Lumo Energy
Profile
Background
Lumo Energy launched 5 July 2010 is the new brand for the former Victoria Electricity (VE) Infratil’s wholly owned Australian electricity and gas retailing business. Victoria Electricity secured its electricity retail license for the State of Victoria in August 2002. It commenced retailing electricity in February 2004 after a satisfactory wholesale supply was secured. Victoria Electricity was granted a license to retail gas in Victoria in December 2004 and commenced retailing gas in early 2005. It also retails electricity in South Australia, and more recently in Queensland.Prospects for Energy Retailing in Australia
At 31 March 2010 Lumo Energy had 411,000 customers, an increase of 24,000 over the year, following two years when customer numbers increased approximately 100,000 per annum.Electricity and gas retailing has been progressively reformed in Australia over the past decade, starting with large commercial and industrial customers. Residential electricity customers became contestable in NSW and Victoria in 2002, in South Australia and ACT in 2003 and in Queensland in 2007. Western Australia, Tasmania and Northern Territory have scheduled reviews and introductions in 2009 and 2010.
The Australian energy retail market is still unfolding which creates opportunities for companies such as Lumo Energy. Our approach is to offer retail contracts only where market conditions allow a strong proposition to customers, along with a sound commercial result for Lumo. Conditions for entry were best in Victoria and Lumo has been very successful in securing customers in that market, along with South Australia. Those markets remain a focus and will be added to by new opportunities in Queensland. Lumo considers these markets opportunities for profitable growth, albeit that there are some concerns about South Australian wholesale liquidity.
Although, Lumo is not governed by retail price caps, it competes against incumbents that are subject to price caps. There are signs that Governments in Victoria, Queensland and South Australia have recognised that price caps have been too low. The trend is toward removal of regulated price caps altogether.
So far, NSW has experienced less reform than other states and is characterised by low levels of customer switching, government owned retailers and generators, artificially low retail price caps for incumbent retailers along with and the Electricity Tariff Equalisation Fund (ETEF). Lumo has not pursued customers in this market to date. However, a number of factors suggest that NSW will present opportunities in the near future. In 2007 the Government regulator announced a 3 year price path for retail prices that would see significant real growth in tariffs, along with the phasing out of ETEF. The NSW Government has also announced its intention to sell its interests in energy retailing and generation during 2010. Overall, the prospects for growth in NSW look good.
Wholesale Arrangements in Australia
All electricity markets in which Lumo operates are part of Australia’s National Electricity Market (NEM), which operates as a gross pool with a single set of rules with one market operator. While the NEM operates on regional prices, states are connected with transmission interconnectors that facilitate some export and import of electricity when there are imbalances and market opportunities. To date, there has been reasonable liquidity for contracting in the NEM and there are a number of intermediaries. The Sydney Futures Exchange has become a far more formidable platform for trading forward contracts over recent years. While liquidity remains, there are opportunities for smaller retailers to participate in new retail markets.Gas remains more difficult in most states, in that it requires a physical position. However, in Victoria, there is a net pool market operated by VENCorp, a Victorian Government entity. This has allowed Lumo to operate a dual fuel offer in Victoria where gas has a high degree of penetration with residential customers. Even in Victoria, there is far less liquidity in gas than in the National Electricity Market and some difficulties emerged in ancillary payments/uplift arrangements in 2007. Lumo is actively involved in promoting liquidity and competition in that jurisdiction.
Energy prices experienced significant volatility in 2007, in both electricity and gas. Lumo was disciplined about restraining sales while margins were strained and, through Infratil Energy Australia, had managed its exposure to volatility effectively. Lumo has weathered strains that saw two competitors leave the market and is well positioned to pursue growth.
Direct Connect Australia
Lumo has been innovative since its inception, and one of its outstanding successes has been Direct Connect Australia (DCA). DCA is a utility connections service provider offering a convenience proposition to customers in the residential and small business markets when moving premises. DCA is able to set up connections for electricity, gas, water, phone, broadband and insurance, along with a range of other services required during a move. It has proven a highly valued service among both people moving home and real estate agents seeking to offer their clients additional services in the process of moving home or office.DCA has in the past offered energy connections to Lumo companies, but also offers connections to other companies, depending on circumstances. It has well established relationships with a number of service providers in non-energy product areas.
DCA operates as a business in its own right and offers services all states with the current exception of the Northern Territory. There is at least one other significant size utility connection service in Australia, which is a similar size to DCA but commenced operations earlier than DCA. Expectations are that DCA will continue to grow in popularity with households and real estate partners.
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