2002IBA – Porter’s Five Force Model (Group Assignment)

2002IBA – Porter’s Five Force Model (Group Assignment) Introduction Hydroelectric power is a well developed renewable energy technology that uses flowing water to spin a turbine connected to a generator that produces electricity. In 2019, the generation of electricity from hydropower sources accounted for 25.7 per cent of Australia’s renewable electricity generation and 6.2 per cent of Australia’s overall electricity ( Clean Energy Council 2020). In this presentation, we will be using Porter’s Five Forces Model to analyse this industry’s profitability. These forces include, supplier power, buyer power, threat of substitutes, threat of new entrants and competitive rivalry. The analysis of these forces within this hydropower industry allows firms to determine the industry’s attractiveness in terms of the potential to earn average or above-average returns ( Porter E, M 2008). Competitive Rivalry The analysis of competitive rivalry is used to determine the intensity of competition within an industry ( MaRS Startup Toolkit 2020). The average industry growth from 2015-2020 is 18.2%, with a market size generating $1 billion from 128 businesses. The companies holding the largest market share in the Australian hydropower industry are, Snowy Hydro Limited, AGL Energy Limited, Hydro-Electric Corporation (Hydro Tasmania) and Origin Energy Limited. These government-owned operators dominate the industry in terms of generation capacity and contribute the largest share of industry revenue ( IBIS World 2020). They generate revenue of 2.62, 2.16, 1.78 ( Company 360 2021) and 1.21 million ( Origin Energy 2019), respectively. These figures can be used to calculate the four-firm concentration ratio for the industry, which is 0.7. Although the magnitude of internal rivalry is not often measured by n-firm concentration ratio, this measure indicates that this industry falls within the medium concentration range and follows a competitive oligopolistic market structure, based on the fact that these four firms have nearly equal sales. Competition and market share within this industry is evaluated through the capacity of which a generator is able to produce, and the amount of energy produced. Snowy Hydro has been included as a major competitor because it has significant capacity which can enter the market quickly. Furthermore, they are starting a Snowy 2.0 project which will provide on-demand generating capacity and large-scale storage, at lower consumer prices ( Snowy Hydro 2020). In competition, Hydro Tasmania has identified a pumped hydro storage resource which is said to have at least twice the output, capacity and half the cost of Snowy 2.0, ( Potter, B 2018). AGL has the largest generator, both by capacity and volume, providing an additionally large source of competitive supply ( AGL Energy 2020). Moreover, there is also a growing share of smaller renewable firms who supply the market and is expected to increase into the future ( Warren, M 2019).

Thus, due to the fact that there is moderate concentration, fast industry growth through the entry of new firms, lack of differentiation between production methods but advanced innovation between competitors, as well as equally balanced competitors, it can be evaluated that there is high competitive rivalry. Supplier Power: The power of suppliers looks at how suppliers can affect cost inputs of an industry, which in this case is the Hydroelectric energy industry. Suppliers within an industry can exercise power through increasing prices and reducing product quality, and this occurs when there are fewer suppliers within the industry or when the substitute products are unavailable to the industry firms. These factors determine the bargain power of suppliers within an industry. To put it in perspective looking at ground level of the suppliers and their costs to the company SnowyHydro and their 2017 project, The Snowy 2.0. The estimated cost of the project after feasible tests in 2019 was around $5.1 billion. This project was spread across 3 main suppliers, these 3 suppliers are Italy’s WEBUILD, South Africa’s Clough and the US Lanes construction ( The Sydney Morning Harold, 2020) . These 3 suppliers are overlooked by Mega Australian construction company SMEC, to help determine the costs over 3 years of feasible testing without any main competition. ( SMEC, 2020 ), all 3 suppliers provide necessities and services to the project such as building, hydro equipment and detailed planning, which is not a big differentiation to the services provided by much smaller substitutable suppliers within the industry. Another example is how Hydro Tasmania has a joint venture (50%) with Cathedral Rocks Management and SA water corporation & Lofty Ranges Power, this example shows such firms like Hydro Tasmania having in house suppliers that are available for their use ( Hydro.com, 2020) . Other big suppliers include such firms like Worley and SMEC Holdings and Tamar Hydro Proprietary limited, who are commonly known for making products such as Turbines that are used to power Hydroelectric plants. The list above shows us that there is a great deal of suppliers within the industry ( Hydro.com, 2020) . The costs of switching between one supplier to another is low, as the smaller firms provide the same equipment and service as the big suppliers do. Therefore it’s evident that there is a vast option for suppliers, low supplier concentration, low switching costs, not much differentiation from products sold by suppliers and minimal reliance on suppliers. The bargaining power of suppliers within the Hydroelectric energy industry is low, hence making the industry more attractive and potentially increasing profitability.. Buyer Power: Buyer power is defined to be the consumer’s ability to exert influence and pressure industries. This usually manifests itself in the form of lower prices and higher quality goods and services . This influence might be due to a number of factors, which include buyer volume and the nature of the products or service of the industry and whether they are differentiated or standardized. Factors can differ from industry to industry, accordingly for the hydroelectric industry the focus will be on buyer concentration, buyer volume, industry products and customer switching costs. The first factor, buyer concentration,

