I don't know if anyone picked up the ARF article last night?This...

I don't know if anyone picked up the ARF article last night?

This situation has been unfolding for the last several months given the situation in the NEM, but its a timely article.

Titled: Energy retailer squeeze worsens as hedging costs spike.

https://www.copyright link/companies/energy/energy-retailer-squeeze-worsens-as-hedging-costs-spike-20221024-p5bsek.

Small energy retailers are struggling to acquire hedges needed to ensure their financial stability, as financial intermediaries retreat or ask for more collateral in the face of volatile wholesale electricity prices. The retail energy sector is under intense financial strain amid a global energy crunch that has sent wholesale prices soaring. The impact is acute for retailers that lack their own generation assets and have to buy wholesale electricity, because they do not reap any offsetting benefits from higher prices.

Wholesale prices are expected to remain elevated for a couple of years at least as major buyers o f Russian gas turn to coal, pushing up prices in the National Energy Market and putting a premium on retailers’ risk management skills. Retailers’ access to the electricity derivatives they need to protect themselves against surging wholesale prices has been curtailed recently after Macquarie and Bell Potter wound back their ASX energy market clearing services because they didn’t want to be over-exposed to the recent price swings. A retailer who is unable to secure clearing services either has to purchase over-the-counter (OTC) derivatives such as contracts for difference or do without hedges, leaving it entirely exposed. With Australia’s wholesale electricity prices so volatile, small retailers can ill-afford to trade without hedges.

Anyway, referring back to one of my earlier posts, DEL are not equipped to deal with complicated retail book.

1. They have limited qualified people to run complex retail/hedging operations.
2. They clearly have a lack of system and process - risk management shortcomings
3. They clearly have no balance sheet to support a complicated retail/markets environment

On point 3 - this is essentially admitted by DEL when they say in their release from Monday 24/10/2022:

Ceasing to provide Western Australian energy retail services at this time and in the current circumstances is expected to be both earnings and cashflow positive for the Company, freeing up cash-backed prudential and contract securities and reducing the Company’s exposure to risk in the WA electricity market.

So this very statement by DEL links to the AFR article from last night.

Whilst the market maybe disappointed in the short term at DEL running down the retail book and existing that business unit, I think its a sensible move by management given their clear lack of experience (people and process) and financial capacity (balance sheet) to continue to navigate this complex area.