Consumers will only get “marginal” bill relief despite rooftop PV driving big falls in wholesale power prices

Australian energy consumers risk benefiting from only a marginal fall in their electricity bills, despite a big plunge in wholesale electricity prices caused by the growth of renewables, and rooftop solar PV in particular.

The Australian Energy Regulator on Tuesday released its draft proposals for what is known as the Default Market Offer for 2024/25.

But critics quickly questioned why “substantial decreases” in current and future wholesale electricity prices – largely driven by the increasing share of renewables, and by the adoption of rooftop PV by homes and businesses – are not being passed on in full to consumers.

And concerns are being flagged, including by the Australian Energy Regulator itself, about the increasing level of complexity involved in setting a reference electricity price for a rapidly evolving energy market where the role of the energy consumer is changing dramatically.

The Default Market Offer (DMO) 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.

The draft determination of the DMO for 2024-25 promises a majority of residential customers price cuts of between 0.4% to 7.1% in 2024/25, with increases between 0.9% and 2.7% on the cards for the remainder, depending on location and load.

For small businesses, a majority could see energy bill reductions of between 0.3% and 9.7% while others could face increases of around 0.7%, depending on their region, the AER says.

In Victoria, that state’s independent pricing regulator, the Essential Services Commission proposed to reduce the Victorian Default Offer by around $112 (or 6.4 per cent) for residential customers and around $266 (or 7 per cent) for small business customers from 1 July 2024.

According to the ESC, the main reason for the drop in the Victorian default offer – which acts a base reference price for customers to compare retail offers in that state – is falling wholesale electricity costs.

“Wholesale electricity costs for 2024–25 will be significantly lower than they were for 2023–24,” the ESC says in its determination.

“The wholesale electricity cost benchmark for the average domestic flat tariff Victorian Default Offer customer is $141 lower in 2024–25 than it was in 2023–24. This reduction is partly offset by an increase in network costs ($34).”

The AER, too, notes that conditions in wholesale markets have “stabilised significantly” since last year’s DMO determination, with base futures contract prices last month found to be down by between 44% and 51% compared with their respective highs in October 2022.

“The overall outcome of this market stabilisation is a reduction in wholesale energy costs … of approximately 19% in SA Power Networks (SAPN) and between 5% and 10% across NSW,” the AER says.

“In the Energex region of Queensland, wholesale costs have remained relatively flat. This is mainly due to an increase in the cost of cap contracts in Queensland for next summer and higher costs from hedging strategies during daylight hours.”

But while regulators describe these default offers as a “safety net” for consumers to ensure they pay a fair price for their electricity, Energy Consumers Australia says this function of the DMO is becoming increasingly questionable.

“The ACCC’s December Inquiry into the National Electricity Market Report found that 47% of all residential customers and 42% of concession customers were on plans that were equal to or greater than the Default Market Offer,” ECA CEO Brendan French said in a statement on Tuesday.

“This calls into question the effectiveness of the Default Market Offer in protecting consumers from unreasonably high prices, which was its original intention.

“It’s clear that over time hundreds of thousands of customers who have stayed loyal to their retailer have ended up being charged higher prices.

“We also note there have been substantial decreases in wholesale electricity prices in the last year – which are largely driven by more renewable energy in the system, including rooftop solar assets purchased by households and small businesses.

“We believe these decreases should be passed on to consumers. The industry is quick to pass on the costs to consumers if prices go up, the reverse should also be the case when those costs go down.”

French says ECA made a submission to the AER raising these issues. “We also noted in our submission that the rapidly evolving energy market, and changing consumer energy usage behaviour, will likely soon render redundant the idea of there being a reference price that is suitable for many people.”

“We will continue to advocate for more protections for consumers as the energy market transforms into a two-way grid,” French says.

In its draft determination, the AER notes that it, too, is seeking answers to questions around how best to set the DMO and how to change its methodology to adapt the the changing market.

“In the issues paper we highlighted increasing penetration of interval meters driven by household solar uptake across relevant DMO regions. We asked stakeholders if they supported moving to a blended load profile, which combined interval meter data and the NSLP (net system load profile) or CLP (controlled load profile).

