednesday there was 520,500MWh of energy consumed over 24 hours on the NEM. The “largest storage in the world” is 100MWp or 129MWh*, equivalent of dispatchable energy. In context, on market, in yesterday’s normal day just in SA, (not the whole grid), the battery could have contributed to 1 hour and 11 mins of energy or …. 2min and 42sec. Inside the whole market the battery could support 0.214seconds or 1/5th of a second.

I am not making an opinion of storage in this comment, it is merely to show that electricity cannot be stored at real world levels for the NEM.

The round trip of storage is 80% so whatever the generation and whatever the storage you need to net up 25% to cover your real demand requirements.