Why Are Electricity Prices Rising in Australia?
Electricity prices in Australia have been on the rise, with many awaiting letters from their retailers on the impending added cost to their electricity prices. In this post, we will explore the factors contributing to the increase and explain the Default Market Offer (DMO), the process behind determining pricing, and how long we can expect these prices to continue.
What is the Default Market Offer (DMO)
The Default Market Offer (DMO) is a regulated price cap set by the Australian Energy Regulator to protect consumers from excessive electricity prices. It serves as a benchmark for energy retailers and is designed to ensure fair pricing for households and small businesses. The DMO takes into account various factors to determine the electricity pricing, such as:
- Wholesale electricity costs – based on the price of electricity costs in the futures market
- Network costs – taken directly from tariffs approved by the Australian Energy Regulator
- Environmental costs – taken from public information on the costs of environmental initiatives
- Retail costs – based on historical cost data
- Other costs – taken directly from published reports from industry bodies
- Network losses – taken from the Australian Energy Market Operator and electricity distributors
- Retail operating margin – based on a benchmark from comparable regulatory decisions.
Wholesale electricity costs, which account for a significant portion of the final price, depend on factors like fuel prices, availability of supply, and market competition. The volatility in the wholesale energy market in 2022, saw many retailers lose a significant portion of their profits as wholesale energy prices make up a third to a half of a consumer electricity bill.
What is the process for raising the DMO?
In December 2022, a consultation paper was proposed for the increase to electricity prices and submissions were made to draft a decision paper. To address the concerns of the public on the proposed increase, a forum was held in March 2023 where further recommendations were made including a a proposal to reduce the price increase. Thankfully, the reduced increase was upheld in the final decision with the introduction of the pricing to be made from July 2023.
How long will the prices continue?
It is challenging to predict precisely how long the current price will continue. With energy retailers pushing for more profits on the sale of wholesale energy to customers, we’ll see continual pressure on the DMO to lift the price ceiling. We recommend that you keep an eye on your tariff prices and look for a better deal periodically. Also, for Victorians, the state government has several initiatives to combat the rising energy prices including solar incentives and the Energy Saver Program that provides $250.00 to anyone that checks their retail pricing to find a better deal. The good news is that in 2023 we’ve seen an increase in the renewable energy in the grid driving wholesale pricing lower, great for those taking advantage of high renewable periods.
Stay tuned for more posts on the energy price increase and how you can combat these price hikes.