hydropower companies. For a small hydropower project installation costs range between $1300 to $1800 and the operation and maintenance costs range between 1-6% compared to a company who is already established with the maintenance costs only being between 2-2.5%. ( Gielen 2012). Therefore, a new entrant is unlikely to achieve economies of scale as it would not be able to generate the demand as efficiently. ADD GRAPH. Product differentiation is currently high as in the hydroelectric power industry, there are already established brands such as Snowy Hydro, Hydro Tasmania and AGL energy that have a large generation capacity and own a majority of smaller hydropower stations ( IBIS World 2020). A new entrant, to establish product differentiation, will have to create a smaller scale hydroelectric plant compared to the existing one, as this is expected to be the main source of future growth for hydroelectric power (Department of Resources, Energy and Tourism 2010). The capital requirements for hydropower differ according to the production size, location and type of plant, which is estimated at USD$2400 per kW ( Department of Resources, Energy and Tourism 2010). Capital requirements are a threat for new entrants as the initial cost of building the plant is high due to construction costs, cost of machinery of facility which includes control systems, generators, turbines and lastly the installation of power transmission lines. Switching costs will remain around the same as energy prices at a similar scale will not fluctuate too much. The average energy price for a hydropower station such as snowy hydro is between $25-35/MWh. For buyers there is not a substantial price difference between switching from different hydropower companies. Additionally hydropower is not a differentiated product, therefore the quality of the product remains around the same. The access to distribution channels is not a threat of entry, as the main hydropower companies are government owned operators, since these are the dominant players, they have an advantage with easier access to contracts. Snowy Hydro is already one of the largest shareholders of the industry and there is now a new large scale project, with funding from the government ( Department of Industry, Science, Energy and Resources n.d) . The distribution channel via the National Electricity Market as shown in figure 2, shows that the generator offers to supply the market with electricity and the cheapest generator is selected to put into operation first ( EMM 2019). Therefore, reputable companies and more competitively priced companies would have easier access to the distribution channel. Figure 2:

There are Government policies placed which encourage renewable energy such as, Commonwealth Renewable Energy (Electricity) Act 2000, Australian Renewable Energy Target scheme and the Paris agreement which is signed by the Commonwealth Government ( EMM 2019). These have increased the use of renewable energy sources and encourage hydro-electric power. Additionally Australia has implemented feed-in tariffs to increase investments into renewable energy, this will lead to higher competition as the use of hydro-power will be increased ( Talberg n.d.). Conclusively, the threat of new entrants is low as capital costs are high and there are already established hydropower companies that produce energy at a larger scale. Conclusion: Conclusively, this presentation analysed the hydroelectric power industry’s profitability in Australia using Porter’s Five Forces Model. It has been determined that there is a high profit potential for this industry. Although buyer power is considered high, all the other forces indicate the potential to earn average or above-average returns. Firstly, there is low supplier power, meaning for hydro companies there are a vast number of suppliers as well as minimal reliance on them, switching costs are low and there is low product differentiation between suppliers. Furthermore, while there is high availability of alternative sources of energy, the threat of substitutes is considered low as the hydroelectricity industry offers more attractive pricing and sustainable product quality for consumers. Accordingly, the threat of new entrants can also be measured low. While it is possible for smaller-scale hydropower stations to enter the industry by introducing new innovation and products, the threat is still minimal due to high capital costs and already established hydropower companies producing energy on a much larger scale. Lastly, competitive rivalry within the sector is high, and although this indicates low profitability, a competitive market can offer many potential benefits. This is one limitation of the Porter’s Five Forces where they seem to assume that competition is a zero-sum game, meaning that the amount of profit potential in an industry is fixed. In

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