set to move higher, page-39

the age: energy prices to be pressured. Tough times forecast for energy producers
By Rod Myer
February 21, 2005


Conditions in the retail energy business will get tougher as margins come under pressure, prices spike and capricious customers change suppliers, says ratings agency Fitch.

Fitch utilities director Carolyn Martin said power retailers would be caught between government statutory price caps and rising demand for peak power.

Power prices would become more volatile as peak demand grew and margins were squeezed as government price caps were reached, Ms Martin said.

Constraints in power networks would make the situation worse during peak demand.

"Utilities will be challenged by low but volatile wholesale electricity prices that will ultimately test the robustness of the generators' and retailers' forward contract cover," the Fitch report said. Market churn from bargain-hungry consumers was an extra pressure.

Ms Martin said 20 per cent of Victorians and 30 per cent of South Australians were now changing retailers each year. In NSW the figures were low.

She said major retailers were in a strong position and had well-balanced portfolios through their exposure to generation, direct ownership and hedging. But this year the market would be increasingly competitive.

"Fitch remains concerned about the potential effect on retailers from a market stress situation, where the price of electricity sold is constrained by the government," she said.

The appearance of several integrated utilities with exposure to retail, network and distribution allowed participants to effectively manage risk, the report said. But Fitch said regulators were concerned that the appearance of vertically integrated entities would decrease the availability of hedge contracts and raise barriers to entry at the retail and generation levels.

Greenhouse issues would increasingly affect power prices.

While the number of gas-fired power stations was increasing Fitch believed their viability was unclear. "In nearly all cases gas-fired plants will be at a price disadvantage to coal-fired plants."

The long-term availability of gas at low prices was also open to question, it said.

Investment in new coal plants was risky without a national greenhouse policy to set emissions benchmarks. The best form of policy would be a well-structured emissions trading program that set in place an investment framework. Clean coal technology would not be available until the longer term and renewable energy would have a place only at the margins.