June 1999 Newsletter - EDR News 1

01 Jun 1999Archived News Climate Change Matters

Welcome to the first edition of EDR for 1999. Energetics Pty Ltd offers this newsletter to our clients so we can keep you up to date with the latest developments in the energy industry across Australia. We aim to keep it brief and focus on the real issues resulting in a newsletter that is of benefit and interest.

 

We were particularly pleased with some of the comments received in the last few months, with clients asking when the next edition would be out and what was happening across Australia,

To make it easier for you to focus on those issues that are of interest, we have divided the newsletter into two sections. The first section looks at changes in the electricity industry while the second section looks at changes in the gas industry.

Electricity Deregulation � The Market is Changing

Holes are beginning to appear in the belief that everybody would benefit from deregulation. In Victoria and NSW, excess capacity has meant that most customers have received significant savings in the first few years of the deregulated electricity market. Prices however are beginning to rise and savings are beginning to evaporate. While this is good news for investors in the industry, especially those who have been anxiously waiting for higher returns so they can meet their financial obligations, it is not good news for customers.

The situation in Queensland and especially South Australia is even more difficult. Although many customers in Queensland have elected contestability status (approximately 40% of those eligible for market entry as at May 1999), just as many customers are retaining their franchise arrangements as deregulation did not present economic savings. In the case of South Australia, very few customers have been able to enter the deregulated market and make savings.

As you would expect, the ability to make savings is very dependent on the supply/demand balance and on monthly market 'idiosyncrasies'. The tight supply/demand ratio in Queensland is expected to ease over the next couple of years as additional generation comes on line and the interlink between Queensland and NSW is implemented.

So how are long term savings maximised? By keeping an eye on the market, recognising that the negotiation of competitive energy supply contracts will require effort, and most importantly, by purchasing 'Derivatives'. Derivatives, e.g. Caps, Collars and Options allow you to 'have you cake and eat it too'. A good package of Derivatives will minimise your exposure to future price rises while allowing you to capture future price reductions.

NSW & Victorian Market

Over the last year electricity prices have been rising significantly with total costs increasing by 30% or more. The upward pressure on prices has originated from the wholesale market where the winding back of vesting contracts has meant that an increasing proportion of generator income is sourced from the contract market. Previously, generators were able to rely on the guaranteed or fixed price vesting contracts which were set at about $40/MWh.

In reaction to these price increases, many retailers are offering longer term contracts with fixed prices (e.g. 5 to 10 years). While this provides long term price certainty, it does not guarantee price competitiveness. Firstly, retailers incorporate a higher premium in their long term prices so they can cover their risk. Secondly, there is no scope to pick up any price decreases that may become evident over the life of the contract.

Fortunately, competition between retailers is still intense. Many of the 30 or so retailers operating in NSW and Victoria are still using price discounting as a mechanism to target different industries or position themselves to secure new businesses. Good prices are still available to the astute customer.

Queensland Market

At last, Network Use of System (NUoS) fees for Tranche 3 of the Queensland market are available.

As expected, there is a considerable spread in the range of NUoS fees, depending on customer voltage, usage patterns, and as one would expect in a State as large as Queensland, geographic location. To make matters even more complex, the trend in 'raw' energy prices (i.e. retail energy prices excluding loss factors) in Queensland has mirrored Victoria and NSW. As in the southern states, retail prices are on the way up. Unfortunately, retail prices in Queensland started from a higher point, and they are still about 50% higher than in Victoria or NSW.

The key point? 'Buyer beware'! Once you enter the contestable market you cannot return to the franchise tariff safety net. Unlike the other deregulating States, there is no deadline to organise an electricity contract before being 'forced' into the contestable market. Sites in Queensland eligible to enter the market can remain on their franchise arrangements 'indefinitely'. Our advice � only move into the contestable market if savings are certain!

This is not to say that savings are not possible. Many Tranche 1 customers negotiated savings of 20% or more, however savings for Tranche 2 were more modest (say 10%) and less that half of the Tranche 2 sites eligible to enter the contestable market have opted to become contestable customers.

South Australian Market

A tight supply/demand balance has meant that the South Australian market opened with limited opportunity for contestable customers to make any savings over the next year or so. To overcome this problem, transitional tariffs will remain in place until July 2001. These tariffs, which will mirror existing ETSA tariffs, will be offered to existing customers who elect not to enter the contestable market. These tariffs will increase by CPI on July 1999 and CPI + 2% on July 2000.

For those customers who are keen to try and make some savings now, Optima Energy is offering 170 MW of peak power to the contestable market. To qualify for a share of this power, electronic load profiles are required. Retailers then make bids to secure prices from Optima for individual customer load profiles.

