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Jul 5, 2012

Electricity retailers: do we really need them?

Electricity retailers are not really retailers at all -- they don’t deliver any product, apart from a bill. Now they're accused of standing in the way of the energy revolution. Why do we need them?


People understand what a retailer is: it’s where you go to buy and collect stuff — shoes, clothes, groceries, petrol and other items. They are the points of sale between the manufacturers and wholesalers, and the consumers.

But what about electricity retailers? Is that where you go to buy and collect electricity? Well, actually, no. Electricity retailers don’t actually deliver you any electricity at all. As the diagram below — taken from a presentation by UNSW electricity expert Hugh Outhred — will tell you, that comes straight from the generators via the transmission network and the distributors. And now, some of you will get electricity from solar PV modules on your roof.

The electricity retailers are simply competing for the right to send you a bill, to package up a range of tariffs and lock you into a contract. They are the archetypal middle-man, and the question that is now being put is: are they of any use?

The question arises because retailers have long been part of an economic model that relies on consumers buying more electricity. That means that retailers can sell more contracts, generators can build more power stations and distributors can build more poles and wires to transport the electrons. But that business model is now changing — demand is falling, energy efficiency is at a premium, more and more consumers (residential and business) are producing their own energy — and the retailers, like some of the other parts of the value chain — are getting in the way.

One of the biggest problems for retailers is a basic one — they aren’t very good at what they do. They find it almost impossible to hold on to customers. Last year, the major electricity retailers reported that the “churn” rate for 2010-11 was nearly 25%. That means, they lost nearly one in four of their clients, and then they had to go and pay to get them back again, and then bill you for it.

It may have something to do with the long-run inability of retailers to engage with their clients. International surveys show that electricity retailers have the worst relationship with their customers of just about any customer-facing group — their relationships are fleeting, and usually coloured by complaints about price hikes and connection problems.

Still, they make a profit. According to the most recent annual accounts for 2010-11 for the biggest retailers, their gross margin — the difference between the cost of electricity they pay the distributors and generators, and the cost of packaging up you bill and collecting money from customers — was between $150 to $200 per customer. The overall cost of retailers equates to about 15% of your electricity bill, or about $350 a year, depending were you live. That’s nearly half the cost of generation.

But that’s not the end of it. Retailers are now being accused of pocketing hundreds of millions of dollars in profits from schemes that have supported the introduction of technologies such as rooftop solar. For instance, they are allowed by pricing regulators — with the exception of the ACT — to charge customers $40 for each small-scale technology certificates (STCs), when the market price has rarely risen about $26. And there are about 45 million STCs washing around the system this year. That has grossly inflated the cost of the schemes, and the returns to retailers, even with their carrying costs.

And electricity retailers are also accused of picking up more profits from exports of excess electricity back to the grid from rooftop solar systems — for which they pay 6c/kWh (and in some cases nothing at all) and then sell it to the houses in the same street for up to five times as much. The retailers can do this because have managed to convince the pricing regulators that the difference is made up with fixed grid, billing and other costs. But the solar industry reckons they are profiting handsomely — hence the push for a “fair value” of solar.

One thing they do achieve is to manage pricing risk, and the rapid and often steep swings in wholesale electricity prices. They do this through a range of hedging policies and by being “vertically integrated”. That means they also own generators, so when the price moves one way, they make it up by increasing profits elsewhere. Unfortunately for customers, this has meant that few have enjoyed the benefits of the lowest wholesale electricity markets since the start of the NEM. Like banks, electricity retailers are slow to pass on the benefits of falling costs, but quicker to act when prices (or rates) go up.

So what would happen if we got rid of retailers? The biggest challenge would be managing the wholesale price risk — electricity is one of the biggest traded markets, bigger by a long shot than carbon. We would need interval metering throughout and, to provide financial risk management, we would also need a carefully designed derivatives market accessible to small players. Such a market was envisaged in the 1990s, but banks and other financial market players argued that this could have been a constraint on competition.

Outhred says perhaps the best answer is to turn them into service providers. “We need energy service companies instead of retailers,” he says. “Because of the way they operate, energy retailers mess up efficient management of uncertainty and deter end-users from energy efficiency improvements, as well as pocket a fee for doing so.”

Evolving into a service provider, however, would require a massive cultural change. But it may be one that is forced upon them. If the electricity retailing business is about collecting data (metering) and sending out bills, then there is a host of competing organisations that are specialists in data management and IT that can take that role, and offer snappy new devices that offer in-house monitoring and controls. If it is about customer management, there are a host of customer service specialists that can do that better too; and now there are a host of technology providers that can offer alternatives to sourcing electricity from the grid. And now these specialists are recognising their are opportunities to work together.

The best chance the retailers have of surviving — apart from regulatory protection — is to strike up some alliances or their own, and to get out of the way of progress. The sooner the better.

