On 27 March, the Prime Minister and Treasurer announced that they’d tasked the ACCC with investigating retail prices. As Australia’s only transparent energy provider, we decided to give them a hand. In this article we’ll break down the various components of a customer’s energy bill and explain exactly what’s going on.
We’ll dive into the bill of Sally.
^ (someone called Sally)
Sally lives in Greater Sydney and is precisely average in her home’s energy usage, spending $1,609 per year on the 5,500kWh of power she uses. She’s on a single rate tariff, meaning she spends the same per unit at all times of the day. She’s also very proud of her 1980s haircut.
We’ll break that down between the factors that comprise the bill:
This is the cost of the energy generated that makes its way to your property. All retailers buy their energy from the wholesale energy market which is part of the ASX. As such, no retailer can make a claim as to the exact source of the energy they provide to their customers.
Retailers actually all have different costs included for wholesale energy. Why? Because energy is traded in the same way that many other financial products are: at one end of the spectrum are retailers that buy the energy from the spot market, meaning they have no predictability over what they’ll pay. At the other end are retailers who seek certainty over their wholesale costs over the next two years.
In reality, most are somewhere in between. Many energy retailers also own generators, meaning they profit from two parts of the retail bill. Wholesale energy prices have climbed steeply in the last year:
Based on publicly available information about the way generators sometimes sell to the market, we reckon the ACCC will find it time well spent to peel back the way these internal transfers take place within the larger energy companies.
We include $532 in Sally’s bill for wholesale energy (33% of the total bill).
Getting the energy to Sally’s house takes a bunch of infrastructure. Much has been written about the so-called ‘gold plating’ of it in recent years. We won’t opine on that here.
There are three separate components to network costs: transmission, distribution and metering.
Transmission costs are for the high voltage lines that transmit power from power stations to low voltage distribution lines, which in turn deliver the power to your meter. Metering costs are just that: the capital cost of the meter itself plus maintenance and the cost of someone reading it.
Unfortunately, not every unit of energy generated in a power station gets put to good use. Transmission and distribution lines suffer from losses along the way. These ‘loss factors’ are published and we include them in our tariff design.
In Sally’s bill we include $749 for network costs (47% of the total bill). This is split by $720 for transmission and distribution, and $29 for metering.
There are Federal and State schemes in place and retailers are required to obtain certificates to meet their various obligations. For Sally, the relevant schemes are the Large Scale Renewable Energy Target (LRET), Small Scale Renewable Energy Scheme (SRES) and the Energy Savings Scheme (ESS).
In FY17, for the LRET scheme, we applied a 12.75% obligation and the cost is $75.
For the SRES scheme, we applied a 9.68% obligation and the cost is $22.
For the ESS, we applied a 7% obligation and the cost associated is $11.
In total, we have included $108 per year (7% of the total bill) for environmental charges.
This is a relatively minor point but we’ll list it here in the interests of completeness. We have to pay fees to the Australian Energy Market Operator for operating in the market. These amount to $0.61 per MWh of energy, which means we include just under $4 in Sally’s bill.
In most of our offers, we include $50 per year (3% of the total bill) for contributions to the amazing partners we support, such as the Australian Cervical Cancer Foundation, R U OK? and Surf Life Saving NSW. Depending on how our community partners want their product to work, some can earn more than this if the amount of bad debt is lower than expected.
Unfortunately sometimes customers disappear before they’ve paid an outstanding balance. We need to include an allowance for this in our pricing, so $16 is included in Sally’s bill (1%).
Retail costs are the final component. These are to cover the expense of running a retail operation, including call centres, billing systems, websites, specialist staff (eg pricing), risk management and compliance.
In Sally’s bill we include $12.50 per month to cover these costs - that’s $150 per year and is 9% of the total bill.
As an Aussie startup our costs are quite a lot higher than this. When we grow and have greater scale to spread our fixed costs over, our net profit from a customer like Sally will be between $35-45 per year, or quite a bit less than $1 per week.
As we don’t have own our own generation, this is the total profit we’ll make from each customer: 2% of the total bill. The Grattan Institute recently reported that many energy retailers are earning 13% net profit. Retailers in pretty much every service industry would dearly love to get a 13% net profit, which may be the reason the ACCC is interested in having a look under the hood.
There’s no doubt that many retailers will include lower retail costs as a way to lure new customers. We’re taking a different approach and promising instead that the price is the price, and it will never change so we can profit.
We think energy can be done differently and customers treated with greater respect. We also firmly believe that making more profit from selling more units of energy is - like Sally’s semi-perm - a bit 1980s. Alternatives are here and a fundamental part of our plan is to maintain this transparent, fair and great value approach so we can help more customers to use the energy they need at prices that are less than they’re paying today.