Small Business Gets Energy Cut

Business is set to get another big dividend from reform of the electricity sector.

As of next month, many small businesses will be free to choose their electricity supplier and thereby take advantage of the lower prices offered by the deregulated market.  Judging from current prices in the deregulated market, this should reduce electricity bills by around 20% and save the small business sector at least $50 million.

Over the last few years, large-to-medium electricity consumers have been able to reap huge gains from the deregulated electricity market.  When this market was first established back in 1994-95, the regulated price for the energy component of the bill for medium-to-large consumers stood at $40 per megawatt hour.  Although the players expected the price to come down somewhat with the introduction of competition, the general expectation at the time was for a price over the long term of around $35 per megawatt hour.  To the consumers' surprise -- and the producers' despair -- prices in the deregulated market have fallen steadily and currently average less than $20 per megawatt hour.

How did the industry get it so wrong?  First, they underestimated the extent of over-capacity in the national grid -- both in Victoria and New South Wales.  Second, they did not adequately factor in the improvement in operating efficiency available from privatisation.  Third, the Victorian generators did not expect the publicly owned generators in NSW to fight so hard and on uncommercial terms for market share.

Nonetheless, they did get it wrong and, according to the experts, the pressure for low prices is expected to continue for the next three to four years.  After that, who knows?

From 1 July, firms consuming more than 160 megawatts hours per year will also be allowed to buy electricity from the deregulated market.  This group represents around 15% of the State's electricity consumption and over 8,000 -- mostly small -- businesses.

Currently these businesses pay roughly about $100 per megawatt hour and spend between $20,000 and $90,000 per annum on electricity.  As such, electricity represents a major operating cost.  The current charge comes in two parts.  A charge for the energy which currently averages about $40 per megawatt hour and a charge for the cost of the lines, poles and retailing.

After the end of this month, the 160-megawatt customers will still be required to pay the gazetted charges for the line and poles, but will be free to buy their energy from any of the over 30 registered electricity retailers at the market price.

This means that most will be able to achieve savings of at least $20 per megawatt hour or 20% off their electricity bills.  This translates into savings of between $4,000 and $18,000 per firm.  There will be some variation in the extent of savings, because of the difference in line charges and effect of time-of-day tariffs.

Not all small businesses consume enough electricity to qualify for the deregulated market.  Although the smaller customers will receive some price relief via the phased reduction in regulated prices, they will have to wait, along with households, until the year 2000, to join the deregulated market.

Nonetheless, the reform dividend will give a boost to many firms in the new financial year.

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