New South Wales has three network distribution areas – Ausgrid, Endeavour Energy, and Essential Energy – where multiple retailers compete for small customers in each market. The Australian Energy Regulator (AER) set the Default Market Offers (DMO) that place a price cap on standing offers in each market. The DMO does vary between each market.

Findings

  • The median residential offer below the DMO increased between March 2019 and March 2020 in all three network areas (Ausgrid network by one per cent, Endeavour one per cent, Essential Energy four per cent).
  • Residential customers on the DMO could save between $301 and $470 (by network area) a year by switching to the minimum market offer available.
  • In New South Wales six retailers entered the electricity market to reach a total of 31 retailers. These are Discover Energy, Elysian Energy, GloBird Energy, Future X Power, Locality Planning Energy and Nectr.
  • The Electricity Market share of the Big 3 retailers has fallen from 83 per cent to 81 per cent in the past year.
  • Residential customer satisfaction with the level of customer service increased by nine per cent to 68 per cent, and value for money increased by 18 per cent to 63 per cent in NSW between April 2019 and April 2020.
  • The number of residential customers on hardship programs increased by 2,621 during 2018-19 to just over 39,500, and the proportion of customers on hardship programs increased from 0.97 per cent to 1.01 per cent of all small customers. The level of debt customers had when they entered the scheme increased by seven per cent to $1,102.

Looking forward

  • Electricity price regulation (DMO) was reintroduced on 1 July 2019 after price regulation was removed five years ago. This has reduced the prices paid by the 13 per cent of households and small businesses in NSW that remain on a standing offer (down by one per cent over the past 12 months).
  • Preliminary results show that there may be a reduced incentive for consumers to engage in the market due to reduced price dispersion under price regulation. This may be contributing to the lower switching seen over the past 12 months. The AEMC will continue to monitor the impact of reregulation and advise Governments on consumer pricing outcomes and implications for the retail market.

Overview

For the electricity market in New South Wales:

  • in March 2020, there were 31 retail electricity businesses (35 electricity brands)
  • Discover Energy, Future X Power, Nectr, Elysian, GloBird Energy, and Locality Planning Energy all entered the market in the past year
  • there was approximately 3.59 million small electricity customers as of December 2019.

For the gas market in New South Wales:

  • there were 10 gas retail businesses (10 gas retail brands) in March 2020
  • GloBird Energy entered the market over the past year
  • there was approximately 1.47 million small gas customers as of December 2019.

Full retail contestability was introduced for electricity and gas customers in 2002, with the New South Wales Government removing retail price regulation for electricity on 1 July 2014 and for gas on 1 July 2017. On 1 July 2019, the DMO was introduced by the Commonwealth Government and has set a cap for all standing offers. The AER sets the DMO for each network distribution area in NSW (Ausgrid, Essential Energy and Endeavour).

The Independent Pricing and Regulatory Tribunal monitors and reports annually on energy retail prices.

New South Wales adopted the National Energy Customer Framework (NECF) in July 2013 with a number of variations.

Retail market structure

The structure of a market influences the conduct of its participants and in turn the performance of the participants and outcomes for consumers as a whole. The Commission analyses a range of factors, including market concentration, customer switching and barriers to entry, expansion and exit to assess market structure. The key findings of this analysis for New South Wales are outlined below.

  • Electricity market concentration, as measured by the Herfindahl-Hirschman index (HHI), declined by six per cent (138 points) to 2,336 from July 2018 to June 2019.
  • New South Wales remains the second least concentrated market in the NEM based on the HHI.
  • Gas market concentration declined by five per cent (166 points) to 3,051 HHI points from July 2018 to June 2019. New South Wales is the third least concentrated gas market.

The retail electricity market in New South Wales is becoming less concentrated overtime as shown in the below figure.

