Open Electricity Market

On 13th October, iSwitch with a market share of 13% (or about 90,000 households) announced publicly that it is exiting the open electricity market. Under the code of conduct, iSwitch is required to approach other retailers to take over the customers on the same terms and conditions. Obviously, she is not able to do so because the existing contracts were likely signed based on heavily discounted rates as recent as just a few months ago. With the electricity cost heading for the sky of late, existing retailers are struggling to keep their heads above water with their own deeply-discounted contracts. Certainly, they would not want to take on the passed-over customers from iSwitch. Just two years ago, these retailers were trying very hard to increase their market share through attractive discounts. Now the contracts have become liabilities.

And just three days ago, Ohm also threw in the towel. It is also reported that another two retailers will be expecting to exit the electricity market soon as they are no longer signing on new contracts. Going further down the road, it is likely that there are more consolidations.

A disproportionate increase in the tariff rates

The ever-increasing crude oil price has caught many retailers off-guard, and, certainly, put many households in a bind. Like others, my existing contract was signed at a deeply discounted rates. A quick check at my existing contract showed that the tarriff has gone up by a whopping 41.2%. It is unlikely to stop at this point going by the way crude oil prices are increasing.  Even if we assume that the tariff remains as it is now and that my power consumption pattern remains unchanged, my electricity bill would have downright increased by 42%, not a small amount to be sniffed at especially if one is paying on a regular basis.

It is also a disgruntled fact to know that consumers are not protected at all when a retailer exits the market. The contract specifies that should a customer breaks the contract, a penalty will kick in against the customer. However, it was left unmentioned should the retailer breaks the contract. While it may be argued that the customer had enjoyed the past discounts while the contract was in force, he is in a way deprived of the benefits he would otherwise have enjoyed should the contract be still in force.  When retailer exits the market, the customer has to sign a new contract with a new retailer or with the SP Group. In either case, the customer will be slapped with a much higher tariff rate. Consequently, customers who signed with ‘weaker retailers’ may be in a danger position even if they have recently entered a new contract with deeply discounted tariffs.     

Higher tariff likely to remain sticky

As the industry is likely to consolidate further, retailers that can survive this onslaught will have a stronger position. They have more bargaining power as they have less competition to contend with going into the future. In other words, they have more control over the tariff rates as the industry would then be an oligoply situation. So, it means that even if energy prices were to come down again, the tariff rate is likely to remain sticky, unless other cheaper alternatives sources like solar power or wind power can come on the national grid just as quickly. Otherwise, it is likely that we have to say goodbye to the deeply-discounted tariff rates.

Brennen has been investing in the stock market for 30 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is the instructor for two online courses on InvestingNote – Value Investing: The Essential Guide and Value Investing: The Ultimate Guide. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy.

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