Energy ministers push for rethink on how regulator sets electricity price benchmark

Federal and state energy ministers have called on the Australian Energy Regulator to “further interrogate” some of the inputs that will inform its final decision on benchmark electricity prices, after the regulator proposed hiking the default market offer (DMO) by up to 9% compared to last year and up to 25% higher than competing retail offers.

The AER – which determines the DMO for New South Wales, South East Queensland and South Australia – on Thursday proposed an increase in 2025-26 prices for residential customers of between 2.5% and 8.9% compared to last year, and by between 4.2% and 8.2% for business.

As Renew Economy noted on Thursday, the annual setting of DMO prices – which caps the price electricity retailers can charge the very small proportion of households (around 9%) and small businesses on standing offers, while also acting as a benchmark for all retail offers – has become one of the most closely watched events on the energy market calendar.

This year’s draft decision – ahead of the federal election and with a final determination due after the election on May 27 – spawned a series of predictably dramatic news headlines across mainstream media, even though the vast majority of consumers are not directly affected by a higher DMO.

Peter Dutton – the leader of the same Coalition party that, when in government in 2022, changed the legislation to push the final determination on the DMO to after the federal election – called for the sacking of federal energy minister Chris Bowen.

But the AER’s proposed hike to the 2025-26 DMO has also reignited calls for a rethink on the methodology the regulator uses to set the prices, as well as concerns that its key function – to protect vulnerable or disengaged customers from paying disproportionately high electricity prices – is no longer being served.

These concerns were also on the agenda for the latest meeting of the Energy and Climate Change Ministerial Council – a mixed bunch of state and territory, Coalition and Labor party ministers that has notably been “on the same page” on the shift to renewables since Bowen stepped into the federal role in 2022.

“Ministers in the Default Market Offer (DMO) regions (New South Wales, South East Queensland and South Australia) acknowledged the cost of living challenges facing households and businesses, and in this context expressed concern at the potential impact of the draft DMO published under the existing regulatory framework,” a communique from the Friday meeting says.

“Ministers encouraged the Australian Energy Regulator (AER) to further interrogate retailer revenues and margins, broader cost pressures across the sector, and to further consider ongoing cost of living pressures in settling the final DMO.”

But the ministers also noted that the Victorian Default Offer – which is determined separately by that state’s Essential Services commission – on this week delivered a draft determination proposing average price increases of less than 1 per cent.

The ministers also noted that the ESC “uses a different methodology” than the AER, to come to what amounts to a markedly less inflated determination.

Questions on the methodology for determining the DMO are not new, particularly from consumer groups concerned that the mechanism meant to prevent hardship and inequity is broken.

“The DMO exists to protect people, particularly those in vulnerable circumstances, from paying disproportionately high electricity prices. It’s not working effectively if it is priced up to 25% above more competitive offers,” the CEO of Energy Consumers Australia, Brendan French, said on Thursday.

In a fresh statement on Friday, the French said the ECA was pleased to see the energy ministers express concern about the potential impact of the draft Default Market Offer (DMO).

“The communique …calls for further consideration of retailer revenues and margins, and cost of living pressures, in the final Default Market Offer determination.

“Anything that can be reasonably done to bring down energy costs, should be done,” French said.

But calls to look closer at retailer revenues and margins are likely to raised concerns with small and consumer energy focused retailers, who are already unhappy that the AER lumps them in with the Big Three gentailers – Origin Energy, EnergyAustralia and AGL Energy – as part of its modelling, considering the vast majority of DMO customers are with the Big Three.

In its draft determination, the AER notes that consumer renewables focused retailer Energy Locals has argued that the regulator’s proposed margins are set too low and recommended expressing the retail margin as a fixed dollar amount, to provide greater certainty on the absolute profitability per customer in the regulated price.

Elsewhere, the energy ministers maintained their focus on optimising consumer energy resources like rooftop solar and home battery storage and firming up other consumer protections.

“Ministers reiterated their commitment to an equitable energy transition for all Australians by agreeing to the National Energy Equity Framework,” the communique says.

“The Framework provides models, tools and guidance for energy policy makers to help ensure equity and hardship are considered in policy and
program development. “This mitigates against future energy policies unintentionally advantaging or disadvantaging different consumer cohorts. Ministers also established a community of practice across governments to guide implementation of the Framework with the involvement of consumer advocates and other key stakeholders.”





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