Retail price round up

July 1 is the traditional date of new prices in the NEM (except Victoria, see below). With the introduction of the default market offer (DMO), all parts of the NEM are again subject to some form of price regulation for small customers. This time, the decisions of the regulators are bolstered by the introduction of new powers for the ACCC, known as the “big stick” legislation. Federal energy minister Angus Taylor has been in the news using this threat to jawbone retailers into offering lower prices than they have done so far. Let’s look at what the regulators have said about what’s driving costs for supplying small customers.

The AER sets the DMO on a roll forward basis. Unlike other regulators, it does not carry out a bottom up analysis of the costs of supplying customers, but applies a percentage change to four cost components: wholesale energy, environmental certificates, network charges and “residual” (retail costs, margins, and sundry government schemes and levies). The last item is simply updated for inflation, to the ire of consumer groups who argue it should be subject to productivity improvements. Of the others:

  • wholesale costs rose slightly in NSW but fell by 6 and 7 per cent in South Australia and Queensland respectively;
  • network costs trends varied by distribution area but were within 1-2 per cent (some up some down) except South Australia which had larger falls; and
  • environmental costs fell significantly by 20 per cent or so.

Other jurisdictional regulators set a price cap based on a bottom up cost assessment. In the ACT, wholesale costs (which are based on NSW) fell by more than in the AER’s process – around 7 per cent. Network costs increased by an underlying 14 per cent, but this was partially offset by a fall in the cost of the ACT’s 100 per cent renewable scheme, which is passed through the network. Retail costs increased by 7 per cent, largely due to metering costs.

In Queensland, the QCA regulates the prices charged by the state-owned regional energy business Ergon. There, energy costs, including environmental certificates were down 9 per cent (for households on flat tariffs – changes vary by tariff type in Ergon’s area) network charges were up 1 per cent and retail costs down 2 per cent.

In Tasmania the regulator allows the state-owned retailer Aurora to propose tariffs that it then approves or not. The tariffs are derived from total costs, rather than on a per KWh or per customer basis, so the changes may not be directly comparable, but the trends were similar, lower wholesale and environmental costs, marginally lower network costs and an inflation-linked increase in retail costs. However, Aurora under recovered some of its costs in the prior year and so it is allowed to claw them back this year, which offset a lot of the gains elsewhere.

Victoria, of course, likes to be different, and its regulated prices change on a calendar year basis. The regulator has started consulting on the 2021 Victorian default offer, but it is too soon to say what the price change is likely to be.

The end result is shown below. Despite all the headlines about plunging wholesale costs, they only make up a proportion of the overall bill (c. 30-40 per cent), and the bill changes are fairly modest, with some customers in NSW effectively seeing flat prices. The differences between household and small business prices are largely driven by their different network tariffs.

Table 1 summary of regulated price changes

Source: AER, QCA, ICRC, OTER

Given that the big three retailers have reportedly reduced prices by around 2.5 to 5 per cent, Minister Taylor’s threats may be fairly hollow. Unusually, ACCC chair Rod sims has been quiet on the matter and the ACCC have held off their regular report on retail costs and margins until September.

As for large users, their prices are not protected by regulation. Wholesale costs are a bigger proportion of their overall bills, so they are likely to be able to achieve bigger savings than small customers at this time. For all customers, large or small, though the best advice remains to shop around rather than rely on regulators or governments to push prices down.