Tasmania

Tasmania has one distribution network area – TasNetworks. The Office of the Tasmanian Economic Regulator (OTTER) regulates standing offer electricity prices in Tasmania. Competition is in its infancy in Tasmania with Aurora having 99 per cent of the market share.

• The median offer increased by 18 per cent between March 2019 and March 2020.
• Market concentration remains stable in Tasmania. There has been very little change in market share. 1st Energy have gained small number of customers but Aurora continue to hold over 99 per cent of the customer base.
• Tasmania was the only jurisdiction to have an increase in customers on standing offers, with an increase of six per cent to 98 per cent, compared to just five per cent of Victorians on standing offers.
• Tasmanians continued to increase their satisfaction with the level of service they receive from their energy retailer. Satisfaction has risen a further four per cent over the past year to 69 per cent.
• The number of customers on hardship programs increased by 839 during 2018-19 to almost 4,100 and the proportion of customers on hardship programs increased from 1.35 per cent to 1.67 per cent. The level of debt they had when they entered a hardship program remained the same at $1,605.

• Standing offers will continue to be set by the Tasmanian regulator
• The AEMC will monitor the impact of reregulation in other jurisdictions and provide information to the Tasmanian Government on any actions relevant to their own regulated price regime.

Tasmania’s electricity market is the second smallest in the National Electricity Market (NEM), and its gas market is the smallest. The roll-out of the state’s gas network targeted large users and this, together with geographic barriers, has resulted in low gas penetration.

For the electricity market:

• there are approximately 283,000 small customers as of December 2019
• in March 2020, there were three electricity retailers
• Aurora Energy supplies electricity to residential and business consumers. ERM Power only supplies business consumers
• 1^stEnergy was the first retail business to enter the residential electricity market in Tasmania when they entered in February 2019.

For electricity, Tasmania introduced full retail contestability for small business customers with consumption between 50 and 150 MWh per annum, in July 2011. For residential and the remaining small business customers, it was introduced in July 2014.

Standing offer prices continue to be regulated by the Tasmania Economic Regulator. For gas, there has been full retail contestability without price regulation since the market’s inception in 2007.

Tasmania adopted the National Energy Customer Framework (NECF) in July 2012 for the retail electricity market but not for the retail gas market.

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 Tasmania are outlined below.

Market concentration has decreased by one per cent (65 HHI points) to a HHI score of nearly 9,935 between July 2018 to June 2019.

Gas market concentration, as measured by HHI, declined by two per cent (112 points) to 5,534 from July 2018 to June 2019. Tasmania is the second most concentrated gas market.

Changes in retail market concentration by jurisdiction are set out 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 Tasmania a number of retailers as part of the survey considered that price regulation and the relatively small size of the Tasmanian market remains a deterrent from more retailers entering the residential market.

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 Tasmania as:

• access to competitively priced hedging = 62 (second highest in the NEM)
• retail licence arrangement/regulations = 56 (second highest in the NEM)
• market power of incumbent = 75 (highest in the NEM)

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

• access to competitively priced hedging = 62 (highest in the NEM)
• retail licence arrangement/regulations = 16 (lowest in the NEM)
• market power of incumbent = 58 (highest 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 Tasmanian customer as follows:

• For residential non-solar offer - annual consumption 7,908 with no controlled load (includes 3,559 KWh on T31 (light and power) and 4,349 on T41 (heating and hot water)).
• For small business offers - annual consumption of 20,000 kWh.

The below table shows the proportion of small customers on standing offers for electricity and shows that in Tasmania, 98 per cent of customers are on a standing offer.

As shown in the figure below, Tasmania only had two offers available in 2019 and this has increased to six offers in 2020. The lowest, average and highest offers have all increased by $291, $334, and $373, respectively in 2020.

There is no small business electricity data in the graph below.

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.

Note that the low number of consumers in this jurisdiction means that the change in actual numbers in relatively small despite seemingly large percentage changes in certain indicators.

Key changes in switching behaviour data is not collected for Tasmania.

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

• the market is working in consumers’ long-term interests was 29 per cent (up 16 per cent)
• they can make good decisions was 66 per cent (up 24 per cent)
• they can access easily understood information was 53 per cent (up 15 per cent).

Residential consumer sentiment

Small business consumer confidence in the energy market was mixed in 2020. In April 2020 (compared to April 2019), confidence in Tasmania that:

• the market is working in consumers’ long-term interests was 33 per cent (down seven per cent from October 2018, the latest comparable data point)
• they can make good decisions remained at 33 per cent (down 17 per cent)
• they can access easily understood information was 67 per cent (down 17 per cent).

Small business consumer sentiment

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

• Complaints to retailers increased by seven per cent from 2017-18 to 2018-19.
• Complaints to the Ombudsman decreased by three per cent in 2018-19.
• The proportion of residential consumers on hardship programs between June 2018 and June 2019 increased by 0.32 per cent to 1.67 per cent of consumers.
• The average debt of customers on entry into hardship programs for electricity remained flat at $1605 in 2018-19
• Electricity disconnection rates have:
• decreased by 27 per cent to 598 in 2018-19 for residential consumers
• increased by 21 per cent decrease for small business consumers from to 33 in 2018-19.
• Gas disconnection data is not collected by the AER. 

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.