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‘These games have got to stop’: Former energy exec slams power price gouging

15 August 2018

A FORMER energy executive who spent years “defending the indefensible” has launched a blistering attack on the country’s biggest power companies, accusing them of profiteering at the expense of vulnerable consumers.

Adrian Merrick, former group executive manager of retail at EnergyAustralia, said the “gentailers” — power generators and retailers — were reaping record profits from the high wholesale price of electricity, when the underlying cost of actually producing that energy hadn’t changed.

Last year, AGL and EnergyAustralia hit customers with price increases of up to 20 per cent, blaming higher wholesale costs following the closure of coal-fired power stations such as Hazelwood in Victoria’s Latrobe Valley.

Both companies last week announced a tripling of profits, courtesy of higher wholesale margins.

“AGL generated the same amount of energy as last year, yet they made nearly $668 million more profit from that generation, all of which is paid for by hard done-by customers,” Mr Merrick said.

“You may remember the price increase in July last year was 16 per cent for customers, and they blamed that on wholesale prices. They said, ‘Wholesale prices have gone up so we’ve got to pass it on to you’.

“What they failed to declare is they are making all of that plus more through the wholesale side. What happens is one part of the business generates it, then they sell it to the guy down the corridor at the market price (and make money on the difference).”

Australia’s energy is created by power generators and “pooled” into a central market — the National Electricity Market (NEM) on the east coast and the Wholesale Electricity Market (WEM) in Western Australia. Energy retailers buy power from the market and then sell it onto consumers.

Mr Merrick, who now runs a small “social enterprise” energy retailer called Energy Locals, said businesses like AGL were “able to go out and blame the wholesale market and then turn around a year later and hope everyone’s forgotten about the price change announcement”.

“It’s just a f***ing joke, it really is,” he said. “These games have got to stop.”

He likened it to a situation where Coles and Woolworths own the majority of dairy farms in Australia. “They sell some of the milk to themselves and they also sell some of the milk to smaller shops such as IGAs, milk bars, cafes and petrol stations,” Mr Merrick said.

“Their internal cost of producing milk remains broadly the same. However, by shutting down a few farms there’s less milk in the market. The market price for milk increases, even though their internal cost of production is flat.

“They then pass through a huge price increase to their customers and blame the market price. Because their internal costs stay the same, they post record profits. Customer prices stay high, however.

“They then bid in the market in a way that makes it hard for the smaller shops to buy milk and sell it at anything other than a price that’s higher than Coles and Woolies.

“Again, they benefit from these higher prices. If Coles and Woolies customers complain, they’ll discount just to them but will still make money due to the gap between the cost of generation.”

AGL, however, said it was important for energy companies to be able to reap profits on their investments because it enabled them to “invest in new generation projects”.

The company will invest more than $2 billion in new generation to make up for the shortfall after the closure of the Liddell coal-fired power station in 2022. That will include $400 million to upgrade the Bayswater coal plant, plus $1.3 billion for two wind farms at Coopers Gap in Queensland and Silverton in NSW.

The combination of electricity generation and retailing in one company has long been criticised as anti-competitive.

But in its Retail Electricity Pricing Inquiry report released in June, the Australian Competition and Consumer Commission baulked at recommending the “vertically integrated” power companies be broken up, as some had predicted.

Mr Merrick said the ACCC could have looked at forced separation of generation and retail but it was placed “in the too-hard basket”. “Until we do, these guys will be laughing all the way to the bank,’ he said.

He said when French utility company Engie decided to shut Hazelwood, the energy market was “blatantly oversupplied already” and the energy companies had been looking for ways to take capacity out of the market so that wholesale prices would increase.

The Hazelwood closure achieved that goal.

“Yes, it took capacity out of the market, but the sheer fact is consumers are putting on solar at a massive rate, people are taking demand out of the market, partly because they’re getting screwed (on price),” he said.

“If there was a generation shortage (the power companies) would have had to spend a lot more creating the energy, buying the energy or building new energy capacity quickly, whatever might have needed to happen.

“But the fact they’ve come out with doubling or tripling of profits after a power station closing shows the reason prices went up is profit taking and nothing to do with having too little capacity in the market.”

According to the ACCC, electricity prices increased by 56 per cent between 2007-08 and 2017-18, but actual bills increased by only 35 per cent.

The watchdog said the difference between the two figures was due to a 13.3 per cent decrease in average electricity usage in the same period, mainly because the proportion of customers with solar panels increased from 0.2 per cent to more than 12 per cent.

“One thing not driving up prices is people using more energy, that’s just not the case,” Mr Merrick said.

He also claims the energy companies may be manipulating the wholesale price — something they vehemently deny.

Such allegations are not new. In 2016, a report by the Melbourne Energy Institute blamed huge spikes in wholesale electricity prices in South Australia on energy companies “gaming” the system.

In its report, the ACCC slammed the status quo as “unacceptable and unsustainable” and called for new powers for the Australian Energy Regulator to target “market manipulation”.

But despite using the word, the watchdog found no actual evidence of manipulation.

It concluded that high prices had “generally been driven by high and entrenched levels of concentration in the market, combined with fuel source cost factors”, rather than “identifiable abuses of market power” such as “conduct of particular generators to ‘spike’ the price”.

AGL executive general manager of wholesale markets Richard Wrightson said, “As with many markets, the wholesale price of electricity is set by the market itself, not by individual participants.

“The ability to make returns from investments is important, because it enables companies to invest in new generation projects. AGL and its partners have committed more than $2 billion to new electricity generation projects across Australia.”

An EnergyAustralia spokeswoman said, “Energy retailers buy wholesale energy and then sell it to retail customers. Wholesale energy prices have increased substantially in recent years. The average NSW wholesale electricity spot price increased from $39/MWh in 2015 to $95 in 2017.

“Clearly when the wholesale cost of supplying customers increases, prices increase — as we saw last year. The closure of the Hazelwood and Northern power stations at short notice drove the increase in wholesale and consequently retail prices in 2017.”

AGL is the largest single generator, contributing 21 per cent of capacity to the NEM. Origin is the second-largest with 14 per cent of generation capacity, while EnergyAustralia has 10 per cent.

Last Monday, EnergyAustralia’s Hong Kong-based parent company CLP Holdings reported a tripling in first-half profit from its Australian operations of $390 million, a 198 per cent increase on $131 million in the same period last year.

CLP Holdings said “high realised wholesale energy prices” had increased its generation margins at the same time as margins on the customer side had been “reduced on higher energy costs, lower customer numbers and discounting”.

It was the same story for AGL, which on Thursday reported a 194.4 per cent increase in full-year profit to $1.587 billion, again courtesy of a surge in wholesale power prices offsetting lower retail earnings.

AGL boosted its gross margin for wholesale electricity by $668 million to $2.217 billion. Chief executive Andy Vesey said higher wholesale prices were good news for shareholders but conceded Australian households were being hurt by higher energy bills.

It comes as the Turnbull government’s National Energy Guarantee — a plan it claims will lower prices and reduce emissions — won approval at Tuesday’s Coalition party room meeting, despite opposition from former Prime Minister Tony Abbott who claimed it would lead to the “deindustrialisation of our country”.

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