Electricity prices for manufacturing businesses and households in Australia have risen sharply in recent years. As per recent data, the quarterly electricity bill of a one-person Australian household is around $318.25.
The National Electricity Market follows an open grid model where private electricity companies and retailers work together to provide clean and affordable electricity to consumers.
Due to the ever-increasing energy prices, many consumers think the Australian government should step in to make electricity bills affordable. Here is some vital information on how retail price regulation works and whether federal policies impact electricity prices.
Australia’s Energy Strategies and Framework
Australia’s Energy Policy Blueprint has detailed policies and clear objectives to offer the cheapest electricity to Australian consumers. Federal policy reforms generally aim to reduce electricity and gas prices.
The reforms also ensure the National electricity market is well-regulated and transparent. The Australian government has made many investments in renewable energy resources to make the energy system efficient and cleaner.
The federal policies are focused on improving market transparency and accountability. These policies allow consumers to navigate the energy market, select their energy retailer and get the cheapest electricity plans that help them reduce their bills.
Here is some important information on how federal policy impacts electricity prices.
Default Market Offer
For consumers who cannot shop for new electricity deals, the Australian government provides a Default Market offer, a price safety net for consumers. Introduced in July 2019, the Default Market Offer sets a price cap on maximum usage charges, and energy tariffs they can levy on Default Market Offer plans, also known as Standing Offer contracts.
The Australian Energy Regulator calculates the price cap set by Default Market Offer every year, and it is reset on 1 July every year.
The Australian government has set a reference price for electricity. Energy retailers must use this reference price as a benchmark to make comparison prices of plans. Consumers can also consider reference prices when comparing electricity plans offered by different energy retailers.
How Retail Price Regulation Works?
The National Electricity Market allows retailers to sell electricity directly to the public. The prices retailers can charge to businesses and households are limited by price controls imposed by state regulators.
Every electricity retailer is required to submit an application outlining the expected rates for the upcoming year. The state regulator has the authority to amend the proposed rates if it thinks they were not calculated correctly.
The retailer’s costs that determine the retail electric prices are wholesale electricity, network, and operation costs, including marketing, billing, and meter reading.
The wholesale electricity (45%) and network costs (45%)account for 90% of the total retailer costs. The operation costs are typically around 10%. The wholesale electricity costs are determined every 5 minutes, while network costs are reset every five years. The operation costs are reset every 1-3 years.
The wholesale electricity costs are set by the National Electricity Market. The price cap exists, but it is not binding on the retailer. The generators bid on how much electricity they are willing to provide and at what rates for each 5-minute interval.
To sum up, due to the open grid model of the NEM, federal policies do not directly affect retail electricity prices. However, the Australian government has introduced caps on retail pricing to keep the electricity tariff affordable to all Australian consumers.