Market share graph - electricity

Market share (%)
HerfindahI-Hirscgman Index (HHI)
DOWNLOAD CHART DATA [0.96 kB CSV]DOWNLOAD ADDITIONAL CHART DATA [4.84 kB CSV]

Source: AER and ESCV, AEMC analysis Notes - Queensland refers to the South East Queensland region. The market share measures (and related HHI calculations) were taken from the fourth quarter of each financial year, except in 2019-20 where only two quarters of data was available.

Market share graph - gas

Market share (%)
HerfindahI-Hirscgman Index (HHI)
DOWNLOAD CHART DATA [5.49 kB CSV]DOWNLOAD ADDITIONAL CHART DATA [0.94 kB CSV]

Source: AER, ESC, and AEMO, AEMC analysis

Independent rivalry

Consumer switching activity can provide an insight into the level of independent rivalry among retailers in a market and also influences levels of market share, market concentration and barriers to entry and expansion. Information about consumers switching between different types of retailers (such as switching from one Big 3 to another, or from the Big 3 to tier 2 retailers) provides an indicator of progress in achieving effective competition in a market. Further, the rate of switching between the Big 3, and from tier 2 retailers to the Big 3, provides an insight into how effectively retailers who have historically enjoyed the benefits of incumbency are competing for consumers.

Overall switching decreased over the past year but switching from Big 3 to tier 2 retailers continued to be greater than switching from tier 2 to the Big 3.The retailers gaining the largest number of customers in NSW in the part 12 months were Red Energy gaining 35,000, Alinta gaining 15,000, Momentum Energy gaining 14,000, and Energy Locals gaining 12,000. Origin Energy and EnergyAustralia lost 17,000 and 10,000 customers respectively. The NSW market grew by 86,000 customers over the period.

Consumer switching within and between retailer tiers, yearly average between 2013 to 2019

Switching rate %
DOWNLOAD CHART DATA [1.44 kB CSV]

Source - AEMO data. AEMC analysis. Notes - Queensland refers to South East Queensland. Big 3 in the Australian Capital Territory includes ActewAGL.

Retailer views on market structure

In addition to examining observable market share data and trends, the AEMC conducts a retailer survey and interviews to obtain insights from retailers of various sizes about what they believe is affecting market structure, the state of competition in the energy market and factors that retailers consider will influence the market in the future.

For New South Wales a number of retailers considered that:

  • increased political and regulatory intervention across the NEM was increasing risk and administrative burden
  • they were critical of the introduction of Commonwealth Government’s DMO on 1 July 2019, but noted more time would be needed to assess the full impacts from it.

Retailers indicated on a scale of 0 to 100 how much of barrier to entry and expansion access to competitively priced hedging, retail licence arrangement/regulations, and market power of incumbent are in each jurisdiction.

With 0 not being a barrier and 100 being a strong barrier, retailers indicated the following barriers to entry into New South Wales as:

  • access to competitively priced hedging = 37 (second lowest in the NEM)
  • retail licence arrangement/regulations = 38 (third lowest in the NEM)
  • market power of incumbent = 44 (lowest in the NEM)

With 0 not being a barrier and 100 being a strong barrier, retailers indicated the following barriers to expansion into New South Wales as:

  • access to competitively priced hedging = 36 (second lowest in the NEM)
  • retail licence arrangement/regulations = 33 (fourth lowest in the NEM)
  • market power of incumbent = 46 (lowest in the NEM)

Pricing practices

The AEMC examines how retailers compete for customers through price and non-price offerings in relation to small consumers in both the electricity and gas markets.

To analyse pricing behaviour, the Commission examined a range of possible bill outcomes for a representative New South Wales customer as follows:

  • For residential non-solar offer - annual consumption of
    • 3,800 kWh in Ausgrid’s network distribution area
    • 4,900 kWh in Endeavour Energy’s network distribution area
    • 4,600 kWh in Essential Energy’s network distribution area.
  • For small business offers - annual consumption of 20,000 kWh.
  • For residential gas offers - annual consumption level of 24,387MJ.

