The winners and losers from surging electricity prices: Robert Gottliebsen

Ironic: Mike Cannon-Brookes bought 11 per cent of AGL with the aim of closing its coal assets early, will benefit from the sharply higher prices. Picture: Zan Wimberley

As happened in the UK, the sharp rise in the cost of electricity is set to put out of business most of the multitude of small electricity retailers that have come onto the market in the last few years.
The big winners are large electricity retailers who have their own power generation led by AGL, Origin, and the Chinese-owned networks.

In the last few years, small retailers using low-cost database systems and efficient customer management were established to take advantage of the opportunity to buy power cheaply and sell it at a favourable price.

The slow moving big power retailers, often with outdated data management, struggled to match the prices of small retailers or their efficient marketing.

Few small retailers were better at the electricity marketing business than ReAmped Energy who very quickly built up an 80,000 customer base. Their brand showed up very favourably on the various power price evaluation sites.

Like most power retailers, ReAmped offered one-year contracts at a fixed price. Almost certainly ReAmped followed others and incorporated in the small print a “let-out” clause. But those “let-out” entitlements will not help in states where consumers can cap prices at the regulator level.

Supplied News ReAmped CEO Luke Blincoe. Source: Supplied

Some of the smaller retailers were smart and hedged their future power purchases so that their one-year fixed price offers were matched with their power-purchase prices.

It would seem that ReAmped was able offer very cheap electricity because they did not fully hedge contracts. By telling customers to leave ReAmped because they are about to be hit with very big price rises signals an end game for the company and others who follow their example. We are going to see a succession of small retailers without generation capacity leaving the market. Many of the companies will fail.

It’s ironic that Mike Cannon-Brookes having bought some 11 per cent of AGL with the aim of closing its coal assets earlier than planned, is now set to be one of the beneficiaries from sharply higher coal prices.

Other retailers with coal generation capacity led by Origin, Energy Australia and Atlinta are big winners as are renewable generators Pacific Hydro and Snowy Mountains Hydro.

If the advisers to Chinese president Xi Jinping ever see him down in the dumps, they can tell him how the Chinese out-smarted the Australians to be big winners from the country’s power crisis.

Chinese President Xi Jinping has outsmarted the Australians to be the power crisis winners.

Energy Australia, which has around 1.7 million customers, is owned by the China Light and Power Company after being sold off by the NSW government.

Alinta Energy, which has about 1.1 million customers, was sold to Chow Tai Fook Enterprises in 2017.

In the Renewable space, the industry superannuation funds bought Pacific Hydro but then, after financial turmoil, lost faith and sold it to the Chinese in 2016. The Chinese use the attractive brand Tango to market Pacific Hydro. All three enterprise are creaming money for Xi’s friends.

But the Australian government as the owner of Snowy Hydro, which borrowed heavily to fund the Coalition government’s expansion program, will now also coin money by selling hydro at market prices to its energy retailer Red and others. It will be able to either repay a big chunk of its large borrowings or lift its dividend to Canberra.

Each of the generating companies that have retailers have a clear decision to make.

Do they take the coal-renewables profits onto the bottom line and pay high dividends to shareholders and/or repaydebt? Alternatively, do they use some of the generation profits to sharpen their retail price pencils and gain market share, mainly at the expense of the smaller retailers.

Currently Origin is marketing a very attractive fixed price contract for 12 months which would indicate it has decided to go for market share in the retail space.

Longer term these power databases will become very valuable to market other products. While the small retailers looked to make a profit, their main long term game was building up a customer base perhaps to sell to another retailer. The value of those databases will be destroyed if the small retailers are forced to stop supplying power.

It was the AGL database that attracted Brookfield to bid for AGL with Cannon-Brookes as a minority partner.

It is perhaps ironic that what is happening to the small power retailers is remarkably similar to home builders who tendered using fixed-price contracts which have been blown out of the water by the cost of materials and shortages.