Regulator’s ruling on default market offers might not lower prices

One of the many pots on Australia’s electricity fire, has been retail electricity prices. The ACCC’s inquiry in the electricity sector concluded that there was a problem to be fixed in these markets, and the federal treasurer and minister for energy consequently asked the AER to develop a default offer, as a capped amount, to be paid by households and small businesses.

The AEMC advised against this on the basis that this would undermine competition (by driving out the new entrant retailers). While governments have pressed on regardless, it is clear that the tension in policy makers’ minds has been to address political pressure for lower prices with perceived detriments to the long-term competitiveness of the retail market.

In this context, the Australian Energy Regulator was tasked with establishing, in very quick order, a “Default Market Offer” for the sale of electricity to households and small businesses.

The Australian Energy Regulator has now finalised its decision on the Default Market Offers (DMO) to apply in the deregulated retail markets outside of Victoria from 1 July 2019.

Its approach has been to set the term of these offers so that at a defined level of usage, the DMO has prices (for flat tariffs with or without controlled loads) that will deliver a maximum bill that is not higher than the DMO.

For the flat tariffs this will deliver average prices of 37.6, 35.1, 42.5, 34.1, and 48.5 cents per kWh for households that buy the DMO quantity of electricity in the areas of supply of Ausgrid (NSW), Endeavour (NSW), Essential (NSW), Energex (South East QLD), and SAPN (SA).

Since June 2016 we have been publishing price indices (see here) based on the median retail offer of the big three retailers (with weightings that reflect the number of customers on standing and market offers and with and without conditional discounts).

Comparing our estimate of the median prices with the AER’s DMO we find that the AER’s DMO is about the same as our estimate of the median offer from the big three in NSW, but the AER’s DMO is above our estimate of the median offers in South East QLD or SA.

So, has the AER set DMO prices that will deliver meaningful bill reductions for a significant number of customers? Almost certainly not, and this is not their intention (or at least the intention of the instructions the AER was required to execute).

Some customers may see some bill reductions but nowhere near as big as they might if those customers were able to engage in the market effectively (yes, it is a big “if” – it is really hard to buy well in these markets).

Australia’s retail electricity markets are eye-wateringly complex. The DMO does not make them any simpler. But has the DMO taken the political heat out of electricity prices? I suspect not.

Based on the press releases I expect some media outlets will trumpet the AER’s calculation of the difference between the current standing offers and the DMO, as bill reductions that customers can generally expect to see. Who can blame them for making such a mistake, but when customers get their next bills most will see that they are no lower, they will probably not be delighted.

It will be interesting to see what Origin Energy and AGL tell their shareholders, if anything, about the impact of the DMO on their profits.

Bruce Mountain is the Director of the Victoria Energy Policy Centre