The impact of technology on costs and the transparency of electricity bills making price comparison far easier will likely squeeze retail margins for the next 18 months, Craigs Investment Partners broker Chris Timms says.
Trustpower began to attack new markets with a discounted pricing offering in 2013 and continued to drive market share through adding its new telco product last year - using another market's profit pool to gain an advantage in the electricity retail margin.
That created an annualised 15,000 to 20,000 customer hole in its three target regions - Auckland, Hamilton and Wellington, he said.
The industry had not allowed Trustpower a free ride, and after initially absorbing lines increases to reduce net retail prices introduced up front incentive payments.
‘‘This led to the cost to serve to increase rapidly. While Trustpower's current strategy is ongoing, and likely to continue for another 12-18 months, the current level of discounting is unlikely to increase and cost increases are now at their maximum.''
A new threat had emerged, which removed the possibility historical generation-retailer (gentailer) premiums would return, Mr Timms said.
New electricity retailer Flick had highlighted consumer thirst for spot products and billed customers in a way that clearly defined all the cost components of the bill, making comparability easy.
Low-cost, technology-driven Electric Kiwi was offering a fixed price residential contract covered by the forward ASX hedge curve, he said.
The offering capped where risk cover pricing could head.
Any premium for risk mitigation by having a gentailer model would probably be removed by the combination of technology and clarity of what was being paid by the customer for the risk mitigation.
‘‘While the near-term is likely to see some positive pricing momentum, it is our view a full recovery in retail margins is highly unlikely - even with an industry return to a balanced supply to demand position.''
It was getting clearer how the future would look for retailers, he said.
Contact was likely to benefit if it could finally deliver on its long-awaited SAP (systems applications products) benefits brought on by the recent $250million spend.
While not certain, Craigs suspected Mighty River Power with a 15-year-old SAP system was probably in need of an IT upgrade in the near to medium-term.
The pending Trustpower unbundling should have some benefits for shareholders but there was concern a change in the dividend received by the Tauranga Energy Consumer Trust could bring further downward pressure on Trustpower's Bay of Plenty incumbency, negating some of the benefits, Mr Timms said.
The electricity sector had had a good run recently and, as a result, Craigs had reduced Mighty River Power, Genesis and Trustpower from buy ratings to hold. As Contact still had the most upside potential and Meridian Energy had the lowest risk exposure, those two companies kept their buy ratings.
The first-half 2016 result season continued to highlight the intense nature of the residential retail market, Mr Timms said.
It was the end of a 12-month period which included profit downgrades, starting with Genesis a year ago, Contact four months ago and more recently, the key driver of competition, Trustpower.
