Wind and solar help slash electricity default market offers for 2021-22

Record-breaking investment in large-scale solar and wind energy generation has helped to slash electricity prices for a range of customers in New South Wales, south-east Queensland and South Australia, with a reduction in 2021-22 Default Market Offers set to deliver more than $65 million in bill savings.

In its final determination on DMOs published on Tuesday, the Australian Energy Regulator said electricity costs for the 727,000 customers on so-called standing offers would be cut by up to $116 for households and up to $441 for small business, starting July 01.

Based on modelling from ACIL Allen, the AER has determined final DMO prices for residential customers in 2021-22 will be between $53 to $102 lower than in 2020-21 in New South Wales, $53 lower in south east Queensland, and $116 lower in South Australia.

For small businesses the cost reductions will be greater again, with DMO prices for 2021-22 coming in $250-$441 lower than the previous year in NSW, $243 lower in south east Queensland, and $272 lower in South Australia.

This will be welcomed by electricity consumers, who may have well seen the massive drop in wholesale prices across the grid as more wind and solar displaces expensive gas and coal, but were yet to see much of a difference in their electricity bills.

A Default Market Offer is the maximum price electricity retailers in the deregulated retail markets – outside of Victoria – are able to charge residential and small business customers on a standing offer contract; that is, customers who have never switched to a retailer’s market offer. It also acts as a reference price for customers to compare deals.

As Bruce Mountain explains here, DMOs were applied from July 01 2019 after an ACCC inquiry concluded there was a problem in the above markets, and the federal government tasked the AER with establishing “in very quick order” a mechanism to protect “disengaged customers” from being stung by higher than average prices.

And while there was resistance to the move from the Australian Energy Market Commission, and speculation over whether DMOs would do anything to deliver meaningful bill reductions for a significant number of customers, the 2021-22 determination from the AER marks the third price cut in a row for customers on standing offers.

“DMO prices have decreased for all customer types in all regions,” the AER said in its 96-page final determination report on Tuesday, adding that a key driver of this was “the continued strong increase in renewable investment,” including about 4,000MW due to enter the NEM over the next 12-18 months.

And as AER consultant ACIL Allen notes in its own 86-page report on the DMO determination, this shift to cheaper solar and wind energy is having an impact throughout the market.

“Compared with 2020-21, futures base contract prices for 2021-22, on an annualised and trade weighted basis to date, have: decreased by about $13.80/MWh for Queensland; decreased by about $15.20/MWh for New South Wales; decreased by about $21.10/MWh for South Australia.

“The market is clearly expecting further softening in price outcomes (in addition to what occurred in 2020) due to the continued strong increase in renewable investment coming on-line between 2019-20 and 2021-22.”

Ongoing lower gas prices were also noted as a contributor to the 2021-22 DMO price reduction, while the ACIL Allen report also gave a nod to a decrease in weekly ancillary service costs, as a result of additional supply of services to what was a “relatively small” market.

“The most significant change in other wholesale energy costs are the costs associated with ancillary services recovery … estimated by the most recent 52 weeks of actual cost data as published by AEMO.

“Generally, there has been a decrease in weekly ancillary service costs as a result of additional supply being commissioned that can offer services to this relatively small market. This results in a reasonable decrease in ancillary service costs in Queensland and New South Wales,” ACIL Allen said.

“The DMO is not designed to be the most competitive deal but rather it is a safety net for customers who don’t or can’t shop around when it comes to their electricity contract,” said AER chair Clare Savage in comments on Tuesday.

“Most retailers have cheaper energy deals on offer, so shopping around remains the best way to get a better price and I encourage customers to visit our free and independent Energy Made Easy website to compare energy deals.

“While the DMO caps the price retailers can charge their customers it is still set at a level that enables retailers to recover their costs and encourages retailers to compete to offer a better deal to their customers,” Savage said.

Energy Consumers Australia welcomed the news of the DMOs price reduction as a further boost for energy consumers who had been subjected to historically-high prices for most of the past decade.

“This further relief for some energy consumers shows that the protections and measures the AER has ushered in are flowing through in the form of lower prices,” ECA chief Lynne Gallagher said in a statement on Tuesday.

“That’s a very good thing but it’s also important that all consumers understand they can do better than these default market offer prices and that they know how to go about getting a better deal,” Gallagher said.