Ahead of the release of the Finkel review of the energy sector, the electricity market is bracing for significant change, with the risk that surging prices will force a number of smaller retailers to quit the market.
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Households in much of eastern Australia are facing double-digit price rises to record levels from the beginning of July as the full effect of the increase in wholesale prices flows through to those consumers on so-called "standing offers", that is, who have not moved to market-based offers.
Smaller retailers in Victoria such as Dodo, Powershop and ERM have signalled electricity prices for both residential and business customers will rise between 11 per cent and 45 per cent, although most larger retailers such as Origin Energy and EnergyAustralia are holding prices largely steady.
In NSW, the surge in wholesale electricity prices is expected to see prices rise at a double-digit pace, energy market sources indicated on Thursday, although the final outcome won't be clear for several weeks.
Households and small businesses in the ACT have been told prices there will jump by about 20 per cent, which may be mirrored in NSW, although competition in larger centres such as Sydney may limit the extent of the rise.
Even so, affordability will be front of mind for an increasing number of households and small businesses.
Larger energy users have already suffered price rises of 60 per cent to 70 per cent, as the impact of surging wholesale electricity prices has been quickly reflected in market-based offers, while the rise for households and smaller businesses will be more subdued, but still significant.
"All of the price offers will reflect the rise in the wholesale market," David Rylah the director of pricing and trading at Energy Action, a specialist trader and advisory company said.
"If wholesale prices rise around 40 per cent and with network charges, which make up around half the bill for smaller users, rising at only around CPI, this will see around a 20 per cent price move."
For larger users of electricity, network charges made up a smaller part of their bill, he said.
'Hollowing out'
Of greater concern, however, is the impact of the surge in prices in forcing smaller energy retailers out of the market, due to the need for higher capital backing to support their operations. This would reduce the level of market competition, traders warned.
"You are likely to see a hollowing out in the market," one industry analyst said. "In Victoria, while the first-tier retailers have held prices largely steady, second-tier retailers are seeing 50 per cent price rises.
"The 'gentailers' – the retailers with their own power generators – are in a stronger competitive position."
Another trader warned: "We need more competition, not less. For a retailer that needed $20 million in capital guarantees, it may now be facing $40 million in guarantees, so some lenders may not be willing to support smaller retailers.
"It will challenge the capital structure of these retailers. Counter-party risk is also elevated, which will also hurt trading activity."
The closure of the Hazelwood power station in Victoria's Latrobe Valley, along with the surge in gas prices, has seen wholesale electricity prices more than double in the past year, with the rise in renewable energy output making it difficult to justify building large capacity power stations.
Energy Action's Mr Rylah said forward electricity prices were indicating a potential decline in wholesale electricity prices in 2019-20, which, if sustained, might indicate the surge in prices currently working its way through the energy market could be the peak.
The forward wholesale price for electricity is showing a decline to about $75 a megawatt hour by December 2019, which is well down from around $110 at the end of 2018.
"'The market will stay irrational for longer than you've got liquidity' is an old saying in the sharemarket, and energy markets may be no different," he said.
"This is one of the pinch years for the market."
Chief scientist Alan Finkel's final report on the security of the national electricity market is due to be handed to state premiers and Prime Minister Malcolm Turnbull on Friday.