AGL’s new retail offer signals big jump in wholesale electricity prices

Our power system is changing and anyone who reads articles on this website will know how topical electricity has become. Possible major changes in electricity production in Victoria are now looking increasingly likely, and the production side of the industry in 10 years’ time could look very different to how it looks today.

There is much speculation about the impact of these changes on wholesale and retail prices. What can we learn by looking at the retail offers in the market today ?

Two days ago, AGL increased the rates on their two-year fixed price retail offer to households in Victoria. This is an offer where they undertake to leave the rates unchanged for the two years after the customer has signed up.

Interestingly this was also the offer that had AGL’s lowest annual fixed charge, and so the most competitive AGL offer to low consumption households.

Assuming a customer is using 4MWh per year on a flat or block tariff (these account for 92 per cent of Victoria’s residential market), the annual bill on AGL’s fixed offer has now increased from $1,185 to $1,354, an increase of 14.3%.

Similar increases are evident in the other distribution areas in Victoria on AGL’s fixed term offers. AGL did not increase the rates on their other (non-fixed term) offers. And if we compare the September and October offers of all other retailers in Victoria, we are not yet seeing any meaningful change over the last few weeks.

So, what this AGL price information might be saying is that AGL is expecting higher wholesale prices in Victoria over the next two years and they are reflecting that in the terms they are offering on their two-year fixed deals.

They must be expecting much higher wholesale prices because network costs are unchanged, metering costs will decline significantly in 2018 and STC and LGC prices can surely not go any higher than they are now.

But is it right to draw this inference from AGL’s offers? In markets there will be competing explanations of why prices change. What do you think can be drawn from AGL’s fixed price offer changes?

AGL has around 22% of Victoria’s 2.4 million residential electricity market. Where they lead others will follow, or not? We will shall wait and see.

Bruce Mountain is the Director of CME and co-founder of retail market software company MarkIntell.