The combination of higher energy prices, tighter credit controls, hot summers and contract renewals are creating a perfect storm for industrial energy users, energy brokers say.
These conditions are creating a “renewals cliff” for industrial users looking to create new contracts, Energy Action chief executive Ivan Slavich said.
“As we start to reach the yearly ‘contract renewal cliff’ period, we are seeing the number of renewals spike 75 per cent compared to last year; this can lead to higher prices for those that don’t renegotiate impending contracts,” Mr Slavich said.
This was due to the continued increase in energy prices, and the massive wave of multi-year contract renewals hitting retailers.
Due to the higher number of contracts coming in, and the shorter timeframe, it is more likely that electricity retailers will offer “standing” contracts, or the default price for new entrants to the market without discounts or special rates. These standing offers are the standard retail offers, which are generally higher than market offers.
“Anyone looking at new contracts from mid-December to Christmas needs their head examined,” he said.
“The power has shifted from customers to retailers, and to the suppliers, whereas previously they were falling over themselves to win business, they can now be more selective on who they supply and their terms,” Mr Slavich said.
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This changing relationship is seeing industrial consumer creditworthiness come under the microscope.
Companies are seeing an increased focus on their credit standing, raising the likelihood that retailers may withdraw pricing for businesses that have poorer credit.
“Retailers are being more selective with who they renew, especially if they smell credit issues,” Mr Slavich said.
“Those industries who have energy as a high proportion of their operational cost will suffer.”
There is also the expectation of higher prices in the immediate term, driven by increased electricity usage over summer and the federal government’s as yet unmodelled National Energy Guarantee policy.
Retailers are being more selective with who they renew, especially if they smell credit issues
Energy Action chief executive Ivan Slavich
“Wholesale prices for the first quarter of 2018 also continue to increase, pushed higher by the focus on generation shortfall as a result of the recently released Australian Energy Market Operator forecasts,” Energy Action said.
This increase in price has also been supported by Professor Ross Garnaut, who has queried the forecast savings in residential and wholesale electricity prices under the NEG.
“I can’t see how they can make any statement on the effect on retail prices when the main source of cost increases – the networks, the oligopoly – are not affected by the NEG,” Professor Garnaut said.
Forward markets are often used as a determinant of how changes to current market regulations will impact price.
According to Professor Garnaut’s research, prices for 2020 actually rose on the news of the NEG, increasing $1.50 per megawatt hour in Victoria since the National Energy Guarantee’s initial announcement in October.
However, it is not expected contract prices will remain high in the longer term.
“We’re seeing a backwardation in the market, and the contract prices for year two and year three are currently lower than year one prices,” Mr Slavich said.
Smoothing out of costs is lessening the impact of first-year costs, but it will simply pass the pain in interest costs to the following years.