As Australians digested the news this week that benchmark electricity prices will rise as much as 18 percent, Bruce Mountain had a disturbing thought.
Although the headlines looked bad, he believed the reality would probably be much worse.
“It very well could be catastrophic for customers,” Mr. Mountain said.
This week marked a turning point for electricity consumers as the turmoil and rising costs of the wholesale energy market finally set in.
The Australian Energy Regulator, unable to ignore the turmoil, lifted the so-called standard market offers that act as a kind of price cap for double-digit customers†
It was a decision that will directly affect only about 10 percent of the market in Queensland, New South Wales and South Australia.
A similar share will be hit in Victoria, where the Essential Services Commission also raised prices this week.
But Mr Mountain, the head of the Victoria Energy Policy Center, said the changes were just the tip of an iceberg that would hit millions more customers much harder.
Small retailers go bankrupt
Most ominously, Mr. Mountain said: wholesale electricity costs up 141 percent in the 12 months to the end of March threatened to send many smaller electricity stores to the wall.
And if — or more likely when — that happened, he said the competition would largely disappear from the market and electricity bills could rise by as much as 50 percent.
“There are very few customers on that [default] offers,” said Mr. Mountain.
“Most customers have much cheaper offers that they have gotten in the past because the wholesale prices were much lower.
“So those cheap offers are gone and most customers will see much bigger increases than what the regulators have reported.”
The warning was supported by consumer groups who pointed out that some smaller energy retailers have effectively encouraged their customers to leave due to skyrocketing costs.
Joel Gibson of consumer advocacy One Big Switch noted this week that a number of carriers have been forced to jack up rates at extraordinary levels to cope with the surging wholesale market.
Dazzling price increases
Gibson said tariff increases ranged from 43 percent to a whopping 285 percent — increases he claimed many consumers couldn’t afford.
“These are the biggest price hikes we’ve ever seen in Australia,” Gibson said.
“This is also the third retailer we’ve seen encouraging customers to leave, which we’ve never seen before.
At the root of the disruption is extreme volatility in energy markets, where: Coal and gas prices have been pushed to record highs by armed forces, including the war in Ukraine†
Coal still accounts for about two-thirds of Australians’ electricity consumption, and the rise in the price of the raw material was cited last month as a major driver of rising wholesale costs.
Mr. Mountain explained that smaller retailers were particularly vulnerable to rising wholesale costs, as few were able to generate much or no electricity of their own.
He said that small operators were essentially resellers, unlike larger providers like Origin or AGL, which had their own huge production fleets and long-term control over prices.
Consumers faced with heavy ride
While the lack of integration could be a benefit when wholesale prices were low, Mr. Mountain said it was a potentially fatal weakness when the market rose sharply.
“This is a windfall for the big producers in general, they are isolated from their production costs, but they are taking advantage of the much higher wholesale price that feeds through to retail prices.
“And they’re so essential to the market — they enforce competition, they bring innovation that the big companies have to follow — so losing those small players will be a huge loss to the market in the long run.”
One benefit of the volatility, he said, was the signal it sent to renewable energy investors who would rush to deliver new offerings.
However, he said it will likely be years before new projects and changes to the network can put downward pressure on prices and consumers are in for a rough ride in the meantime.
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