The rise of the alternative energy seller

Share this article:

Emerging Issue: In June 2014, the Australian Energy Regulator (AER) published its final ruling on the regulation of Alternative Energy Sellers (AES) under the National Energy Retail Law. Since then, there has been over 40 approved applications for AES status with the AER, with anecdotal reports of up to 10 new applications per week.

These exemptions are being sought by range of market participants (from Zero Cost Solar to Origin Energy Retail) who are looking to offer Solar Power Purchase Agreements (SPPAs) to customers to diversify their customer offering.

Under these arrangements, an AES installs a solar PV system on a customer’s premise at no cost to the customer. The AES remains the owner and maintainer of the system for the life of the contract and they sell the output from the system directly to the customer at a discount to their typical retail tariff for grid supplied electricity. Excess energy is exported to the grid and owned by the AES.

Because value is primarily generated for the AES by customer electricity use during the day, they must be careful to select customers with the appropriate load profile to provide a return on their assets. Customers will also be incentivised to use as much of the solar generated electricity as possible and can use smart devices and thermal storage techniques to do this (e.g. running AC units and electric hot water systems during the day). This is also obviously an additional incentive for the use of battery storage technology, as it becomes more cost competitive.

When a customer no longer wants to continue the arrangement, there is typically (but not always) an exit fee to remove the equipment, or the contract can be transferred to the new owner or tenant.

This arrangement is highly advantageous to an AES who can offer a discounted electricity tariff to customers, the use of a renewable energy (which typically retails at a significant premium) and no upfront costs. They also avoid the considerable and costly responsibility that goes with being a traditional retailer (e.g. retailer of last resort obligations, financial hardship obligations, wholesale market settlements and risk).

Unsurprisingly, regulated retailers have argued these AESs are enjoying too much of a free ride on the services they provide and, although standard consumer protection mechanisms still apply, a rapid increase in their number in such a short time will ultimately lead to customers being poorly serviced by irresponsible operators with regulated Retailers left to pick up the pieces.

Retailers obviously can, and do, also offer Power Purchase Agreements for their customers, and simply provide the balance of electricity requirements at their higher price (or an overall blended lower retail rate). Retailers can also set up separate entities to trade as an AES in order to sell SPPAs to customers of competing retailers – Origin and AGL have already done this.

This emerging business model offers some distinct opportunities for small-scale renewables:

  • Enables Solar PV products to be taken up without the upfront costs for the customer, particularly for customers who have high load profiles during the day e.g. small retail businesses, commercial and industrial customers
  • Potentially overcomes the split incentives barrier preventing tenants from accessing solar PV. As the assets are owned by the AES and can be removed if the tenant moves out, or transferred to new tenants, this arrangement is effectively a neutral impact on the landlord
  • Provides an additional incentive for storage and demand management technologies
  • In part, it also works around the current limitations associated with multiple retailer relationships not being allowed.

There is a risk, however, as highlighted by fully licenced Retailers, that relatively less regulation on these suppliers may lead to questionable business practices that adversely impact customers. The AER does not agree, indicating as such in its final statement of approach on the regulation of Alternative Energy Sellers stating that: “The ACL (Australian Consumer Law), in particular, provides robust protections for residential customers who buy electricity through SPPAs.” Given at least two major retailers have already set up separate entities to operate with AES status, it may be that not all traditional retailers share this view.

It is noted that this status is only available in States which have signed up to the National Energy Retail Law, hence the significant markets of Victoria and Queensland are currently locked out of the benefits of this business model. However, we understand that Victoria is committed to signing up by the end of 2015 and Queensland by mid-2015, so it is likely that the whole NEM will be open to the AES business model soon.

It is too soon to find any meaningful correlation between the emergence of this business model and an increase in solar PV sales, but this is definitely a case of “watch this space”.