Standing and market offers

The below table shows the proportion of small customers on standing offers for electricity and gas and shows that in New South Wales, 87 per cent of electricity customers and 88 per cent of gas customers are on market offers.

Electricity and gas standing offers percentage

Electricity standing offerChange from 2018 to 2019Gas standing offerChange from 2018 to 2019
Queensland*13%-2%22%-2%
New south Wales13%-1%12%-1%
Australian Capital Territory43%-8%43%-6%
South Australia8%-1%10%-1%
Tasmania**98%+6%
Victoria***5%-1%6%-1%

Note: *Gas statistics are Queensland-wide and electricity statistics are for the deregulated region (South East Queensland). **While Tasmania has multiple gas offers - the AER does not publish customer numbers. ***Victorian numbers are based on residential customers only - Source: AER retail statistics and the ESC's Victorian Energy Market Report 2018-19. Data as of December 2019 - except for Victoria which is based on 2018-19.

Pricing behaviour - standing and market offers

As shown in the figure and table below, in New South Wales’s residential market the highest priced offers have been removed, more than half of which were standing offers. This has reduced price dispersion in each of the distribution areas. From 2019 to 2020 the lower priced offers, below the DMO, have:

  • remained largely unchanged in Ausgrid’s distribution area, with an increase of one per cent in both the average and median priced offers. The lowest priced offer remained steady at $1,032.
  • increased in Essential Energy’s distribution area, with an increase of four per cent in both the average and median priced offers. The lowest priced offer did increase by $70 or five per cent to $1,440.
  • remained largely unchanged in Endeavour’s distribution area, with an increase of two per cent and one per cent in both the average and median priced offers. The lowest offer did decrease by $160 or 13 per cent to $1,093.

New South Wales residential customers on the DMO could save between $301 to $470 by switching to the minimum market offer depending on the network area in 2020.

Bills - NSW Electricity Distribution Residential

Number of offers
DOWNLOAD CHART DATA [10.74 kB CSV]
20192020changechange %
Number of offers12012887%
Highest offer$1,8331311-521-28%
Lowest offer$1,0351032-20%
Range$798279-519-65%
Default market offer (DMO)$1,334
Offers below DMO801284860%
Median offer$1,170$1,183$131%
Average offer$1,183$1,199$171%
Lowest offer$1,035$1,032-$20%
Range$299$279-$20-7%

Bills - NSW Electricity Distribution Small Business

Number of offers
DOWNLOAD CHART DATA [9.16 kB CSV]
20192020changechange %
# of offers11991-28-24%
Highest$8,898$6,830-$2,068-23%
Lowest$5,000$3,761-$1,240-25%
range$3,898$3,070-$828-21%
DMO$6,701
Offers below DMO9188-3-3%
Median offer$5,722$5,729$70%
Average offer$5,830$5,775-$56-1%
lowest$5,000$3,761-$1,240-25%
range$1,701$2,940$1,24073%

Bills - NSW Gas Distribution

Number of offers
DOWNLOAD CHART DATA [3.56 kB CSV]

Consumer behaviour and sentiment

In order to determine consumer behaviour and sentiment the AEMC examines consumer:

  • switching behaviour
  • ability to make choices and access to information
  • confidence in the energy market
  • satisfaction with energy services
  • perceptions of value for money for energy services

In an effectively competitive market, the expectation would be for consumers to have increasing confidence in their ability to make decisions over time.

Residential consumers

Data on residential consumer sentiment is sourced from the ECA's biannual Energy Consumer Sentiment Survey (the ECA Survey). Survey results have been compared on a year-to-year basis due to seasonality in the biannual survey responses (i.e. results in April 2019 to April 2020). The ECA survey results show that September/October results are generally more pessimistic than April.

Key changes in switching behaviour in New South Wales were:

  • Less customers switched retailers (18 per cent in 2019 compared to 21 per cent in 2018).
  • Less consumers indicated an intention to switch retailers in the next 12 months (16 per cent in April 2020 compared to 18 per cent in April 2019).
  • The main reasons stated by consumers for switching was not being satisfied with the value for money from their retailer (19 per cent) and/or having searched for a better deal on a comparison website (22 per cent).

