New policy must deliver better competition

ERM Power CEO Jon Stretch has no illusions about the huge task facing the Energy Security Board (ESB) as it tiptoes through a political and technological minefield to find a solution balancing reliability, affordability and sustainability.

POSTED 05/04/2018

ERM Power CEO Jon Stretch has no illusions about the huge task facing the Energy Security Board (ESB) as it tiptoes through a political and technological minefield to find a solution balancing reliability, affordability and sustainability.

‘‘It’s easy to get two of those right, but it’s really hard to get all three right,’’ he says.  The proposed design of the National Energy Guarantee (NEG) was outlined in the draft design consultation paper released on February 15.

Stretch has no quibble with the need for an overarching policy to solve the so-called ‘‘trilemma’’, but any flaws built into the system at the start could be around for a very long time.

That’s why he is one of 10 CEOs of electricity retailers co-signing a detailed submission in response to the ESB paper.

Most of the concerns identified in the joint submission revolve around competition or the lack of it, and the risk that the NEG may inadvertently tilt the playing field further in favour of dominant players.

ERM Power and the other retailers are not the only parties raising questions about competition and the NEG.

The Australian Competition and Consumer Commission (ACCC) made its own submission to the ESB, drawing on its ongoing enquiry into competition in the electricity supply chain.

The ACCC said one of its ‘‘serious concerns’’ was competitiveness in the wholesale contract market.

That’s the same market that the NEG proposes will be used by retailers to meet their obligations for emissions and reliability.

The ACCC singled out the market dominance of the big vertically integrated generator-retailers or gentailers as a likely contributor to higher prices and pricing practices inconsistent with vigorous competition.

Stretch wants to make sure the ESB does not miss the opportunity to make the market more competitive.

The consultation paper simply says the design of the NEG “should make sure that it does not unintentionally further entrench existing market power”, but stops short of calling for improvement.

Stretch is adamant that anything in the NEG that restricts competition, or shifts the balance further in favour of the big gentailers, will be bad for the end users.

‘‘I think that you want transparency in pricing, and you don’t want the large integrated generator-retailers being able to use transfer pricing to thwart competition.’’

‘‘A feature of the NEG proposal centres on physical bilateral contracts between generators and retailers.

‘‘This represents a huge shift for the market and effectively would mean that retailers must contract while generators may contract.’’

Stretch says that emissions and reliability obligations sitting with retailers would be inefficient.

‘‘To hold retailers responsible for generator reliability, emissions and investment is a misplaced risk that poses a range of market implications including cost due to inefficiency,’’ he says.

Both the increased market clout of the gentailers and this loss of liquidity would increase the risk faced by retailers, which would inevitably flow through into the prices they charge.

Stretch and his co-signatories also raise a red flag over the forecasts underpinning requirements for the reliability and emissions contracts.

Generators will be able to influence not only the forecasts but whether forecasts are realised, opening the system up to be gamed.

The joint submission describes a scenario where a generator schedules a maintenance shutdown, triggering a forecast shortage and higher prices, then defers the maintenance to cash in on the higher market price.

“The strategy could be repeated by multiple generators, time and time again,” the joint submission warns.

Looking beyond competition, Stretch says the NEG should address a lack of investor confidence, the residue of a decade or more of policy uncertainty which has failed to integrate sustainability and energy security.

‘‘What anybody who is going to invest needs to know is that there’s not some subsequent government, state or federal, that’s going to turn around for politically expedient reasons and change the basic premise for the investment,’’ Stretch says.

One of the joint submission’s key recommendations is that the government must stand ready to invest if, thanks to this legacy of distrust, the private sector falls short.

‘‘In fact having the last-resort mechanism often will help private industry go ahead and make that commitment anyway,’’ Stretch says.

And he says ERM Power’s market position makes it uniquely qualified to make a positive input to the NEG through these recommendations.

‘‘We’re by far the largest net buyer in the wholesale market, so the ESB, the AEMC, the AEMO, the AER, the ACCC – they all look at us as a really significant stakeholder with a lot of experience to bring to bear,’’ he says.

‘‘And, frankly, without all of the vested interest that those large generator-retailers introduce into these sorts of discussions.’’

* Article as published in the Australian Financial Review on 27 March 2018.

Did you find this article helpful?