*This article was first published at RenewEconomy


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32 thoughts on “Electricity retailers: do we really need them?

  1. Frank Campbell

    For once, Parkinson is right

  2. Bryannai Baillieu

    Retailers are important so that the public maintains the delusion that there is competition in what is really a privatised monopoly. Silly!

  3. Hamis Hill

    Remote Mine Site electicity supply company PowerCorp has a device called PowerStore which aids in the mangement of supply and demand. They have a web site and have recently merged with another power company.
    The concept of storage is the key to solving some of the problems in the article, especially for the
    energy service groups now getting together.
    PowerCorp is/was an energy service company of the sort postulated in the article.
    Do not see why their operations cannot be applied to slices of the grid of similar size to their remote mine site operations. And almost immediately, considering their long history of operation.
    Something similar to this established energy service business could knock the retailers off their pedestal.
    But don’t monopolies protect themselves by denying the very existence of competition.
    Remote area mine site energy provision? Suely nothing at all happens outside the Grid?
    All those mining ans electrical engineers? What would they know about energy? Ridiculous!

  4. Hamis Hill

    But don’t monopolies protect themselves by deying the very existence of competition?
    What happens at remote area mine sites beyond the Grid.
    Is someone already servicing their energy needs?
    Are mining and electrical engineers involved? What would they know about energy and how to use it?
    Better not ask Eh?

  5. Scott

    “Last year, the major electricity retailers reported that the “churn” rate for 2010-11 was nearly 25%”

    Rather than a bad sign, that’s good as it’s usually a sign that the level of competition is high.

    Competition is the key to lower prices. You remove the retailers, you get less competition as the cost barriers of becoming a (serious) supplier of energy are too high (the solar distributed model is not quite there yet). Becoming a retailer, on the other hand, isn’t as difficult and they can concentrate on contract management efficiencies, leaving power generation and distribution to the big boys.

  6. Merve

    The power system in Australia is a scam from top to bottom. We have retailers who just print bills. We have distributers who scam the system by bumping up costs. Read “The Age” today, “Why your electricty bill is growing”. Tony Abbott and friends are hyper ventilating over the Carbon Price, when the majority of the rise in our bills is due to other reasons, many of which are to do with the failed privatisations, with overseas companies robbing us.

  7. Jonathan Prendergast

    Retails do more than print bills.
    Contracting the right amount of electricity at peak, shoulder and off-peak times is crucial, and enables the wholesale market. Some retailers have gone under when they haven’t contracted enough energy on the hottest sunny day, or haven’t allowed for a generator maintenance.
    They also have huge regulatory compliance they have to keep up.
    Concession prices for low income and the elderly.
    Not only do they pay the generators, but they calculate and pay the distributors and transmission companies also.
    They also have to buy Renewable Energy Certificates, and implement other policies like CFL and LED lightglobes.
    The main role of the retailers is the customer service. Which some do very poorly. But remember, they are the only point of customer service, so are doing it on behalf of the generators, distributors and themselves.
    We expect a lot from our retailers, and they are in a very competitive market. It’s unrewarding work, then the above article says their useless. Thankless task. I’d never wanna do it.
    And then when people discuss the retail part of the cost of electricity, they call it ‘retail margin’. Yeah, the generators and distributors are doing it for free, and the retailers are just sitting there taking profits? Of course not.

  8. Owen Gary

    Electricity utility split into four= 4x more cost to consumers. Standard Corporate operating practice, it’s called the “Free Market” which means it’s free for them to make a profit at our expense.

  9. David Hand

    Every trader you engage with who you pay for a good and service that you beneficially use for yourself is making a profit at your expense. In fact, when you trade your hours to your employer in exchange for your salary, you are making a profit at their expense.

    It’s called the “Free Market”.

  10. Wood S

    Please allow me to use this forum to raise my complaint against ACTEW (ACT Electricity and Water Corp) again. Having taken the offer of 100% Greenchoice, mandated as windpower, and paying extra for the priviledge, I have been told by ACTEW that my electricity supply is attracting the full price rise resulting from the introduction of the ‘carbon tax’ on 1 July, with the approval of the regulator! (There is also as additional infrastructure price rise.) This despite the ICRC’s recent determination that green energy will not contribute to price rises and my assumption that it would be counter productive if it did.

  11. sickofitall

    Another bunch of lazy rich bastards who rip us off shamelessly, and pay little tax. Dole bludgers who should be imprisoned. Find the politicians who approved this stupid idea and exile them. To Afghanistan , Ethiopia, or anywhere where they’d have to actually fend for themselves.

  12. beetwo77

    I’m a bit ignorant I’ll admit on how the entire system works. But to me the argument that we need an intermediary to manage wholesale power price fluctuations. Surely the answer is simply that the wholesale price shouldn’t be fluctuating? What is the benefit of that?

