Queensland

Queensland has two distinct energy markets – South East Queensland, where multiple retailers compete for small customers; and regional Queensland, where regulated prices are subsidised through the Uniform Tariff Policy, which limits competition for non-subsidised retailers. The Australian Energy Regulator (AER) sets the Default Market Offers (DMO) that place a price cap on standing offers. The focus of the sections below are on the South East Queensland market unless otherwise stated.

• The median residential offer below the DMO fell by 3 per cent from March 2019 to March 2020
• Residential customers on the DMO could save $289 by switching to the minimum market offer available
• Three retailers entered the electricity market to reach a total of 22 retailers. The Electricity Market share of the Big 3 retailers has fallen from 76 per cent to 72 per cent in the past year. Alinta Energy has continued to gain more customers than any other retailer, with an addition of 46,000 residential customers over the past year. Over the same 12-month period Origin Energy lost 27,000 customers.
• While the rate of switching decreased by nine per cent in 2019, it was still 20 per cent, second in the NEM only to Victoria.
• Residential customer satisfaction with the level of customer service for electricity increased by two per cent to 74 per cent between April 2019 and 2020, and value for money increased by two per cent to 60 per cent.
• The number of residential customers on hardship programs increased by 442 during 2018-19 to just over 20,200 for all of Queensland, however the proportion of customers on hardship programs remained stable at 0.94 per cent of all small customers. The level of debt customers had when they entered the scheme decreased by 3 per cent to $867.

• Electricity price regulation (DMO) was reintroduced on 1 July 2019 after price regulation was removed four years ago. This has reduced the prices paid by the 13 per cent of households and small businesses in South East Queensland that remain on a standing offer (down by two 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 the Governments on consumer pricing outcomes and implications for the retail market.

Full retail contestability was introduced in the state’s two markets in 2007. Price deregulation in gas occurred in both markets in 2007 and in electricity in South East Queensland on 1 July 2016.

Marked differences in these markets’ characteristics have influenced the evolution of competition. South East Queensland covers a much smaller geographical area than regional Queensland (25,000 square kilometres compared to more than one million square kilometres). It also has a much larger customer base, which is approximately twice the size of regional Queensland’s customer base.

Similar to previous years, the Commission has defined the South East Queensland and regional Queensland markets based on their electricity distribution areas (the Energex and Ergon Energy areas, respectively). For gas, while Toowoomba and Oakey fall into the Ergon Energy area, gas customers in these towns are supplied from the same pipeline as those in South East Queensland. Consequently, they have access to the same gas offers and have been included in this market.

Queensland implemented the National Energy Customer Framework (NECF) on 1 July 2015.

In December 2019, retail electricity businesses were supplying approximately 2.24 million small electricity customers in Queensland.

As of December 2019, there were approximately 214,000 small gas customers across Queensland. While most of South East Queensland has access to reticulated gas, only some areas in regional Queensland have such access. These are Gladstone, Rockhampton, the Wide Bay-Burnett region (Bundaberg, Maryborough and Hervey Bay), Toowoomba and Oakey.

In South East Queensland there were 22 electricity retailers (with 25 electricity retail brands) and two gas retailers, as of March 2020. This includes Commander Power & Gas, Discover Energy, and Future X Power which entered South East Queensland in the past year.

On 1 July 2019, standing offers in South East Queensland were capped under the Commonwealth’s DMO, as set by the Australian Energy Regulator (AER).

In regional Queensland Ergon Energy Retail supplied almost all of the market’s small electricity customers. There are approximately 622,000 customers in the area as of December 2019. One other electricity retailer and two gas retailers are present in the region.

Ergon Energy Retail remains the dominant retailer in Regional Queensland because of the large per-customer government subsidy to Ergon to ensure regional customers pay a similar price to customers in the South East Queensland market. Competing retailers in Regional Queensland do not receive this government subsidy.

Electricity prices are subsidised in regional Queensland through the Uniform Tariff Policy (UTP). The Queensland Competition Authority published the regulated retail prices for 2020-21 for small customers in regional Queensland on 31 May 2020.

