The Australian Energy Market Commission (AEMC) has given the greenlight for a six month network bill deference for some energy retailers in an effort to bolster market resilience during COVID-19.
In its final determination, the AMC said the move would help protect consumers from the downstream impacts of multiple retailer failure in the market – which is a risk during the COVID-19 pandemic. The decision is in response to an Australian Energy Regulator (AER) request.
AEMC Acting Chair, Merryn York, said, “We want to avoid the domino effect of multiple retailers failing, because this would put immense pressure on the remaining businesses to service larger numbers of customers unable to pay their bills during the pandemic.
“This could reduce choice and increase prices.”
The change goes hand in hand with recent moves by the AER to protect consumers in financial hardship from disconnection and allow them to defer paying energy bills.
From December to March, the AER estimates the number of customers on payment plans jumped by 20,000 and household energy debt is sitting at $35 million.
“Insulating consumers in this way is an entirely appropriate and important thing to do but both we, and the Regulator, recognise that asking retailers to manage higher levels of non-paying customers is causing financial strain, particularly for smaller businesses,” Ms York said.
“While the market would normally govern which retailers stay in operation and which retailers exit, COVID-19 restrictions are being placed on how retailers operate, and this means things are not business as usual.
“This measure aims to ease some of the pressure, given that network charges make up more than 40 per cent of the average retail bill.
“We want to keep competition strong because that is ultimately in the long-term interests of energy customers. A number of new retailers have entered the market in recent years, and we don’t want to see those competitive gains eroded.”
The AEMC has applied eligibility criteria to the scheme so that the Retailers of Last Resort (Origin, AGL, Energy Australia) and government owned retailers are not eligible. These retailers are excluded because they are already required to meet solvency tests.
The AEMC’s final determination also requires retailers to pay networks a three per cent annual interest rate on any deferred funds.
This is to allow networks to recover the costs of funding these deferrals for a six-month period. It is also designed to incentivise retailers who can afford to do so, to deal with any cash flow shortfall by borrowing from banks at a lower rate.
“Eligibility to the scheme is deliberately limited because it’s a safety net plan to help prevent financial contagion, not a way to recession-proof the energy sector,” Ms York said.
“Consumers’ access to bill relief of hardship payments should not be affected regardless of whether their retailer qualifies – and customers of those mid- to large-size retailers should rightly expect these larger players to be able to manage their costs more flexibly.
“Some have suggested that the risk of consumer bad debts should be shared across the supply chain. That’s beyond the scope of this temporary measure to boost cash flow – and a much more complex change that would affect the long-term risk profile for energy businesses.”
The scheme applies to the network costs retailers pay for all household and small business customers on payment or hardship plans, or COVID-related deferred debt arrangements. Retailers will have to report on the number of customers affected to the energy regulator and AER will be required to publicly report the data.
Energy Networks Australia CEO, Andrew Dillon, said the targeted nature of the final decision would enable network businesses to continue to provide support to residential and small business customers impacted by COVID-19 in the form of cash flow assistance to eligible retailers.
“Energy networks have been proactive in providing assistance throughout the pandemic, and we will continue to do our part to help retailers support their customers who are impacted by COVID-19,” Mr Dillon said.
“Networks are again stepping up to support the small retailers who drive competitive deals for customers.
“If further support is needed beyond today’s rule change, it is incumbent on other parts of the energy supply chain to contribute.”
Mr Dillon said energy networks were taking steps to minimise the impacts of planned works during the pandemic while also ensuring the lights stayed on and the gas kept flowing.
“We know how much customers rely on power and gas, which is why networks are taking steps to reduce impacts of critical works while also maintaining a safe and reliable network,” Mr Dillon said.
The AEMC’s recent Retail Energy Competition Review, published in June, made a wider range of recommendations to build market resilience in the face of economic shocks like pandemics.
These included improving the Retailer Of Last Resort Scheme, protecting customers in embedded energy networks, and improving the AER’s information-gathering powers to identify risk of retail failure earlier.