Correlations between the Australian and New Zealand energy markets
Similar to Australia, for a number of years now energy retail margins have been squeezed significantly due to increased market participation and retail options, increased fluidity in the ASX market and subdued energy demand leading to a lack of requirement for more generation capacity. Since late 2012 when over the counter retail prices dropped by around 20% to almost the same level as long term average wholesale Spot pricing, 3 year fixed price variable volume (FPVV) contracts have largely been priced at similar levels year on year.
With a large number of new entrant energy retail brands (some with or without ownership of generation assets) competition continues to increase which has assisted in keeping pricing down and keeping the big 5 honest. As energy consultants and advisors it is our job to ensure that customers get visibility of all available and reputable retail options and provide safety in the knowledge that pricing and contract terms / conditions are independently vetted before being accepted.
The energy retail space is not the only part of the market that is facing competition. In New Zealand there are over 30 companies offering procurement services for electricity and gas. The consultant and adviser industry for energy is not regulated, effectively anyone can put up a shingle and start a business that offers procurement services.
Questions to ask potential energy advisors
The quality of service and outcomes varies drastically. If it were my business, there are only a small handful of organisations I would consider using in New Zealand to obtain an energy contracts on my behalf. The following are few questions I would ask before engaging a professional services company to act on my behalf:
1. Does the company you are working with have certification with the Financial Markets Authority.
Post global financial crisis, New Zealand made a number of changes to the Financial Securities Act, this extended to any company offering trading or advisory services around energy futures, derivatives and wholesale market products. To comply with the act, companies must hold accreditation under section 38 as this ensures companies have a high standard of conduct and expertise when advising customers of their options.
2. Does your adviser or Consultant review the entire market?
There are currently 29 energy retail brands in New Zealand, however only around 15 or so can supply business and not all of these can supply all regions in NZ. A smaller number again can supply natural gas and LPG however, many consultants only obtain pricing from favoured retailers meaning customers may only see pricing from 4 or 5 companies. In cases like this the customer may be missing out on the best available pricing and contract terms from reputable retailers due to sub-par market evaluations.
3. So you get a report that only outlines the price of contestable energy…
Around 35% of electricity costs and around 40% of natural gas costs relate to third party charges such as transmission and distribution. While these costs are not contestable charges there may be opportunities to reduce the impact of these charges i.e. aligning capacity so it better matches peak demand or required throughput. Some networks also have the option for customers to move load groups to better suit their energy profile; this can also lead to annual savings. Are these charges being reviewed as part of the procurement process by your consultant or adviser?
4. Energy market intel – what’s happening?
The rate of change in both energy markets is only increasing. While we can’t necessarily predict what will happen, it is still important to keep your finger on the pulse. Does your adviser or consultant track wholesale pricing, the forward ASX curve, industry developments? Do you get regular updates in these areas? Knowing when to go to market and timing it right can have a massive impact on pricing obtained, it should not be a matter of waiting until the end of your contract term before looking at pricing as in most cases this will limit your options as you have to take what the market is offering or risk default business prices.
5. Contractual terms and conditions
While the Commerce Commission recently cleaned up anti-competitive clauses in energy contract, such as automatic renewals, right of renewals and right to match terms, there are still a few gotcha clauses to look out for, such as maximum and minimum quantities, assignment and conditions of force majeure. Does your consultant outline these issues in their procurement process and how they may impact you as a customer in the long term?
6. Large Energy Consultant or Adviser versus small Consultant or Adviser, does it matter?
A better question would be how many procurement exercises does the company you are looking to engage with conduct a year? The energy market is highly dynamic, energy retailers are entering and leaving the market at unprecedented rates and pricing models and practices are changing daily. If the consultant or adviser is not pricing in the market on a regular basis, then you and they are likely to be caught out by the market changes. Look for companies conducting over 100 procurement exercises per year, Total Utilities as an example conducts over 500 procurement exercises per year.
7. Insured or not?
For companies providing professional services, they should hold public liability insurance and professional indemnity insurance of more than $2 million dollars.
So are energy advisors friends or foes?
Energy advisors and consultants should develop a relationship with their customers built on trust. This trust is based on significant market knowledge and intellectual property, creative business problem solving and transparent processes while upholding strong business ethics to ensure sustainable business and commercial outcomes.
This is achieved by market wide reviews, in-depth reports and financial analysis to ensure that all angles are covered and customers get the best possible information to make strategic business decisions.