Virtual Retailers Explained

The Wholesale Electricity Market is so well set up and regulated that a retailer has no physical role in electricity supply. Retailers are essentially risk-management, information and regulatory-compliance companies that buy and sell quantities of electricity.

Business men go down with their businesses because they like the old way so well they cannot bring themselves to change. One sees them all about--men who do not know that yesterday is past, and who woke up this morning with their last year's ideas. It could almost be written down as a formula that when a man begins to think that he has at last found his method he had better begin a most searching examination of himself to see whether some part of his brain has not gone to sleep. There is a subtle danger in a man thinking that he is "fixed" for life. It indicates that the next jolt of the wheel of progress is going to fling him off.”
- Henry Ford (1922)

Origins

Electricity supply companies were for most of the 20th century 'vertically integrated' monopoly utilities, managing all aspects of electricity supply from fuel procurement to generation, transmission and distribution. In Western Australia in the mid 1990s the former State Energy Commission of Western Australia (SECWA) was split into separate gas (Alinta) and electricity (the then Western Power) companies, but both companies initially remained vertically integrated. At this time, there was no competition to supply consumers and so the equivalent of the present day Synergy’s Retail Business Unit existed as a Marketing Branch comprising 30 people, which reported to the General Manager of the Distribution Network division.

As deregulation progressed, competition occurred to supply contestable consumers and a separate Energy Trading Branch was created to better integrate generation and sales. As competition progressed, Energy Trading and Marketing were subsequently subsumed into a new Retail Division under its own General Manager, but still within a vertically integrated utility with dominant market share.

In 2004, the State Government disaggregated the various divisions of Western Power into separate arms-length companies for retail (Synergy), generation (Verve Energy) and network (which retained the original name Western Power). These companies served the area covered by the south west network, and Horizon Power was created to serve the regional areas.

In 2014, the State Government re-merged Synergy and Verve Energy, retaining the trading name Synergy. Western Power and Horizon remained separate entities.

These origins have created the common perception that retailers actually deliver electricity to consumers. The reality is that generators inject electricity into the network and the network operator (the current Western Power) delivers the electricity to all consumers (in the south west), which draw it from the network as desired. The retailer actually plays no role in this process, which is why the marketing function was originally a minor department in the vertically integrated utility.

The Market Operator also plays no role in the physical delivery of electricity, but is responsible for, amongst other things, managing the price-setting markets.

The 'Trustee' relationship

The role of the retailer during the pre-deregulation days was primarily to issue invoices and 'negotiate' supply contracts with large users that had special circumstances... and usually no alternative supplier. While invoicing and sales are still important aspects of the retail function, the energy trading function has become critically important with the advent in 2006of the Wholesale Electricity Market. Under the market, retailers (which are known as 'Market Customers') act as intermediaries between consumers and both the Network Operator (Western Power) and the Market Operator (IMO). The retailer maintains accounts with both these entities, and retailers compete with each other to persuade consumers to nominate them as their intermediary.

This is akin to a trustee relationship in which the consumer agrees to limits on its consuming behaviour (such as not causing damage to the network and not exceeding a certain maximum amount) and to pay an agreed price for the electricity consumed. For its part, the retailer must then, on the average, procure energy at a price lower than the equivalent energy price being paid by the consumer. And this is where the risk management function becomes critical: the retailer has to blend the purchase from generators of fixed quantities of energy over the long term at specific times at a fixed price, versus a generally lower price in any required quantity at any time from the market. The criticality arises because the market sets energy prices every 30 minutes that are reflective of the balance of supply and demand, power system condition and power station availability. While on the one hand this minimises prices over the long term, those 'minimum prices' can in fact be extremely high for prolonged periods over the short term - for example, during fuel shortages. For this reason, risk management is the central issue for a retailer: it must navigate a careful course between having bought too much energy at too high a price - and having to sell the surplus at a lower price - versus having not bought enough energy at a fixed price - and having to buy the shortfall at very high market prices. This balance is especially poignant for Synergy, which is by definition expected to cede market share whilst simultaneously having an obligation (be it formal or informal) to supply any consumer that reasonably applies.

Regulatory function

In terms of their regulatory function, retailers undertake on behalf of their customers compliance with the ERA's licensing conditions, Western Power's Electricity Transfer Access Contract (pdf, 700KB), the IMO's Market Rules, and the Commonwealth environmental regulations administered by the Clean Energy Regulator. In principle, customers may be able to conduct all this for themselves, but it is so esoteric that none are understood to do so, with the possible exception of very sophisticated large energy, often posseing credit ratings higher than some countries.

Pure retailers and Gen-tailers

A 'pure retailer' is a retailer that has no generation of its own and is entirely dependent on either the market or other companies for its energy procurement. During the decade after 2014 the then Synergy (Electricity Retail Corporation) was a pure retailer. On the private side, so was the then Premier Power Sales (now Kleenheat).

Pure retailers potentially suffer a price disadvantage in that they must pay a margin to the generator selling them fixed offtakes. Equally, generators are disadvantaged by having no direct route to the end-users. One solution to this is to own in-house generation - known as 'Gen-tailers'. The re-merged Synergy (Electricity Retail and Generation corporation) is a Gen-tailer, as are Alinta, Perth Energy, Griffin Energy and Landfill Gas and Power; these companies all combine ownership of generators and retail businesses. In this way, they can potentially offer lower prices because they avoid they capture for themselves both the generator and retail margins.

Private retailers are also permitted to vertically integrate, though this is most viable in limited circumstances that are usually 'edge of grid'. An example is Goldfields Power Pty Ltd which owns and operates generation and a local electricity network to supply the 'superpit' gold mine in Kalgoorlie.

Virtual retailing

The Wholesale Electricity Market is so well set up and regulated that the retailer has no physical role. The retailer’s day-to-day role is primarily to manage the risk-return dimension of its customer portfolio, collect revenue from its customers, pay its suppliers and answer customer account enquiries. All retail operations can be performed from anywhere in the world via internet portals, emails and telephone. All transactions with Western Power, the Market Operator and the Clean Energy Regulator are conducted through the respective web portals.

Unconscious benefits

In terms of risk management, retailers' most important 'value-add', and the basis of competition, is through:

  • Lodging Prudential Guarantees on behalf of the customer
  • Guaranteeing a price to the customer
  • Earning a margin on energy from the difference between the sale price and the purchase price; and
  • Bearing the risk that the energy purchase price might exceed the sale price.

On this basis, pure retailers and Gen-tailers provide valuable benefits to customers, of which customers are often not consciously aware.

Community Electricity believes that these unconscious benefits are expensive and that consumers should be properly informed how much they are being charged for them and the alternatives available. Community's electricity product offers customers the alternative of accepting more responsibility, managing their consumption in response to price signals and paying lower prices. That said, we would emhasise that customers that intend to continue consuming unconsciously without regard to the real time price are best served by a traditional retailer.

Community's product

Community Electricity is a Virtual Retailer, which extends the concept of a pure retailer as follows:

  • The customer funds its own Prudential Guarantees as cash deposits;
  • All Regulated Prices (such as network and environmental charges) are passed through to the customer without modification;
  • All energy is purchased from the Wholesale Electricity Balancing Market and passed through at cost;
  • Community charges no margin on any of the cost components;
  • Community possesses and manages on behalf of the consumer, the relationship with the IMO, Western Power and the Clean Energy Regulator;
  • Community provides a Management Service for which a Management Service Fee is charged