Electricity switching graph

DOWNLOAD CHART DATA [0.68 kB CSV]

Test Description

Gas switching graph

DOWNLOAD CHART DATA [0.54 kB CSV]

Source: AEMO, AEMC analysis.

Residential consumer confidence in the energy market increased in 2020. In April 2020 (compared to April 2019), confidence in New South Wales that:

  • the market is working in consumers’ long-term interests was 37 per cent (up six per cent)
  • they can make good decisions was 64 per cent (up three per cent)
  • they can access easily understood information was 53 per cent (up three per cent).

Residential consumer sentiment

DOWNLOAD CHART DATA [10.74 kB CSV]

Small business consumers

Small business consumer confidence in the energy market increased in 2020. In April 2020 (compared to April 2019), confidence in New South Wales that:

  • the market is working in consumers’ long-term interests was 54 per cent (up 14 per cent)
  • they can make good decisions remained at 58 per cent
  • they can access easily understood information was 55 per cent (up four per cent).

Small business consumer sentiment

DOWNLOAD CHART DATA [4.33 kB CSV]

Consumer outcomes: Complaints, hardship and disconnections

Key statistics related to complaints, hardship and disconnections for New South Wales include:

  • Complaints to retailers decreased by 11 per cent from 2017-18 to 2018-19.
  • Complaints to the Ombudsman decreased by 0.3 per cent in 2018-19.
  • The proportion of consumers on hardship programs between June 2018 and June 2019 increased by 0.04 per cent to a total of 1.1 per cent of consumers.
  • The average debt of customers on entry into hardship programs for electricity increased by $68 from $1,034 in 2017-18 to $1,102 in 2018-19.
  • Electricity disconnection rates have:
    • decreased increased by 0.25 per cent to 32,237 in 2018-19 for residential consumers
    • decreased by 20 per cent for small business consumers to 4,190 in 2018-19.
  • Gas disconnection rates have:
    • increased for residential customers by 28 per cent to 3,392 disconnections in 2018-19
    • decreased for small business consumers by 27 per cent to 202 disconnections in 2018-19.

The table below provides a breakdown of closed complaints to jurisdictional ombudsman schemes:

NSW ombudsmen complaints

2014-152015-162016-172017-182018-19
Retail electricity21,22615,65915,77819,17019,652
Retail gas5,3805,3794,9524,5313,972
Retail dual fuel885
Total27,49121,03820,73023,70123,624

In addition to closed complaints, ombudsmen deal with a range of enquiries and issues across various categories, which are listed below (noting that most complaints are in the ‘billing’ category):

  • Billing complaints
  • Credit
  • Transfer
  • Marketing
  • Customer service
  • Land
  • Supply
  • Provision
  • General enquiry

Additional information

Access to generation

Vertically integrated retailers

A vertically integrated retailer is a business that owns generation assets as well as selling electricity to customers in the mass market. Vertical integration in the electricity market provides a means for retailers and generators to internally manage the risk of price volatility in the wholesale spot market as they have a physical hedge. A physical hedge means that they have direct access to generation contracts to cover their customer's demand (also known as their load). The business therefore does not need to purchase that quantity of generation contracts from another party to manage its risk. However, these retailers' load and generation is unlikely to ever be perfectly matched, and they will therefore still have to purchase derivative products to manage their risk. Likewise, other risk management tools (such as demand response) may be used to hedge the retailers load to the desired level of risk.

The trend of retailers in the electricity market vertically integrating continued in 2019. This included acquisition of generation assets and entering into long-term contracts with generators, such as joint ventures.

Some retailers noted in the retailer surveys and interviews that some form of vertical integration is becoming a prerequisite to be able to expand to an efficient scale.

