Australia’s energy providers put on notice

Australia’s energy retailers have been warned that the federal government is coming after them – after a review found Victorian electricity retailers had doubled profit margins since the market was deregulated in 2009.

Who said deregulation is always more efficient?

Power companies have long been accused of gold plating their networks, by spending unnecessary capital upgrading their networks. That’s despite energy use falling.

Deregulation was meant to deliver lower utility prices for households and businesses, but a report by the Grattan Institute says, “Competition in electricity retailing has failed to deliver what was promised: lower prices for consumers.

The report says that the failure was worst in Victoria – which has the longest experience of deregulation – despite not having to cover major investment in poles and wires.


Source: Grattan Institute

There have even been calls for state governments to re-regulate the industry and the Federal government is now conducting an electricity review.

But it’s not just electricity that is under watch. A shortage of gas on the east coast is also causing issues for businesses.

Building materials manufacturer Brickworks Limited (ASX: BKW) today suggested it could consider moving its production offshore, after being forced to pay 76% more for gas across east coast operations. The company says energy costs represent 30% of non-labour related input costs at its Austral Bricks division.

Listed energy companies like AGL Energy Ltd (ASX: AGL), Origin Energy Ltd (ASX: ORG), Spark Infrastructure Group (ASX: SKI), AusNet Services (ASX: AST), DUET Group (ASX: DUE) and even ERM Power Ltd (ASX: EPW) all face the risk of some adverse measures across their business, if the government is serious about lowering power prices.

Alinta Energy’s planned IPO for 2017 could also be delayed yet again – and we may not even see it come to market this year.

Foolish takeaway

Energy retailers have been given a virtual licence to print money since deregulation in several states, but it seems the pendulum is likely to swing back the other way and margins could fall by as much as 50%.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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