Review into the arrangements for failed retailers’ electricity and gas contracts

Market Review: Open

Overview

The Australian Energy Market Commission (AEMC or Commission) is reviewing the arrangements for failed retailers’ electricity and gas contracts.

On 22 February 2024 the AEMC published a draft report, outlining ten draft recommendations to improve the Retailer of Last Resort (RoLR) scheme. Our recommendations will simplify and improve the RoLR scheme, better protect retailers who take on the failed retailer's customers and lower costs for consumers.

Stakeholder submissions are being accepted on these draft recommendations until 4 April 2024.

Electricity and gas have different approaches to managing risks

The RoLR scheme facilitates a timely transfer of customers to a new retailer when their retailer fails. It can result in risks and costs for customers and designated RoLRs.

During volatile market conditions with high wholesale prices, the designated RoLR may face financial stress from being exposed to these prices. For gas retailer failures, the designated RoLR may also face the risk of being unable to obtain gas to supply their new customers.

Our draft recommendations simplify and improve the RoLR gas directions framework

The Commission has made six draft recommendations to simplify and improve the RoLR gas directions framework. These are set out below:

Require the AER to issue directions for gas all RoLR events, except if it reasonably considers that issuing the direction would not benefit the designated RoLR or consumers.
Extend the RoLR gas directions period from three to six months.
Remove the mandatory negotiation process between the failed retailer and designated RoLR, and the subsequent auction process if negotiations are unsuccessful.
Clarify what happens to contracts that begin or end during the directions period.
Expand the RoLR gas directions framework to include storage contracts and gas held in storage.
Require designated RoLRs to pass on the financial benefits of RoLR gas directions to customers.

Our draft recommendations reduce costs and provide better incentives for failing retailers in electricity and gas

The Commission has made four draft recommendations to improve incentives for failing retailers and reduce costs from the RoLR scheme.

Improve cost recovery clarity through changes to AER guidelines.
Expand the AER’s RoLR information-gathering powers to include third parties to enable designated RoLRs to get the necessary information to service transferred customers.
Introduce a new framework that allows the AER to issue the failed retailer a bill for the costs associated with its failure.
Introduce civil penalties for retailers who did not take all reasonable steps to avoid causing a RoLR event.

Retailer failures are managed through legislation held in the National Energy Retailer Law (NERL). Therefore, any recommendations from this review will need to be endorsed and implemented by Energy Ministers through a package of law and rule changes.

Retailer failures are managed using the Retailer of Last Resort scheme

In the event of a retailer failure, the Retailer of Last Resort (RoLR) scheme facilitates the orderly transfer of customers to new retailers without disruption to their electricity or gas supply.

Between 2012 and 2022, the RoLR scheme had only been used four times, and the AER had never used its RoLR gas directions powers. The high wholesale prices and reduced liquidity in the contract market that occurred in 2022 put pressure on retailers, resulting in seven authorised retailers failing and triggered Retailer of Last Resort (RoLR) events, including the AER using the gas directions powers for the first time.

The RoLR scheme represents risks for the designated RoLRs

While the RoLR scheme facilitates a timely transfer of customers to a new retailer it can result in risks and costs for customers and remaining retailers. The failed retailer's customers are transferred but the contracts that the failed retailer used to manage wholesale price risks are not transferred to the designated RoLR.

If retailer failure occurs in volatile market conditions with high wholesale prices, the designated RoLR may face financial stress from being exposed to these prices. For gas retailer failures, the designated RoLR may face the risk of being unable to obtain gas.