Natural Gas Deregulation � An Uncertain Time

Deregulation of the natural gas markets has not generated the levels of activity or savings comparable to the deregulation of the electricity markets.

Firstly, there was the problem with gas supply in Victoria, secondly, there are problems with the 'access' arrangements in NSW and thirdly, there is very limited competition.

NSW Market

The current AGL Access Undertaking which has been in place for 2 years is due to expire on August 1, 1999. Currently IPART is reviewing AGL's proposed Access Arrangement which provides guidelines for third party users and sets the network costs for end users for the period from August 1, 1999. The indication for approval of the Access Arrangement is by January 2000 � there has been no notification of interim arrangements at this stage. This is set to alter the methodology for determining your network charges which account for 40 � 50% of the total cost.

A commitment by Duke to build a second pipeline into Sydney and their alliance with Energy Australia's natural gas retailing operations is expected to deliver gas from Bass Strait by September 2000.

In other developments, Boral has secured gas in NSW and are currently supplying their own sites. Furthermore, Boral has recently purchased Energy21 and are reviewing their strategy for supply in all States.

All sites that currently use over 10 TJ p.a. are eligible to enter the contestable market. By 1 October 1999 the threshold will reduce to 1 TJ p.a. When investigating the opportunities available in the gas market, it is important to understand the restrictions applied to contestable customers and the opportunities that will arise over the next few years.

Queensland Market

According to the Department of Mines and Energy, Queensland's natural gas market is scheduled to deregulate on 1 January 2000 for users consuming more than 100 TJ p.a. The Gas Pipeline Access (Queensland) Act 1998, Act No 28 of 1998, has been published, however it has not been passed by the Queensland Government yet. As a result very little information is publicly available in relation to the deregulation of Queensland's natural gas market.

For more information on energy deregulation contact:

Melbourne, Mark Searle or Toni Georgakopoulos on (03) 9602 5511

Sydney, Annie Carapetian or Tim Parker on (02) 9929 3911

Brisbane, Jane Colvin or Stephany Howard on (07) 3257 0354

Next Edition will Feature Gas Deregulation in Victoria

EDR � Queensland Special Edition June 1999

In conjunction with our National EDR update, we felt that Queensland warranted some 'special' attention given that the market is now into its second year and Tranche 3 sites (i.e. site consumption > 200 MWh p.a.) are eligible for market entry on 1 July 1999.

Interesting Facts to Date Since Market Opening:

Average pool price as at 30 May 1999 was in the order of $58.95/MWh;
As at 1 May 1999, approximately 40% (40 of the 43 Tranche 1 sites and 155 of the estimated 450 Tranche 2 sites) of eligible customers had chosen contestability as viable savings were achievable;
Tranche 1 sites averaged savings in the order of 25% while those Tranche 2 sites who entered the market, received average savings of 10%;
To date four (4) interstate Retailers have secured contracts in Queensland � Boral Energy (1), Northpower (3), Citipower (2) and Powercor (4); and
Since the opening of the National Market, the Ancillary Service Charge has fluctuated between $0.25 and $8.07 /MWh and is currently averaging $1.68 /MWh. It may be worth discussing the intended settlement/reconciliation procedure with your retailer. This could avoid an unnecessarily high account at the end of the annual billing period.
With the release of the Network Pricing Books for Tranche 3, customers can now make decisions about the viability of market entry. We felt it relevant to highlight some issues to assist clients avoid potential pitfalls in the market, including:

Code Complaint Meters are compulsory for each network supply point;
Summation of multiple supply points on Tranche 3 sites is NOT as simple as summation in either Tranche 1 or 2 � Talk to your LNSP;
Volume Based Network Tariffs are not necessarily the 'worst case' pricing scenario. If your site is currently billed under a General Supply � Consumption based tariff (e.g. T20, 21, 22, 37), logging the site's load for a month to determine an indicative monthly demand and load factor will allow you to evaluate the electricity costs under the appropriate Demand Based Tariff;
Volume Based tariffs will cease, at this stage, on 30 June 2000; and
Confirm the Distribution Loss Factor to apply to your site, it is dependent amongst other things, on the location of the transformer � Talk to your host retailer or Local Network Service Provider (LNSP).
Remember:

Deregulation implies negotiation � you can negotiate contract terms and conditions that minimise your risk/exposure and maximise cost saving opportunities;
Once you become contestable you cannot revert back to the safety net of franchise; and
Franchise tariffs will remain in Queensland at this stage, INDEFINITELY.
In addition to our Energy Procurement Services, Energetics offers an on-going Portfolio Management Service which will allow you to keep abreast of market issues, keep up with changes in charges and the impact on your accounts, cross check the accuracy of the accounts and tracks the overall performance of the contract over its term comparative to previous franchise arrangements and the pool.

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