COVID energy market resilience measure gets AEMC green light
The Australian Energy Market Commission has formally agreed to allow some retailers to defer network bills for 6 months to help keep the energy market resilient for consumers during COVID-19.
In its final determination released today, the Commission 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.
"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," said AEMC Acting Chair Merryn York.
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% 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 retailers are not eligible. These retailers are excluded because they are already required to meet solvency tests.
The AEMC's final determination issued today also requires retailers to pay networks a 3% annual interest rate on any deferred funds. This is to allow networks to recover the costs of funding these deferrals for a 6-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.
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.
