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Consumption decline hits power companies

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Australian power and utilities companies face difficult operating conditions due to lower energy consumption and changes in government policy, says a report released today.

Rising gas prices are also expected to have an effect on SA power prices.

International ratings agency Fitch Ratings’ latest assessment of the road ahead for electricity and gas companies says margin pressures will increase in the near term.

“Utilities are faced with significant and unprecedented changes in electricity consumption, as demonstrated by lower generation volumes from increased use and penetration of energy-efficient appliances and solar photovoltaic installations,” the report said today.

“Subdued consumption conditions are likely to continue in the near term.”

On the positive side for the companies, but a negative for consumers, the rounds of price discounting appear to have come to an end.

“Margins have recovered thanks to reduced customer switching and consequently less price discounting, as evident in the second half of 2013,” the Fitch report says.

“Margins will also benefit from a likely move to full retail price deregulation, through lower risk of regulatory intervention, and cost-reflective tariffs.”

New rules governing the regulation of electricity and gas network prices will apply from July 2015, with a one-year transition period for regulatory determinations from 1 July 2014.

Gas prices are likely to rise due to export demand, leaving South Australia’s gas-fired Torrens Island plant on the wrong side of the equation.

“East coast gas prices reflect increasing linkage to high oil prices from significant gas production earmarked for substantial export liquefaction capacity from 2015,” Fitch says.

“Higher prices also reflect retained options over future gas production for further capacity expansion – and, as such, are also being factored in domestic gas supply contracts. It benefits the hybrid profile of integrated entities and future coal-fired plant utilisation.”

With the make-up of the Senate yet to be decided, due to the election re-run in WA government, energy policy remains unknown.

While not pointing to the WA scenario, the Fitch report expresses concerns over the timing and nature of future government policy shifts.

“There is uncertainty in the timing and nature of new government policy governing future emissions and renewable generation growth following the change of federal government in September 2013.

“This adds to the uncertainties in managing ongoing compliance related to individual emissions, and future investment decisions.”

The full report is available here:

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