Retail market competitionRetail market competition

1st ATE Symposium, Massey University, Auckland

12 December 2013

Carl Hansen

Overview

Brief overview of current regulatory arrangements for electricity

Competition in the NZ retail electricity market

Initiatives to enhance retail market competition in NZ

StatutoryObjective

For the long term benefit of consumers

PromoteCompetition

PromoteReliable supply

PromoteEfficient operation

Reducingbarriers

Providing efficient

price signals

Fit-for-purposemarket services

How Facilitatingconsumer

participation

Promoting flexibility &resilience

Increasingcompliance

with the rules

Our objective is specified in s15 of the Act

Big lift in perceptions of wholesale competition but no change for retail competition

Survey statement: prices in [this] market reflect the outcomes expected in a workably competitive market

2013Survey

2011Survey

Retail

Spot

Futures

Structure

Seller and buyer concentration indicators

Barriers to entry indicators

Conduct

Price vs. cost indicators

Output withholding indicators, curious bids and offers

Competitive marketing activity

Performance

Static efficiency indicators

Dynamic efficiency/innovation indicators

Metrics for monitoring competition

Competition in the NZ retail electricity marketCompetition in the NZ retail electricity market

6

New Zealand has 13 independent electricity retailers

Market share of connections

7

Any chance one of these will be a disruptive force? Or will it be one of the 9 potential new

entrants?

Small retailers have expanded rapidly since 2008

Retail market concentration (HHI) has declined significantly

Sharp reductions in HHI are clearly possible in NZ

Significant reduction in market share of largest retailer per region … driving the reduction in HHI

Big increase in pitching to customers since 2011

Before WMN After WMN

Retailer advertising now more price-focused?

C&I prices rose considerably over 2001–2009 period

Prices in 2013 dollars

2001-2009

FRC startsChoice

starts

C&I price rises due to rises in LRMC of generation

2001-2009

But residential prices have risen faster than C&I prices since 1985 and since 2001 – why?

Prices in 2013 dollars

FRCNo Residential Competition

Residential demand is very peaky: eg Pauatahanui

Modelled cost-to-serve for three customer types

Long-dated futures prices fallen sharply since July 2012 – will they flow into lower residential prices?

• Blue line shows average prices for long duration contracts – large fall in prices due to flat demand and over investment in generation capacity

• Red line shows average prices for short duration contracts – largely driven by hydro conditions

QSDEP: posted residential prices increased 3.3% (annual) Energy component contributed 2.5% Distribution and transmission contributed 0.8% But QSDEP (and Stats NZ prices) don’t capture many discounts

Ad-hoc discounts to attract residential customers range $80 - $300 A $150 upfront discount = 6% price reduction for an average consumer This amounts to 1.7c/kWh off 28c/kWh

Comparable to dollar value of discounts for C&I customers Anecdotal evidence that C&I receiving 2.5c/kWh off 11c/kWh

Reduction in futures prices flowing to some residential consumers Implies strong competition for some residential consumers

Posted prices increase in 2013 but also significant

discounting to attract new customers/retain shoppers

20

Cost drivers for stand-alone retailer since Sept 2010

Costs facing stand-alone retailers rose faster than

residential prices for Dec 2010 – Mar 2013

Is this an indictor of a workably competitive retail market?

Initiatives to further enhance retail market competitionInitiatives to further enhance retail market competition

23

Is this due to poor visibility of retail prices (and prices vs. costs)?

Until very recently consumers rarely saw mass advertising of residential retail price discounting

Complex pricing structures make it difficult for consumers to know their average effective price (c/kWh) for electricity

There don’t appear to be accurate and timely measures of aggregate residential retail prices

There has been no measure of prices relative to the cost-to-serve residential customers

There is a lack of authoritative reporting about drivers of price changes

Retail market not widely seen as workably competitive

24

Or is it that we don’t yet have strong enough competition for residential consumers? Too risky for new entrant retailers to ‘take on’ the incumbents? Are there barriers inhibiting expansionary retailers from easily finding the

profitable customers? Are residential consumers easily segmented?

Strong competition for ‘active shoppers’ but weak competition for inactive consumers?

Hence competition for marginal consumers doesn’t discipline pricing for all consumers?

Evergreen contracts allow consumers to avoid decision-making? Complex retail pricing structures making decision-making difficult for

consumers? Barriers to competitive provision of switching services for residential

customers? Barriers to group switching initiatives?

Retail market not widely seen as workably competitive

25

Initiatives to reduce barriers to retailer expansion

AncillaryServices

Spot

Hedge

Retail

Transport

3. Review ‘saves’ to ensure level playing field for new entrants

2. Improve retailer access to consumer information

4. Revise prudential rules to reduce retailer risks

5. Introduce pivotal pricing rules to reduce retailer risks

6. Review of distributor contracts potentially inhibiting retailer access

1. Review of barriers to retailer competition on embedded networks

8. Extend FTR market to more locations to assist retailers to manage risks

7. Introduce peak load futures to assist retailers to manage risks

Initiatives to enhance consumer choice

AncillaryServices

Spot

Hedge

Retail

Transport

5. Continue WMN campaign?

4. Review of barriers to group switching and mass market aggregation

2. Improve consumer ability to compare

retail pricing offers

1. RAG project: improve transparency of consumer electricity charges

3. Review impact of low user fixed charge

regulations

DiscussionDiscussion

28

Our latest enquiry is on ‘saves’ and ‘win-backs’