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 Queensland are outlined below.

• Electricity market concentration, as measured by the Herfindahl-Hirschman index (HHI), declined by eight per cent (247 points) to 2,665 from . South East Queensland is the fourth least concentrated market in the NEM based on the HHI.
• South East Queensland has experienced the largest percentage decreases in market concentration in the NEM for each of the past three years.
• Gas market concentration declined by three per cent (128 HHI points) to 4,542 from July 2018 to June 2019. South East Queensland is the fourth least concentrated gas market.

Changes in retail market concentration by jurisdiction are set out in the figure below. It shows the retail electricity market in the South East Queensland has consistently become less concentrated overtime.

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. Alinta Energy’s expansion continues to drive this behaviour. Switching rates between retailers is shown in the figure below.

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 South East Queensland retailers considered that:

• increased political and regulatory intervention across the NEM was increasing risk and administrative burden, although some retailers noted this was less of an issue in South East Queensland
• 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 South East Queensland as:

• access to competitively priced hedging = 38 (third lowest in the NEM)
• retail licence arrangement/regulations = 36 (equal lowest in the NEM)
• market power of incumbent = 50 (fourth lowest in the NEM)

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

• access to competitively priced hedging = 48 (third lowest in the NEM)
• retail licence arrangement/regulations = 32 (third lowest in the NEM)
• market power of incumbent = 54 (equal third lowest in the NEM)

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 South East Queensland customer as follows:

• For residential non-solar offer - annual consumption of 4,600 kWh with an annual controlled load.
• For small business offers - annual consumption of 20,000 kWh.
• For residential gas offers - annual consumption level of 7,366MJ.

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

As shown in the figure and table below, South East Queensland’s residential market has seen more than half of the offers removed, which were the highest priced offers available, although there are still two market offers priced above the DMO. This has reduced price dispersion from the highest standing offer to the lowest market offer by 63 per cent. The lower priced offers, below the DMO, have remained largely unchanged from 2019 to 2020, with a minor decrease in the average priced offer.

South East Queensland residential customers on the DMO could save $289 by switching to the minimum market offer.

Bills - Queensland Electricity Distribution Residential

Bills - Queensland Electricity Distribution Small Business

Bills - Queensland Gas Distribution

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.

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 South East Queensland were:

• Less customers switched retailers (20 per cent in 2020 compared to 29 per cent in 2019).
• More consumers indicated an intention to switch retailers in the next 12 months (18 per cent in April 2020 compared to 13 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 (16 per cent) and/or having searched for a better deal on a comparison website (14 per cent).

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

• the market is working in consumers’ long-term interests was 38 per cent (up two per cent)
• they can make good decisions was 71 per cent (up seven per cent)
• they can access easily understood information was 61 per cent (up one per cent).

Residential consumer sentiment

Small business consumer confidence in the energy market was mixed in 2020. In April 2020 (compared to April 2019), the proportion of small businesses in Queensland that had confidence:

• the market is working in consumers’ long-term interests was 28 per cent (down five per cent)
• they can make good decisions remained at 52 per cent
• they can access easily understood information was 40 per cent (down 10 per cent).

Small business consumer sentiment

Key statistics related to complaints, hardship and disconnections for Queensland include:

• Complaints to retailers decreased by 28 per cent from 2017-18 to 2018-19.
• Complaints to the Ombudsman decreased by 19 per cent in 2018-19.
• The proportion of consumers on hardship programs between June 2018 and June 2019 remained flat at 0.94 per cent of consumers.
• The average debt of customers on entry into hardship programs for electricity decreased by $23 from $890 in 2017-18 to $867 in 2018-19
• Electricity disconnection rates have:
• decreased increased by four per cent to 26,937 in 2018-19 for residential consumers
• increased by 13 per cent decrease for small business consumers from to 1,564 in 2018-19.
• Gas disconnection rates have:
• increased for residential consumers by 19 per cent to 2,077 disconnections in 2018-19
• increased for small business consumers by seven per cent to 137 disconnections in 2018-19.

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

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

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.

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.

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:

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 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:

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:

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.