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Battlelines drawn over competition under National Energy Guarantee

Battlelines drawn over competition under National Energy Guarantee

The federal government's National Energy Guarantee proposal has got renewables companies and junior power retailers hot under the collar.

Even if the political obstacles can be overcome, the issue of market concentration looms as a serious threat to their businesses.

As the chief architect of the NEG, Kerry Schott, has spelt out, in a supply system underpinned by contracts between generators and retailers, vigorous competition in each state power market is essential. Only with effective competition within both the retail and generation parts of the industry will the policy achieve its twin goals on reliability and emissions reductions at least cost to consumers.

But there lies the problem, with AGL Energy's strength in both generation and retailing in South Australia cited the stand-out. Other states are also expected to have issues, including Queensland, although there the problem is less severe as the "Big Three" – AGL, Origin Energy and EnergyAustralia – have a much smaller share of generation.

Smaller players – both in renewable energy and retailing – are worried the NEG will only entrench the power of the majors, putting them in control of how the generation sector will be shaped in future and potentially shutting them out.

Difficult position

As Marcus Dorreen, co-founder of solar-and-storage start-up Evergen, points out, those aiming to set up a power project, for example, would not only be in direct competition with the powerful "gentailers", but be largely dependent on them as customers for their output.

Dorreen compares the problem to the situation under the large-scale Renewable Energy Target, where renewable project developers struggled as the dominant retailers stalled on signing up new renewables purchasing contracts, or developed the best sites themselves within their own generation businesses.

"It puts start-up and challenger brands in a very difficult position," Doreen says.

The Energy Security Board's analysis on the NEG provides plenty of fuel for that concern, zeroing in on South Australia, where AGL controls 42 per cent of the generation, rising to 52 per cent for "dispatchable" power. Its share of the retail market is almost as powerful, at 51 per cent.

In all, the three largest generators in South Australia – AGL, Origin and Engie – have almost 90 per cent of the state's "dispatchable" generation and a combined share of the retail market of 80 per cent.

Under an NEG, the ESB points out, that level of integration between generation and retailing would only exacerbate market concentration, to the detriment of emerging competitors.

Alternative approach

Electricity retailers seeking to break into the market would be primarily looking to AGL to buy power, while developers seeking to get renewables projects off the ground are largely dependent on AGL to sell their offtake.

The ESB suggests three broad ways of tackling the problem: restricting which companies can own and operate new power plants; restricting who can retail power; or restricting cross-ownership between generation and retail.

Dorreen suggests an alternative approach, where the NEG is overlain by a type of auction scheme for dispatchable power similar to those that have worked effectively at state and territory level for renewable energy and storage and have opened up opportunities for new entrants such as Evergen.

Such a system would promote competition and innovation, instead of stifling it, he argues, while helping cut emissions and improving network reliability just as the NEG aims for.

Schott has emphasised that the competition issue will need a lot more work, with potential solutions to be workshopped and tested before the NEG can move forward.

Given the heavyweight players involved and what is at stake, it's safe to assume the industry debate has a long way to run.

Financial Review

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