The big three electricity retailers (Origin, AGL and EnergyAustralia) recently raised their retail prices in South Australia (SA), New South Wales (NSW) and Queensland (QLD) with effect from July 1.
This post looks at the annual gross margin of the big three, compared to the gross margins on the cheapest offers in the market, before and after July 1. According to the most recent AER data these retailers together provide electricity to around 90%, 80% and 70% of all small customers in NSW, SA and VIC respectively.
Annual gross margin is defined here as the annual retail bill less the annual network charges, smart meter charges (in Victoria), environmental certificates (STCs and LGCs) and wholesale energy costs.
Every retail offer is matched to its applicable network tariff so that the network charge specific to that offer can be deducted. The gross margin is what the retailer keeps, before deduction of its own costs.
For the purpose of this comparison, we assume a 4,800 kWh per year household, STC and LGC prices of $40 and $55 and wholesale prices of $50/MWh, $55/MWh and $65/MWh in VIC, NSW and SA respectively. Load profile assumptions are set out in the most recent international price comparison report available from our website.
Also for the purpose of this comparison, we assume the conditions of all conditional discounts are met. The big three and most of the smaller retailers offer conditional discounts between 2% and 34% on their standing offers but usually only on the variable part of the bill.
All electricity price fact sheets from the websites of all licensed retailers in these states were downloaded and the data mined on 23 June and again on 7th July. These offers were then priced to establish the two snaps-shots of the market. This meant pricing 2,562 offers in VIC, 2,123 in NSW and 269 in SA.
Chart 1 shows that the average annual gross margin on the standing offers of the big three retailers ranges from about $550 to $800. SA has been and remains the most profitable market on these offers.
Chart 2 shows that for the average of the cheapest market offers of the big three retailers, SA has been more profitable than VIC or NSW. But it also shows that after the price rises in NSW and SA, average gross margins on the big three retailers’ cheapest offers will increase by about 50%.
Chart 3 shows the gross margins on the lowest priced offer of all retailers in each state. Comparing Chart 3 with Chart 2 it can be seen that the gross margin on the lowest priced offers in the market is around a quarter to a third of the average margins of the big three’s lowest priced offers.
Retailing electricity is evidently profitable and more so since the recent price rises in NSW and SA. The gap between the cheapest offers of the big three and the cheapest offers in the market is surprisingly large.
Maybe customers are less price sensitive than many say they are. Why else do new entrants offer such deep discounts to the big three’s best offers? Or might it be that some retailers are willing to take on this business with lower margins than others?
Perhaps customers trade off price for perceptions of service quality, billing accuracy and so on?
Mining customer reviews from web forums produce results that are not always kind to some of the lowest price retailers (or indeed some of the most expensive). And many of the new entrant retailers’ best offers are still some way north of the big three’s best offers. If they are not competing on price, what else are they offering?
In Britain, Ofgem has been publishing trends on retailer profits for several years. Comparison of their analysis with this, suggests retailing by the big retailers is a lot less profitable in Britain than Australia. But this is just a preliminary look, much more needs to be done to understand these markets.
Automated data mining means that proper retail market price and profit tracking is now possible in Australia. A wide variety of analyses can be done quickly and easily. Customers will have a better chance of buying well, sellers can know more precisely and quickly what they are up against, regulators can be more confident they are getting closer to figuring out what is going on and policy makers can be empowered to decide what, if anything, to change.
Bruce Mountain is director of Carbon and Energy Markets (CME), and co-founder of MarkIntell.