Energy prices will rise; but how will it affect you?

The Australian Energy Regulator (AER, the Regulator) has released its final determination of Default Market Offer (DMO) prices for next financial year (1 July 2022 to 31 June 2023). These are reference prices, which means retailers must refer to these prices when they advertise their market contract offers. 

The DMO is also referred to as the reference price or reference rate, and retailers must compare their offers to this price when they advertise their deals. This enables customers to compare one discounted retail rate with another.

The DMO is a price set for a “typical” or example household in South Australia, using 4000 kWh without a controlled load (such as electric hot water), or 4200 kWh plus 1800 kWh for a controlled load (e.g. electric hot water). It operates as a price cap for standing offer contracts.

Most often, energy retailers will compete to show how their market offers are lower than the DMO reference rate.

In South Australia, for a typical household using 4000 kWh per year and with a gas or other non-electric hot water system (no controlled load), the DMO price is $1840. This is an increase of $124 from last year’s (2021-22) DMO price of $1716 (which was, in turn, a decrease of $116 from the previous year’s price).

The price represents an increase of 7.2 percent in raw dollar terms; however, given that inflation is forecast to be 5.5%, the price increase is only 1.7% or $30 in real terms.

For a typical household with electric storage hot water, using 4200 kWh per year plus 1800 kWh of controlled load, the DMO price is $2275, an increase of $198 or 9.5% or, taking the 5.5% inflation into account, a real increase of $84 or 3.8%.

Industry expert and ConnectEd advisor Mike Leane adds;

“Given household incomes are mostly going up at a rate less than inflation, the ‘impact’ they’ll experience will be somewhere between the real $30 and nominal $124 increases for those using 4,000 kWh pa.”

What has caused the price spike?

The prices have been raised due a number of factors;

  • some large ageing coal generators in the eastern states breaking down, plus interruption to coal supplies due to flooding,
  • higher gas prices increase the cost of the non-renewable generation (~40% of total) in SA, and
  • higher transmission (+1.4%) network costs.

As a result of the very high prices and generators appearing to withhold their generation capacity from the National Electricity Market, the Australian Energy Market Operator suspended the market for about a week in June 2022.  They lifted the suspension around the June 24 when a significant number of coal fired generators came back on-line and the amount of reserve capacity in the market returned to acceptable levels.

We are all seeing the daily updates and news stories about the gas supplies for Australian markets being limited due to offshore sales commitments. The Russian invasion of Ukraine has pushed up the price of gas in the international market, meaning gas producers are exporting as much as possible, which creates pressure on the domestic market.

In South Australia, 62,198 residential customers (7.8%) remain on the standing offer at DMO prices. Some of these customers are unable to find another supply contract due to poor credit history; some are unaware that their market contract has expired; some have never chosen a market contract since the introduction of retail competition. 

The Regulator expects that customers will continue to be rewarded for shopping around to find a market contract that is considerably cheaper than the DMO price. As of May 2022, the median market offer in SA is 16% below the DMO, and the lowest offer is 30% below the DMO price.

A risk for market competition and consumer driven deals

The large increase in wholesale prices has had a ripple effect on the competition landscape for energy retailers in Australia. In the past two weeks a few small retailers have made the bold decision to tell their customer base to go ‘somewhere else’ for a better energy deal.

They are all firms that have entered the market in recent years to compete with Origin, AGL and Energy Australia. These smaller retailers are essentially resellers who buy from the wholesale market. They play a vital role in bringing competition and innovation to the market and are reflective of the consumers need for more choice, better pricing and a social or environmental agenda. 

It is not yet clear how much the larger retailers in South Australia (AGL, Origin and Simply Energy) will increase their retail prices by, as they often have forward contracts that reduce the immediate impact of wholesale energy prices increases.

Future proof your energy bill

Here at ConnectEd we are supportive of the tried and tested methods in managing your energy bill and preventing risk of energy hardship.

Shop around
Visit Energy Made Easy to find the cheapest deal for your household.

Apply for energy concessions
Follow this link to apply for Household Concessions, including Energy Concessions, in one online form. Energy Concessions give you a $233.60 annual reduction, applied to your energy bills before you receive them.

Energy plan for concession holders
For those who are eligible for the Energy Concession (above), the Origin SA concession energy discount offer contract offers 21% discount off the DMO, which is applied to both daily and energy usage (kWh) charges, plus a range of other benefits including no late payment or card fees, no paper bill or exit fees. 

Budget for bills
Look at your most recent bill. What is the daily cost? Multiply this by 14 (days a fortnight) and set aside this amount of money each pay for your bill.
i.e. $5.14 (per day) X 14 days = $71.96 a fortnight
This can go in a separate account that your bills are direct debited from, or you can set it up as a regular transfer directly to your energy retailer via internet banking.

Know where your energy goes
Visit the ConnectEd website and learn about saving energy and water in your home.

This pie chart shows the breakdown of energy use in a typical Australian home. The biggest piece of the pie is heating and cooling. Tackling your heating and cooling will have a much greater impact on the size of your energy bills than, say, working hard to reduce stand-by power or turning of light switches. Heating water is the next biggest piece, and if you have an electric hot water storage system of 125 litres or more, you are entitled to the off-peak controlled load tariff – roughly half the price of the peak tariff.

Of course, every Australian home is different, and many factors will determine the make-up of this pie for each household.

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