Energy Ministers should ask the Australian Energy Regulator (AER) to explain why retail electricity prices need to increase from 1 July, 2025. A key driver of high retail prices is network charges regulated by the AER itself.
If network price regulation were effective, most if not all the proposed retail price increases from 1 July 2025 could be avoided and perhaps even reduced. Extended Federal budget bill relief from 1 July 2025 could also be reduced or avoided across the National Electricity Market.
The AER has yet to explain why network prices substantially and persistently exceed actual network costs, including a reasonable profit margin. It is unclear why Ministers have so far not asked the AER to explain why network prices are excessive, despite poor sector wide productivity performance.
In last Friday’s communique, the Energy and Climate Change Ministerial Council (ECMC) “encouraged” the AER to further interrogate retailer revenues and margins, broader cost pressures across the sector, and ongoing cost of living pressures in settling the final Default Market Offer [DMO].
ECMC’s comments followed the AER’s release of its draft DMO decision to increase retail prices in NSW for 2025-26 by more than eight (8) per cent compared with 2024-25. The Reserve Bank’s forecast for inflation over the same period is less than three (3) per cent.
ECMC also noted consumers could shop around for lower prices. While only a small portion of customers are on the DMO, many customers on market offers end up paying prices that are higher than the DMO.
ECMC’s communique assumes that regulated network prices are efficient, and this component of retail price increases is unavoidable. But is this true?
For NSW, network price increases are the single biggest factor driving the rise in final retail prices, as shown in the table below. Network price increases are bigger than the other major item in the DMO cost stack – wholesale electricity. Network charges are forecast by the AER to increase by more than 2.5 times inflation.
Draft DMO decision for NSW – residential with controlled load
| Residential with CL incl. GST | DMO increase from 2025 | DMO % increase from 2025 | Network increase % | Network % of DMO increase | Network increase over inflation |
| Ausgrid | $204.73 | 8.2% | 8.6% | 36.0% | 288% |
| Endeavour | $248.82 | 8.9% | 11.6% | 43.7% | 388% |
| Essential | $243.01 | 8.3% | 7.8% | 40.8% | 259% |
Source: Analysis of data in AER Draft determination cost assessment model
The focus here is the increase in NSW network prices, reflecting the network impact on the AER’s Draft DMO cost stack. Structurally excessive network prices exist across the NEM. This suggests there is scope for DMO prices for 2025-26 to be lower across the NEM.
NSW network supernormal profits for 2022-23 substantially exceed the $493m impost under the NSW electricity infrastructure investment roadmap to be recovered from 2025-26 regulated network charges. The transition to renewable generation is not the main reason for increased draft NSW DMO prices.
Network price rises can’t be avoided by shopping around – networks are monopolies. Network prices are also regulated by the AER and, unlike the DMO methodology, the network pricing methodology does not vary between Victoria and elsewhere.
Over the last decade, electricity and gas network prices have substantially exceeded the price levels judged by the AER as necessary to deliver a safe and reliable service.
For example, in November last year, the Institute for Energy Economics and Financial Analysis (IEEFA) found that, across the NEM, electricity networks made an estimated $4.35 billion in supernormal profits in the 2023 regulatory year – in addition to their $1.39 billion profit allowance.
These supernormal profits substantially exceed the federal government’s energy bill rebates for 2024-25 of $3.5 billion.
In 2023, the AER acknowledged that IEEFA’s earlier estimates of “outperformance” are accurate.8 However, the AER has so far failed to explain why these enormous supernormal profits are necessary under incentive regulation.
The theory under incentive regulation is that networks are rewarded for higher productivity. However, according to the AER’s own productivity data, average network productivity in 2022 is still lower than it was in 2010.9 Networks judged by the AER to have weak productivity have nevertheless generated substantial and persistent supernormal profits.
Even if productivity was strong across the sector, it would not explain the size of observed supernormal profits. In a 2018 report for the AER, regulatory expert Darryl Biggar explained that, over the long run, networks could expect to generate total returns between 0.9 and 1.3 times allowed returns.
Applying this conclusion to network profits, the chart below shows that actual profits have exceeded allowed profits by much more than 1.3 times over the last decade and in 2023 actual profits were around four (4) times allowed profit.
Source: Analysis of AER financial performance data 2024 – electricity networks
The AER attributes the recent surge in supernormal profits to high inflation. The last two years of the chart above show that networks are being compensated for inflation costs that do not exist.
But in earlier years, supernormal profits existed even during extended periods when actual inflation was lower than forecast inflation used to set regulated prices at the start of each five yearly price control period.
No one knows the extent of supernormal network profits over 2025-26. They will hopefully be lower than the very high levels experienced in 2022-23. However, given the AER has not experienced any concerns over those historical supernormal profits, there is no reason to believe it has acted to avoid supernormal profits in 2025-26.
