Questions as to why wholesale electricity price drops often fail to lower retail bills immediately have been raised with our office.
In summary as we have been advised, wholesale costs make up only 30-40% of your total bill. The remaining majority comprises fixed costs, market regulations, and the hedging strategies energy retailers use to manage price volatility.
Below are several factors that contribute to the lag in falling wholesale and retail pricing:
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- Retail Price Regulations: Regulators set annual safety-net prices, such as the Australian Energy Regulator Default Market Offer, based on historical and projected costs, creating a delayed pass-through for consumers.
- Hedging Contracts: Retailers rarely buy power at the volatile wholesale spot price. They use long-term contracts (hedges) to lock in prices. If wholesale prices drop today, retailers may still be locked into higher contracts purchased months or years prior.
- Fixed Network Charges: Getting electricity to your home (polies, wires, and transmission infrastructure) accounts for around 40% of your bill. These ‘poles and wires’ charges are fixed, highly regulated, and frequently rise with inflation.
- Retail Costs & Margins: The remaining balance covers environmental scheme certificates, metering, billing, retailer operating costs, and profit margins.
Independent public policy think tank, the Grattan Institute, recently published an article outlining why electricity prices are currently falling but also explain from their own independent research why they do not apply evenly everywhere at https://grattan.edu.au/news/why-retail-power-prices-are-finally-falling/
At a federal government level there are 3 major market bodies that oversee national electricity and gas markets in Australia.
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- Australian Energy Market Commission (AEMC) is an independent national statutory body with responsibility for making and amending rules under several laws that underpin the National Electricity Market (NEM). Essentially they develop the rules by which the markets must operate.
- Australian Energy Market Operator (AEMO) manages electricity and gas systems and markets across Australia, essentially this is the day-today operations of the markets.
- Australian Energy Regulator (AER) whose role is to ensure energy consumers have access to a reliable and secure market and that they pay no more than necessary for energy to their homes and businesses and monitor performance and compliance with the rules.
The Queensland Government’s control over retail electricity pricing depends on geography. It has direct price-setting authority in regional Queensland, but relies on national regulatory caps and open-market competition in South East Queensland (SEQ). More on this is available at www.qld.gov.au/housing/buying-owning-home/energy-water-home/electricity/electricity-prices/understand-electricity-system
Additionally, the Queensland Competition Authority sets prices in regional Queensland and monitors the operation of the retail electricity market in SEQ. It also enforces the Electricity and Gas Network Codes which outline the rules for retailers and distributors in Queensland. They have some excellent Q&As at www.qca.org.au/project/our-role-electricity/electricity-faqs-2/ covering the basics of electricity prices. More information is also available on the Queensland Government’s electricity tariffs and charges web page.
Further information:
Our earlier post regarding electricity prices and renewable energy is available at www.sandybolton.com/cost-of-living-electricity-prices-and-renewable-energy-update-july-2024/
Federal MP contacts:
Wide Bay – Llew O’Brien MP – llew.obrien.mp@aph.gov.au
Fairfax – Ted O’Brien MP – ted.obrien.mp@aph.gov.au