  13. David Hand

    Fluctuations in the wholesale price occur because electricity can’t be stored and must be created as it is demanded. Demand fluctuates during the day and some generation is a lot more expensive than others, hydro generally being the cheapest. Typically, peak demand is between 5 and 7pm when most people arrive home and turn on appliances, cook dinner and use hot water. Electricity generators control this by putting the price through the roof at these times. This causes other users to shut equipment down. The alternative to a wholesale price spike is brown outs.

    Consumers are protected from this through electricity retailers setting a standard price to customers and contracting a fixed price from generators. This pushes demand management onto industry which often shuts down at 5pm to avoid the spot price hike. In the absence of retailers, consumers would be exposeed to very high kwh charges at peak times.

    We could of course have massive generating capacity, half of which is only switched on at 5pm for a couple of hours but the cost electricity would be much higher to pay for it.

  14. Frank Campbell

    Merve: thanks for the link to the excellent Michael West article in the Age. Everyone here should read it.

    The furious residents’ response in Brunswick- against a dozen pylons 26 m high- was successful in the sense that the pylons were eliminated (and they may yet get rid of the facility altogether from their back yard). This makes an interesting contrast to
    the contempt poured on rural residents defending their basic rights against 120m high wind turbines- the noise of which alone is far more damaging than pylons.

    This exposes the essential hypocrisy of the Greens and urban interests generally.

  15. Frank Campbell

    Wood S: “This despite the ICRC’s recent determination that green energy will not contribute to price rises and my assumption that it would be counter productive if it did.”

    “Green” energy (except hydro) is far more expensive than conventionally generated power. We all pay for solar subsidies- i.e. consumers pay for the generous feed-in tariffs. These are being cut back drastically worldwide- because the rort is now seen as a regressive tax, and domestic solar makes a miniscule contribution to power production. As for wind power, that is a dead weight on all of us, quite apart from the brutal losses and misery turbines inflict on those nearby.

  16. john2066

    Electricity privatization is essentially a scam, an act of theft against consumers. There should be a class action at the people behind it, as yes, really its a disguised monopoly. These people should be brought to account.

  17. Hamis Hill

    But, David Hand, if electricity could be stored what effect would that have on fluctuations?
    The holy grail of supercapacitors ( The capacitor is like a bucket for storing electrons in electronic circuits and can be used to iron out fluctuations in voltage, a bit like water pressure in high dams maintaining the water presure in suppy pipe lines) has not yet been accomplished but electricity can be converted into other forms of energy for storage and reconverted back into electricity again.
    See above post concerning PowerStore device used to help manage demand and supply in remote areas. (Incidentally helped to commercialisation by John Howard’s Australian Greenhouse Office grants). So the taxpayer has already funded it, have they got a return yet?
    The question must be why are forms of energy storage not being incorporated more widely into the grid?
    Does such an innovation, if successfully applied, somehow threaten the Grid and those happy with the present circumstances?
    As pointed out, electricity storage through energy conversion does exist in remote areas like mines and islands, so why is it not being applied to the grid and its problems with the intermittent supply of renewables?
    Privately stored energy, sourced from renewables, would have an immediate effect upon the amount of demand upon the grid (if that energy can be accessed as an electricity supply).
    Energy from renewables stored in such a fashion could be sold back to the grid, on demand as it were through some sort of generator as is presently used in petrol generators. Or Hydro
    Is someone in Grid land who is having mega bucks dangled infront of them for nuclear or coal fired plants scared that energy storage, as described, will destroy their carefully crafted business models? Scared of competion?

  18. Hamis Hill

    To David Hand , see above HH post on energy storage recently released from m—-tion.
    More recent reply now in m——ion.

  19. David Hand

    All the remote mine sites I have been on, and I’ve been on a lot, have their own power generation plants, many of which supply power back to the local camps and towns.

    Your conspiracy theory that power retailers are hiding effective storage technology in order to preserve their profits is merely shallow lefty anticpitalist nonsense. Believe me, power generators would give their eye teeth for a technology that allows efficient energy storage.

  20. Owen Gary

    @David Hand,

    The free market has historically been one that is regulated, the kind of free market we have now entered in this era is basically a free for all, & this is the model that is sponsored by the coalition.

    What has been set up in this instance is a kind of monopoly that does not serve the interests of the public or the country only private financial cartels so save the bumf for someone who will actually believe you.

    In point of fact David I think youv’e got your hand on it.

  21. Hamis Hill

    David, all the remote mine sites you’ve visited have “their own power generation plants”?
    And here we all were thinking that they were connected to the grid.
    Your wisdom passeth all understanding including how to look up the Australian energy management company and the their unit for reliably storing energy whose very existence you claim is
    “merely shallow lefty anticapitalist nonsense”.( see above post 5 July 4.18 pm)
    To paraphrase you Dave; “Believe me if there was a technology that allowed efficient energy storage,
    you’d deny its existence”. You are not alone, you may find that comforting.