Arm’s-length vertical integration

A retailer that is vertically integrated through an arms-length relationship has access to wholesale hedging contracts through its parent company that owns, or is, a generation business. Unlike traditional vertically integrated retailers, the retail business and generation assets are generally separate businesses. For generators, such as Pacific Hydro, adding a retail arm like Tango Energy can reduce the risk they face in the contracts market by providing an extra path to market for their generation.

These retailers have access to contracts from their parent company’s generation, typically purchased at market rates, and terms and conditions. Any further uncontracted load is then purchased through the wholesale contract market or left exposed to the spot price. This structure allows the retailer to have a greater level of certainty that it will have access to contracts to provide a hedge against a volatile and/or illiquid market.

Standalone retailers

A standalone retailer is one that does not own, or have a commercial relationship with, any generation business to manage their customer's load. These retailers typically have to contract for their whole risk management portfolio with external parties. Therefore, to manage their risk to the same level, a standalone retailer will need to enter more commercial contracts with external parties relative to a vertically integrated retailer.

Standalone retailers typically have a higher cost to serve each customer due to the larger amount of derivative contracts they must purchase to hedge their load. The cost of hedge contracts stem from the associated premiums (and other costs) to ASX and over-the-counter (OTC) contracts. These businesses also face uncertainty of the availability and price of contracts in the future. Neither the costs nor uncertainty faced by standalone retailers are present to the same degree for vertically integrated retailers because they internally hedge.

While, in theory, standalone retailers may get access to lower costs on a transient basis compared to a vertically integrated retailer, over the longer term their costs are expected to be higher.

Wholesale contract market

The wholesale contract market is an important feature of the NEM, which supports retail competition. The below sections explain why and how retailers interact with the wholesale contract market. Retailer views on the contract market are covered in Chapter 3, section 3.3.1.

Why retailers interact with the wholesale contracts markets

The NEM wholesale spot market is a gross pool market where generators are paid for the electricity they produce, and retailers pay for the electricity their customers consume.[1]

The wholesale spot market price per megawatt hour varies from -$1,000 to $14,700. Retailers and generators therefore use electricity wholesale contracts as a way to manage the risk they are exposed to from fluctuating spot market prices. The wholesale contract market has implications for retail market outcomes. Wholesale contracts allow retailers to have a form of insurance so that they are able to know the price that they will pay for electricity in the medium-term. This in turn allows them to write longer term retail contracts with consumers, providing stable retail prices. For generators, wholesale contracts provide the revenue certainty that is critical when seeking finance for new generation investments.

A more liquid wholesale contract market typically supports a more effectively competitive retail market. This is because retailers are able to get the contracts they require to manage the wholesale market risk. A liquid wholesale contract market is typically characterised by:

  • no single transaction being likely to move the price excessively
  • individual trades that are able to be easily executed
  • an ability to trade large volumes of energy in a short period
  • a market that can recover towards its natural equilibrium after being exposed to a shock.

How retailers interact with the wholesale contracts market

Contracts in the NEM are currently traded either on the Australian Securities Exchange (ASX) or Over-The-Counter (OTC) through bilateral contracts. Swaps, cap options and power purchase agreements (PPAs) are the typical types of wholesale market contracts. These contracts are written to relate to a specific regional reference node and therefore only cover the risk for a retail load in that region. Different contracts also have a different certainty, or firmness, attached to them. Examples of this are:

  • A PPA contract from a generator is not as certain (or firm) as a base swap or cap contact because the retailers is still exposed to high prices if the generator is not generating at the time.
  • Interregional hedging is generally not as firm a contract as those written for the region where the generator is located. For example a New South Wales base contract will only cover the risk of the New South Wales wholesale spot price and not that of the retailer's customers in another state. This can mean that while a business may manage their risk by contracting between regions, these hedges are not as firm as the same contract with a generator in the same region as the load. This means that generation assets are most valuable in the state where they exist.

