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

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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,

looks at the ratio of buyers to sellers. If there are a small number of consumers and there are a huge number of sellers it can be said that buyers hold more power in the industry, and this can be seen in the hydroelectric industry. As there are over 100 businesses in the industry, demand is quite miniscule in comparison with hydroelectric power only providing 5 to 7 % of Australia's energy needs. This means a small amount of consumers is largely responsible for the industry's income. Secondly, buyer volume, outlines which buyer group has the most influence over the industry. The three main buyer groups the industry caters to are the households, manufacturers and the commercial and retail sector. The latter are responsible for almost 50% of the revenue, and so have the most influence over the industry. Furthermore, the sole product of the hydroelectric industry is electricity. Meaning, there is little or no way to make the product unique or differentiated. The way this product could be provided is also quite standardized with all electricity plans being around the same price range with the only competitive edge being discounts or specials. Finally, customer switching costs refers to the costs customers incur when they switch from one seller to another. In relation to this industry, the switching costs depend on the electricity plan contracts. The industry standard is that usually there would be no switching costs if the customer switches to another provider when the contract ends, otherwise these costs can be significant. Conclusively, all factors seem to indicate that buyers have a substantial influence over the hydroelectric industry and can therefore demand for better goods and services. Threat of Substitutes: Threat of substitution for hydroelectricity energy is low. This is because, although there are a number of competitors present in the industry, the switching costs for consumers are quite high. Alternatives to hydropower are solar power, wind energy and biomass ( Oxfam n.d). Compared to other energy alternatives, hydro has low maintenance and operational costs, with a longer operating life of approximately 30-80 years ( Gielen 2012). Typically, other sources of energy only operate for about 25 years. The global average cost of hydroelectricity is US$0.05 kWh while solar energy is at USD$0.10 kWh ( International Renewable Energy Agency 2018). This shows that hydroelectricity is at a much more competitive price compared to its substitutes. Hydropower's initial construction cost is high, however in the long-term it is cheaper to maintain and is a trusted source of renewable energy that lasts many years compared to its substitutes. Although there is a high availability of substitutes for this industry, this cannot be considered a strong threat as hydroelectricity’s more attractive price and quality outweighs all ot her factors. Threat of New Entrants: Threat of new entries considers how difficult it is for competitors to join the market. Economies of scale is considered a high entry barrier, as the initial cost of installation is higher for smaller or newer

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:

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