Never before has Australia seen energy prices in the wholesale market spike like they have over the last five months. Between May and August 2022, average wholesale prices in the National Energy Market (NEM) states have increased by 324% compared with the same period last year ($282 per megawatt-hour (MWh) in contrast to $87 per MWh in 2021).
At the height of this unprecedented volatility, the Australian Energy Market Operator stepped in – for the first time – and suspended the wholesale market for a week. Amid this very elastic situation, industry participants were left wondering where all this was going, and looking for policy reforms and perhaps wholesale (excuse the pun) restructuring of the market.
And all that’s before sparing a thought for energy consumers.
Energy retail customers and small business owners could be forgiven for being both concerned about massive electricity price rises, while also quietly confident that price rises are ‘constrained’ by regulation.
The default market offer (DMO)/Victorian default offer (VDO), also known as the reference price or the ceiling price, is described by the Australian Energy Regulator as the “safety-net price cap that ensures consumers are protected from unjustifiably high prices”.
The DMO/VDO increases from 1 July 2022 (with different impacts in different states) appeared not so bad compared to rises in the wholesale market. But the impacts belie an uncomfortable truth for many energy consumers – the DMO/VDO is applicable to no more than 7% to 16% of residential and small business customers. As a result, most consumers are on competitive market offers – exactly the outcome policy makers have been aiming for since full retail contestability was adopted in the NEM states.
When energy prices are stable – or even falling – and there are many energy retailers to choose from, shopping around for the best energy deal is easy, and the astute consumer can save hundreds of dollars a year.
However, prices aren’t stable and consumers on competitive market offers are watching their rates rise much higher than the DMO/VDO. Retailers are not obliged to sell electricity to customers at the default rates, so many are not. Some are, in fact, increasing their prices dramatically by as much as 285%!1 Consumers are finding that the lowest rates on offer are, in fact, the DMO/VDO. Many consumers have been searching for better deals on the government-run comparison websites (Victorian Energy Compare and Energy Made Easy, which facilitate easy switching to the best energy deals in the market, normally saving consumers hundreds of dollars a year). Now, this search will show very little difference between the DMO/VDO and the best offer. In fact, many offers on these sites are much more expensive.
It’s an upside down world where the previous ceiling has become the floor price.
However, the government’s commitment to a 43% reduction in carbon emissions by 2030 and also the federal, state and territory energy leaders’ agreement to dump the Energy Security Board’s model for a proposed so-called “capacity mechanism” (which could have possibly aided energy reliability - and put downward pressure on prices) could mean high(er) energy prices may be here for a lot longer.
Industry regulators are ‘stress testing’ energy retailers to ensure their viability to participate in the market. Energy retailers should be ready to:
Uncertainty around prices is very much a part of Australia’s energy transition (which is now in full swing) and an inevitable by-product of the turbulent pathway towards rapid decarbonisation of the electricity sector (which is responsible for 36% of emissions).
Australia is experiencing the pitfalls of delaying energy reform and not approaching the transition in a planned manner – and that’s before allowing for potential global market shocks.
Domestic consumers, residential and business alike, will have to accept fluctuations in energy prices as we navigate the energy transition ahead. Gone are the days when a price ceiling means anything. Perhaps it was a glass ceiling all along and aren’t glass ceilings meant to be broken?
1. Joel Gibson from consumer advocacy One Big Switch quoted here.
2. NOTE – this author’s own retailer has sent him numerous emails and texts advising him to switch to another retailer. They also advised that if he didn’t switch, his tariffs would go up by 82%.