Along with the typically high use of swap, cap and PPA products, there has been the emergence of more bespoke products, such as weather derivatives and load-following hedges. These contracts are becoming a common way for retailers to manage a portion, or all, of their risk exposure to the wholesale market. There is currently poor visibility on who is using these products as they are not traded on the ASX, and the Australian Financial Markets Association (AFMA) electricity OTC derivatives survey does not provide detailed information for these types of contracts.

Wholesale risk management

The retailer survey asked retailers four questions regarding their management of wholesale risk. Retailers were given multiple answers to choose from. 20 retailers responded to the survey, and between four and 15 retailers responded to each question. These results provide an indication of how retailers manage their exposure to risk in the wholesale spot price market, but should not be relied upon as definitive. Retailer results for Tasmania were excluded due to small number of respondents. 

How do you manage your wholesale risk?

Retailers were given four options to choose from

  • Internal contracting  - e.g. vertical integration
  • External contracting - active trading through OTC and ASX
  • External contracting - load following hedge or other de-risk strategy
  • Pass through wholesale costs - risk passed onto customers

 The table below shows the proportions of retailers that chose each of the four wholesale risk management strategies by jurisdiction:

Wholesale risk management strategies

Internal contracting-External contracting - active tradingExternal contracting - de-risk strategyPass through wholesale costs
SEQ25%58%50%33%
NSW40%53%53%20%
ACT29%57%57%43%
Vic.50%50%50%25%
SA42%33%50%25%

When do you start hedging for wholesale costs?

Retailers were given the following options to choose from

  • 0-6 months
  • 6-12 months
  • 12-18 months
  • 18-24 months
  • Greater than 24 months
  • Wholesale costs are not hedged

The table below shows the proportions of retailers that chose each of the ‘when do you start hedging’ options by jurisdiction:

When do you start hedging

0-6 months6-12 month12-18 months18-24 monthsGreater than 24 monthsNot hedged
SEQ0%25%17%25%25%8%
NSW0%33%20%20%20%7%
ACT0%17%17%33%17%17%
Vic.7%29%15%21%21%7%
SA8%15%15%23%23%15%

When do you finish hedging for wholesale costs?

Retailers were given the following options to choose from

  • 0-6 months
  • 6-12 months
  • 12-18 months
  • 18-24 months
  • Greater than 24 months
  • Wholesale costs are not hedged 

The table below shows the proportions of retailers that chose each of the ‘when do you finish hedging’ options by jurisdiction:

When do you finish hedging

0-6 months6-12 month12-18 months18-24 monthsGreater than 24 monthsNot hedged
SEQ27%27%18%9%9%9%
NSW36%29%14%7%7%7%
ACT40%20%0%20%0%20%
Vic.23%31%23%8%8%8%
SA33%17%17%8%8%17%

Has your wholesale market hedging strategy changed over the past 12 months?

Retailers were given the following options to choose from

  • Yes, more coverage compared to 12 months ago
  • Yes, less coverage compared to 12 months ago
  • No, the same coverage as 12 months ago 

The table below shows the proportions of retailers that indicated whether their wholesale market hedging strategy has change or stayed the same as 12 months ago, by jurisdiction:

Has your strategy changed

More coverageLess coverageNo change in coverage
SEQ9%0%91%
NSW8%0%92%
ACT0%0%100%
Vic.31%0%69%
SA0%9%91%

Engaged retailers

For the 2020 Retail energy competition review, the AEMC attempted to engage with 40 energy retail brands through an online survey and interviews. The below table show which retailers responded to each of these engagement methods. 

Engaged retailer

Online surveyInterview
1stEnergyYes
AGLYesYes
AlintaYesYes
AmaysimYesYes
AmberYes
AuroraYes
BlueNRGYes
ElysianYesYes
EnergyAustraliaYesYes
Energy LocalsYesYes
EnovaYes
ERM PowerYes
GloBirdYes
MomentumYesYes
NectrYes
OriginYesYes
PeopleEnergyYesYes
Pooled EnergyYes
PowershopYesYes
Red/Lumo EnergyYesYes
SimplyEnergyYes
TasGasRetailYes
TeslaYes