How Are Energy Prices Set?

by Jeremy

Global energy price trends for businesses and households continue to have an impact on local electric rates. Projections indicate that prices will continue to increase in the short term. The underlying cause of these increases is a host of factors, from demand to production costs to zip code. In Australia, these factors are also different for each state and territory. Responsibility for regulating the electricity industry is shared between the national, state, and territory governments. The Australian Government only has a small direct influence on price outcomes for electric services. Let’s take a look at how energy prices are set.

Price Increases

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In examining the cost of electricity, the good news is that the rate of price increase is expected to slow down in the next few years. Overall, prices for household electric supply are anticipated to increase at an average of three percent over the next year. Outcomes will vary by zip code, with a high of 16% in the Northern Territory and a low of one percent in South Australia. Smaller electricity price increases result from the most recent changes to the regulation of the management of networks and competition in electricity wholesale markets. With natural gas, however, prices are expected to increase significantly in eastern Australia due to the development of new export terminals and tightening supplies. The significance of this impact will depend on how quickly new gas resources are developed.

Factors Contributing to Price

Three components influence a typical energy bill. Wholesale costs cover the price of energy production. Network charges pay for the delivery of energy across power lines. Finally, retail costs pay for meter reading and other services done by the electric supplier. Other factors that can impact energy bills include government-based environmental programs aimed at increasing renewable energy generation. The percentage of each component can vary depending on the zip code and the type of customer.

Utility companies can compete for customers in all regions except Tasmania. All states and territories except Victoria and South Australia regulate electricity prices in some way. Retail prices combine the costs of maintaining and upgrading networks, which regulators largely determine based on set rules. Competitive markets mostly define the wholesale part of an electric plan. While major electricity markets are connected across some state and territory boundaries, state and local factors can heavily impact wholesale prices.

Other recent contributing factors in Australia are also having an impact on prices. From 2019 through early 2020, the country was devastated by bushfires. Called the black summer, this caused damage to infrastructure and had a considerable impact on business. It also led to a tragic loss of lives. Additionally, Australia, along with the rest of the world, has dealt with the COVID-19 pandemic. These events have impacted the energy demand and have ultimately influenced electric providers and energy markets.

Electricity Plans

There are two types of electricity plans that you may be offered. A standing offer or a market offer will determine what rate you will ultimately pay for your energy use. All electricity service providers must have at least one standing offer that includes the prices and standard terms and conditions that apply to all providers. The prices are set by the energy supplier and can only be changed once every six months. Standing offer prices are typically higher than market offer prices. Governmental agencies in several areas have applied a price cap on standing offers. The price cap, set by the Australian Energy Regulator, is the maximum that can be charged for electricity services. On the other hand, a market offer usually includes special discounts or prices that are good for a set period of time. These plans vary greatly between suppliers and can expire or be changed at any time. Most market offers can come cheaper than the price cap, and the set cap does not apply to them.

The price cap is also called a reference price that all suppliers must use to calculate discounts. Simply put, this means that if you are offered a 20% discount from one provider and an alternate supplier offers a 30% discount, both of those discounts can be compared to the same starting point or the reference price. Rate customers can compare electricity plans to shop for the best discounts and lowest price.

Numerous influences impact energy prices. Understanding how plans are structured and how discounts are applied could help you get the lowest price for your energy plan.

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