“Additionally, we asked how household solar PV exports within the interval meter data should be treated, noting that including the impacts of exports would result in a greater daytime carve-out of demand.

“We also asked if stakeholders had concerns about data transparency, because the interval meter dataset is not publicly available.”

AER chair Clare Savage says a range of costs are factored into its draft determinations including wholesale and network costs, environmental and retail costs.

Savage says the rules require the AER to set a reasonable per-customer annual price, taking in the costs of supply and enabling retailers to make a reasonable profit. This year, however, ministers have asked for the protection of customers “from unjustifiably high prices” to be a priority, so for this DMO the retailer “headroom” has been reduced.

“We know that economic conditions have put pressure on many Australians and the increases in electricity prices over the last two years has made energy less affordable for many households. In light of this, the AER has, in this decision, placed increased weight on protecting consumers,” she said.  

“While wholesale markets have stabilised since their extreme peaks of 2022, this easing has been offset by the pressures we are observing in network prices. Poles and wires costs are a large component of retail prices, comprising around 40% of the price.

“Our draft determination should still allow a retailer to recover their costs and make a reasonable profit with a retail margin of 6% for residential plans and 11% for small business plans,” Savage says.

Nexa Advisory’s Stephanie Bashir says she recognises that setting the DMO price is “a balancing act for the AER” and is affected by a number of inputs – including network costs, which she says is where reforms and scrutiny are needed.

“It’s noteworthy that solar power is a key contributor to low wholesale prices which fell by 64% annual average as the AER highlighted earlier this year, making it a win-win situation for everyone, whether they have rooftop solar or not,” Bashir adds.

“My message to consumers though is take control and shop around – the AER says the median market offer has dropped by 1-5% across most electricity distribution zones since 31 December 2023. But the most competitive market offers are now 18–23% below the DMO price.”

Tim Buckley from Climate Energy Finance says the different energy bill discounts for different states, and even different parts of each state, reflect the varying degrees of renewables progress.

“Even with 50% declines in wholesale electricity prices over the calendar year 2023, NSW consumers are only seeing margin bill relief,” Buckley said on Tuesday.

“The more local supply and storage, the less need for ever expanding grid transmission costs, and no need to delay 5-10 years for this to be evaluated, then approved, then built.

“Time to act is now, we need Distributed Energy Resources (solar and batteries), Virtual Power Plants, Vehicle to Grid and Demand Side Participation (levers for companies to manage demand). NSW needs much faster planning approval of utility scale renewable energy developments, waiting 3-10 years for approval is ridiculous in the face of the concurrent current energy, cost of living and climate crises.”

Renewables advocacy group Solar Citizens says many NSW households, especially in regional areas, will face continued energy bill increases under the new DMO.

“The cost-of-living crisis is ongoing, and it’s offensive to suggest that the Default Market Offer announcement provides any meaningful relief,” said Solar Citizens CEO Heidi Lee Douglas on Tuesday.

“The NSW government has a choice – to prop up failing coal power to the detriment of consumers’ hip pockets, or to invest in rooftop solar and household batteries to the benefit of consumers.”  

For Queensland, Buckley says the draft DMOs of 0-3% rise year on year for households and a flat rate for small business are “much harder to comprehend.”

“While wholesale prices have fallen by half, overdue investment in grid modernisation seems to have been passed through well in advance of the service to consumers,” he says.

On the plus side, Brendan French says the ECA was pleased to see the regulators reduce the retail margins allowed in the DMO in recognition of the cost of living demands on consumers.

“We were also very pleased to see that the AER’s media release mentions the legal obligation for retailers to offer assistance to consumers when they are in hardship,” French said.

“People living in Australia have a right to ask their retailer for assistance, and we encourage people to seek help if they are having difficulty paying their energy bills.”

Federal energy minister Chris Bowen, meanwhile, told reporters on Tuesday that he regarded the draft DMO as “encouraging” but also as a sign that there is “much, much more” to do.

“I mean, the race isn’t run and nor would anybody … sensibly suggests that it is. We have more work to do.

“We’re not giving up on the task at hand, which is getting more renewables into the system to reduce prices and emissions.”

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This story was first published by RenewEconomy. You can read it here.