  22. David Hand

    Sorry HH,
    I thought when you posted,

    “Remote Mine Site electicity supply company PowerCorp has a device called PowerStore which aids in the mangement of supply and demand. They have a web site and have recently merged with another power company.
    The concept of storage is the key to solving some of the problems in the article, especially for the
    energy service groups now getting together.”,

    I thought you were saying that storage technology to even out demand/supply variations actually exists and is not in use because it suits evil capitalist monopolist corporations. I may have misunderstood you.

  23. David Hand

    Happy to have you disagree with me. Hey, we might both learn something by reading posts by those with alternative views.

    Electricity is not a free for all. Prices are closely regulated and an efficiency dividend is demanded each time the pricing is reviewed to put downward pressure on prices.

    Why are prices rising? I hear you ask. Well as I put my hand on it and stroke it, I think the Power retailers have large get-out-of-jail-free cards in the form of passing on the Mineral Resources Rent Tax and the Carbon Tax, you know, that tax you aren’t going to pay.

    How are you lefties going to get traction on those, how did you put it?, “a kind of monopoly that does not serve the interests of the public or the country only private financial cartels” (beautifully put if I may say so). Julia is giving such gratuitous free kicks to them that they can light up even higher quality cigars at their beachside condominiums in Acapulco.

  24. Hamis Hill

    Adam Smith, the “father” of the free market, has some relevance here.
    Smith stated that his work intended to “understand commercial society and better it”.
    Some might think that certain members of commercial society might be quite happy with levels of understanding in the general community which allow “private financial cartels” to fix prices by avoiding competition and further, might harbour an interest to both quash competition and reduce understanding.
    And didn’t Adam Smith argue that “natural monopolies” for which it was difficult to introduce competition, should be controlled by the “nation”? Otherwise what would happen?
    Wouldn’t it be nice if those who prattle on about lefties actually read Adam Smith?
    And that the actual lefties, whoever they might be, actually dropped the Marxist crap and read Adam Smith as well?
    After all, Marx stole most of Smith’s ideas and bowdlerised them for the consumption of the not yet fully literate industrial workers. A thief and a fraud preying upon those with an imperfect understanding of commercial society.
    Smith and his fellow enlightenment philosophers came from a nation where the majority of the adult population was infact, and unlike the rest of Europe, literate and numerate.
    Hence Marx’s playground.
    Now how do we get competion into the energy market so the consumers can chose the winners?

  25. Hamis Hill

    Why is it that any post with “Adam Smith” in it is automatically moderated?

  26. Hamis Hill

    That person, AS, argued that natural monopolies should be controlled by the “nation” because monopolists, who have no competition, are free to set their own prices.
    So how do we get competition into the present energy market?
    Is it a natural monopoly for which there is no competition?
    Where does private storage of energy change the idea of a natural monopoly in the supply of energy.?
    By providing competition?
    There is no argument that the private provision of electrical power is anything new.
    Eg, those stand alone energy consumers, notably North American farmers mid 20th century.
    One inventor had a clockwork style apparatus of toothed gears and cables which mechanically allowed a large weight to be raised by the power of the wind, storing that potential energy you all know from high school and allowing it to be used later when the “Wind Don’t , snigger, snigger-it’s all so obviously stupid, Blow”. He called it an Accumulator.
    Now all the experts will tell you that all this storage could not possibly occur and if it did then they’d be the obvious ones to tell you about it, bein’ the experts ‘n all, right?
    Noticed, Dave and others how the experts,( now who are they employed by and trained to serve?)
    have very little to say about energy storage? Might threaten the monopoly?

  27. Hamis Hill

    Now I get the moderation rules, anything longer than a few grunts and belches is deemed too dangerous to post on the weekend when the moderators are out getting a life.

  28. Hamis Hill

    To one of David’s posts (other responses locked in moderation) electricity is, physically, uneconomic to store. But can be converted and stored in other forms of energy, knowledge of which most people gain in high school.
    Stored energy which can be converted back to electrical energy, those things called “generators” are actually energy conversion devices. ooh, ooh!!
    So please debaters do not confuse energy storage with electricity storage, that is if you really do want to have a debate. you do don’t you?

  29. Hamis Hill

    The article, “Electricity retailers: do we really need them?”, finishes with a host of service specialists and technology providers now recognising opportunities to work together to offer alternatives to sourcing energy from the grid.
    Existing, commercially available and reliable energy storage units, some known as “mechanical batteries”, will be part of their armaments. looks very much like monopoly busting competition.

  30. Hamis Hill

    That HH character does rave on!

  31. Owen Gary

    @David (both Hands on-it)

    I think you might find the “Corporate Model” was invented to take over & crush competition
    They even invented corporate law to protect it!!

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