While the majority of companies are still paying fixed-rate prices for their power, Matthew van der Linden tells Manufacturers’ Monthly why more companies are moving to the wholesale market.
Across the Australian energy market, prices have significantly increased during the past two to three years and are driving a lot of the conversation we hear within manufacturing industry today.
As it currently stands, the vast majority of businesses are now paying top dollar for their power as traditional retailers sell the country’s energy at fixed rates much higher than its wholesale price.
According to the people at Flow Power, the Australian owned wholesale power retailer, larger businesses are paying almost a third more on fixed contract rates than other companies in the supply chain spend on their energy consumption.
Since announcing their presence in 2008, Flow Power’s research has revealed what they call a “disparity” between the wholesale and retail markets – which, if addressed, they claim will help to stabilise an ongoing energy crisis.
In the past 12 months, Flow Power has seen a 50-per-cent spike in interaction in wholesale energy, which is believed to be a clear indication that the market is shifting.
“In the market, we have had very significant price rises and customers are becoming acutely aware of that as they go to renew their contracts,” said Flow Power’s managing director Matthew van der Linden.
“In many cases, companies are paying perhaps two to three times the price they were last time. By opening up the wholesale market, they could bring that down their energy costs from 23 cents to eight cents for anywhere up to 50 per cent of their load.”
The largest impact seen today is the customer’s ability to buy from large-scale renewable sources.
“There is a lot of news on 100MW solar farms being built and how most of the energy output is going to the big three retailers,” Van der Linden continued. “One of the key areas we are moving ahead with is the ability for customers to contract directly with those farms and get an energy rate that the large retailers get, which is very cheap.
“With such a large price disparity, we are able to show that there is the opportunity to downsize this kind of purchasing. It is pretty much that simple – by signing retail contracts, you get access to portions of solar farm, access to the wholesale market and all the benefits that go along with that.”
In Australia, as few as 0.5 per cent of industry buy energy wholesale compared to 10-20 per cent in other countries.
At Flow Power, they believe this target is achievable. However, the biggest issue is that there hasn’t been anyone out there offering energy at wholesale prices, according to Van der Linden.
“What you have to remember is that, while buying wholesale in Australia is relatively new, the wholesale market represents most electricity markets around the world,” he added.
The wholesale market includes all power generators such as AGL’s coal-fired power plants and the Snowy Hydro project.
Based on demand and supply, the market operator, AEMO, sets a wholesale price every half hour. But most retailers aggregate the market movements and other inputs to give their customers a fixed rate.
“What we are doing is coming up with solutions for our customers that make it simple and easy for them to get the lowest rate possible,” Van der Linden said. “The traditional retail model shields them from the market, yes, there are a few high price events but mostly there are low prices, and it’s our role to expose them all and make them available to the customers to take advantage of as much as possible.
“The fixed retail model needs changing. The biggest problem in the market at the moment is a ‘disconnect’ between the generation and usage of power; for everyone who is on a fixed retail contract, there is no motivation to do anything differently.
“While generation prices go up, the only way to recover that price is to continue to drive these fixed-priced contracts up. Our model is very different: we connect energy generation to consumption and, over time, will reduce the market price.
Following the release of the Finkel Report earlier this year – an independent review, which looks into the future security of the national electricity market – Flow Power has highlighted some key elements.
One is the growth of renewable energy outputs and how, it is claimed, promoting them on the wholesale market can “help grow renewables and make them more viable”.
The report also notes customers should be rewarded by the market operator for switching off its power or using a back-up generator when the market is stressed and overworked.
“That doesn’t happen in Australia,” Van der Linden said. “The large retailers are buying up the low cost output and it’s not being passed on. They are holding onto it and using it in their own portfolio and customers don’t get access to that low cost energy.
“It’s almost unfathomable how low-cost it really is (eight cents/kW). Why aren’t they seeing it in the market? I guess it’s because big retailers don’t need to yet.”
According to Van der Linden, New Zealand is a notable example of a country “right next door to us”, which has strong connections between its energy generation and consumption.
“The market here at the moment doesn’t respond to load, which is partly why we are in the dilemma that we are in right now,” he explained. “That disconnect is what has caused most of our problems.
“At Flow Power, our customer base has grown by 50 per cent in 12 months. If we keep going, I believe 20 per cent of the whole market can eventually buy wholesale. We are probably somewhere around 0.5 per cent at the moment.
“As a result of competition, it will happen, and, once we can demonstrate that it works customers will sign up in their droves, it will change behaviours in the market. Other retailers can start to operate very soon after and hopefully drive down the cost of energy.
“It will also help fix the market because our model connects customers to what’s happening on the generation side. There is a huge scope for growth.”
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