Will higher wholesale electricity prices send some retailers bankrupt?

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If you are a ReAmped Energy customer, you probably recently received an email recommending that you switch electricity suppliers. Yes, you read that right – they want you to take your business away from them. But why is this and what does it mean for your electricity bill?

The structure of the National Electricity Market (NEM) means your electricity retailer, who sells you electricity will need to either:

1) Buy the electricity from the wholesale market so they can on sell it to you; or

2) Own the generation sources so they can then sell it to you.

There are more than 50 electricity retailers in the market all competing for your business and they don’t all own generation (think solar farms, wind farms, coal and gas). The larger companies like AGL and Origin do own generation sources. Part of an electricity retailers’ job is to match the demand from their customers with supply from generators.  

So, the many electricity retailers that need to buy on the wholesale market can be exposed to higher wholesale electricity costs.

However, to reduce risk these electricity retailers should hedge their future price risk by purchasing derivatives so they can source the electricity into the future at a known price (or at least a capped price). This provides price certainty for you as a consumer and for them to manage their business costs.

It seems that ReAmped Energy may have been running a significant unhedged position and this is now starting to unravel. Its great that they have proactively contacted their customers to let them know they should move, as they will be putting up their prices very soon. But this is also in their own self-interest, because if you move, it means they need to buy less electricity on the wholesale market and sell for a loss to you.

So what does this mean for you?

Firstly, if you are a ReAmped Energy customer you should switch as soon as possible and Huglo electricity comparison has been established to help you do just that. We compare every electricity retailer and our database updates every day, so you know you have up to date pricing. Try it out here.

This is a bit of an inconvenience for you now, but what does it mean longer term?

The question remains, how many electricity retailers are in this same position. If there are many retailers with unhedged price risk, this will mean they will have to significantly increase their prices to remain viable. Worse is they could go bankrupt. This is bad news for competition, as it means not only will we have to pay more due to wholesale electricity prices being higher, but also competition in the market could decrease.

Fill your roof with solar panels

The best thing you can do is to fill your roof with quality solar panels. While you may think we are talking our own book because Huglo sells and installs solar - there are good reasons why you should.

A solar system will partly lock in the price of your electricity as you now own your own generation (just like AGL and Origin!).  What proportion of your electricity costs will depend on the size of your solar system and when you use electricity. A good rule of thumb is you will offset around 40% of your usage.

This means you will be partly insulated from prices rises. Solar is still one of the best investments you can make, with Huglo solar customers achieving 20-25% ROI - a pay back period of less than five years.

A quality 6.6kW solar system will cost upwards of $5,800. Which isn’t a small amount of money but there are green loans from Brighte (Huglo solar’s finance partner) that can mean the electricity bill savings offset the loan repayments of your solar system.

You can get cheaper solar systems, but like everything in life you get what you pay for. And you should be thinking long-term and none wants to deal with a faulty cheap system in five years time.

Act now as interest rates are rising. As we all know, money has been unbelievable cheap for a period of time now. The Reserve Bank of Australia has already started to increase rates and the wholesale cost of financing is increasing. This means they are going to be passed onto you as a consumer very soon.

There are many reasons the wholesale cost of electricity has skyrocketed (discussion for another blog). But it is becoming clear that we are heading into a more volatile period in how we source and pay for our electricity. There are steps you can do now that can protect your household from rising costs – but don’t put it off.