Market Review: Completed
The Australian Energy Market Commission (AEMC or the Commission) has published a final report which provides a set of targeted recommendations to improve the Retailer of Last Resort (RoLR) Scheme. The RoLR scheme is the mechanism, included in the National Electricity Retail Law (NERL), to be followed in the event of the failure of a retailer, to ensure the orderly transfer of retail customers to new retailers without disruption of supply. The recommendations seek to improve outcomes for small customers following a RoLR event and enhance the financial market resilience of the national electricity market (NEM) if a medium or large RoLR event should occur.
This review follows the Commission’s analysis and similar recommendations in the 2020 Retail energy competition review final report to amend the RoLR scheme after assessing the effect of the pandemic on the retail electricity sector. The Commission considered that pandemic impacts heightened the risk of the failure of a retailer, or retailers with a large number of customers, due to a potentially significant increase in the number of customers who are deferring or unable to pay their bills.
On 8 October 2020 the ministerial forum of Energy Ministers (formerly COAG Energy Council) requested the Commission conduct this review to provide advice to governments on updating the RoLR scheme. The AEMC published a consultation paper on 22 October 2020 seeking stakeholder feedback on a number of specific issues and recommendations to improve the RoLR scheme.
Final report recommendations
To improve outcomes for small customers following a RoLR event and enhance the financial market resilience of the NEM the Commission made the following recommendations, that the:
- NERL is amended to remove the requirement (but not the ability) for the small customers of a failed retailer to be transferred on to the standard retail contract of the designated RoLR. This would allow customers to be placed immediately on lower priced market offers and therefore face lower electricity bills, if a RoLR's market offer is approved by the AER.
- RoLR cost recovery arrangements in the NERL be amended to provide greater certainty to the designated RoLR(s) so that they can quickly recover the efficient costs they incur following a RoLR event and that the failed retailer's customers will not bear the financial burden of their retailer's failure.
- RoLR scheme is amended to allow the AER to delay the designation of RoLRs by up to 24 hours following a RoLR event which gives the AER greater ability to appoint multiple RoLRs if appropriate.
- National Electricity Rules (NER) are amended to give the RoLR more time to meet AEMO's credit support requirements in relation to the RoLR customers it gains, noting that this maybe a significant number of customers in the event of a large retailer failure or multiple retailer failures.
- NERL is amended to provide the AER with appropriate flexibility in its RoLR plan communication and publication requirements.
In this report, the Commission presents policy advice that can be further developed into law and rule changes that will address the issues present in the RoLR scheme. If the recommendations are accepted by jurisdictions, law changes to the NERL will be progressed by jurisdictions in coordination with rule changes by the AEMC.
The AEMC published a consultation paper on 22 October 2020 seeking stakeholder feedback on a number of specific issues and recommendations to improve the RoLR scheme. Stakeholder submissions were due by 19 November 2020. The Commission received 14 submissions (which are available below).
Through the 2020 Retail energy competition review final report the Commission assessed the retail market under the COVID-19 pandemic conditions. The Commission traced through the effects of the pandemic on consumers, retailers and the market as a whole.
Given the Commission’s findings that there had been a sizeable impact on the retail market the Commission assessed the adequacy of the existing market and regulatory framework to deal with the potential for retailer failures. The Commission updated the extensive analysis it previously conducted in the NEM financial market resilience review for pandemic conditions. These specific conditions relate to the failure of a retailer or retailers with a large number of customers, due to a significant increase in the number of customers who are deferring or unable to pay their bills. This may:
- heighten the risk of the existing RoLR scheme triggering financial contagion across the sector through the transfer of non-paying customers to retailers who already have a growing number of non-paying customers
- result in both paying and non-paying customers being automatically placed on the receiving retailer’s standing retail contracts, when experience shows that it will take many years for customers to shift onto lower priced market offer contracts
- reduce competitive pressure on prices generally through the loss of second and third tier retailers who have over recent years been increasing their market shares at the expense of the “Big 3”.
To address these risks the Commission considered that changes should be made to the RoLR scheme to improve outcomes for small customers and to enhance the financial market stability of the NEM. For more information on the Commission's analysis and recommendations see chapter seven of the 2020 Retail energy competition review final report.