rss
7

Australia’s big energy retailers are fattening their consumer margins

Print Friendly, PDF & Email

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 1. Annual gross margin, standing offers, big three retailers

Chart 1. Annual gross margin, standing offers, big three retailers

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 2. Annual gross margin, average of lowest market offers, big three retailers

Chart 2. Annual gross margin, average of lowest market offers, big three retailers

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.

Chart 3. Annual gross margin, lowest market offer of all retailers

Chart 3. Annual gross margin, lowest market offer of all retailers

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.  

Pocket
  • MaxG

    I am not sure what the issue is; it is a private company and they can change what they want as long as customers are willing to pay the asking price.

    It is a different story altogether, that the natural monopoly, as well as it being a public asset should have never been sold in the first place. Too late whining now.

    • Flying high

      As an ex Sparkie of the SECV, blind Freddie could see that it was never going to be cheaper after being Privatised.
      In addition, the State government used to recieve circa $340 million per annum from the SECV into the Victotian State coffers.
      Yes, we are truly being ripped off.
      Thank you not Mr Jeff Kennett….

      • Chris Fraser

        There must be a threshold above which the privatisation of public utilities just Doesn’t provide any public benefit (different to the question of providing private equity benefit). All it does is make the public more skeptical of privatisation.

  • Jon

    LGC prices are $85 and wholesale prices in SA are predicted to be $90 – $100 over the next few years. This analysis is hard to believe….I’d suggest margins are about half what is shown here. It’s always nice to pick on the big incumbents but if they were that far off the pace I’d suggest they wouldn’t have too many customers. Particularly in Vic where competition is fierce and churn rates are 30%-40% per annum.

    • Bruce Mountain

      Jon

      It may be the case that “spot” LGC prices are around $85, but who really knows, there is no traded spot market and price transparency is poor. But anyone who transacts a large chunk of LGCs knows that the effective price is well south of the apparent spot price you suggest.

      With respect to “predicted” spot (wholesale) prices, whose predictions are these? It is true that wholelsale spot prices have been very high at times,. and very low at times and depending on the interval of your study, different estimates are plausible. Perhaps if you think the estimates I used are off the mark why don’t you put forward your own suggestions, with some rationale.

      I think you also miss the point if you think this article is about picking on incumbents. It does indeed focus specifically on them because they supply by far the greatest number of customers. But the point is to bring data to light for discussion, not polemic.

      • Jon

        Bruce the asx energy futures shows the forward curve for all markets out to 2019. Your inputs match for VIC and NSW but not for SA. Since the closure of Northern power station prices in SA have averaged approx $350/MWh. Re LGCs, it’s true there is little liquidity but the market is heading for shortfall and I’d be surprised if some smaller retailers aren’t short already. No analysis I’ve seen has suggested prices are heading down any time soon and if you could buy volume now for $50 then I’m sure retailers would be buying up big as there is very little new capacity coming online in the near future.
        Your analysis provides none of the rationale for your inputs you are asking me for. You have simply assumed cost inputs for the purposes of “comparison”. The suggestion of the article is clearly that retailers in Australia are profiteering from their customers, particularly the big three. However, we operate some of the most competitive energy markets in the world so I find it hard to believe that these super profits go unchallenged and that consumers ignore the opportunity to save your suggested $600 per year. My assertion is that the cost base and risk to retailers is much higher than you suggest and that there is enough competition in all the markets you have analysed to indicate that there is no room for profiteering.
        Another way to look at the profit of these companies is through their financial results which indicate profits of 5-10% of turnover which is not extraordinary. Notwithstanding all that, it is fair to say that anyone on a Standing Offer is paying too much!

  • Mike Dill

    Go Solar and beat the utilities at their own game!