ACCC Report: Prices, Profits, and Margins in the Supply of Electricity in the NEM

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The Australian Competition and Consumer Commission (ACCC) has published its sixth report as part of its inquiry into the prices, profits and margins in the supply of electricity in the National Electricity Market (NEM). 

The report has made a number of findings including that electricity costs are now the lowest they have been in eight years with the average annual residential spend now $1,434.00, down $128.00 or 8% over the previous two financial years.  Lower wholesale spot market prices have started to flow through to consumers and this, according to the ACCC, is the primary cause of decreases in overall costs across the last two financial years.

The ACCC expects a further reduction in the wholesale costs in the next year. The ACCC considers that the introduction of the default market offer and the Victorian default offer in July 2019 were significant contributing factors in reducing retail margins.  Finally, environmental costs have increased across the last two financial years driven by increasing costs of the small-scale renewable energy scheme.

The average annual residential bill for 2020 to 2021 was $1,434.00. Of this 45% was attributable to network costs, 32% to wholesale, 10% to environmental, 10% to retail costs, and 3% to retail margin.  Greater retail margin was found to be realised in the sale of electricity to small business customers at 5% versus 1% to large businesses on an average tariff of 15.1 cents per kilowatt hour.  As noted above, this has recently been driven by recent falls in previously high wholesale electricity costs but also by the gradual decline in network costs. 

The ACCC notes that despite these reductions, electricity costs are still much higher than they were over a decade ago.  In 2007 to 2008, the average cost per unit of electricity supply to residential customers was 20.4 c per kilowatt hour (adjusted for inflation).  The average today is 32% higher than this.  The experience of business customers largely reflects that of residential customers.  Over the previous two years, the average cost per unit of electricity supplied fell by 10% to 26.2 c per kilowatt hour for small business customers and by 12% to 15.1 c per kilowatt hour for large business customers.  Wholesale electricity costs make up half of the average cost of supplying large business customers, compared to 1/3 for residential and small business customers.  Consequently, the fall in wholesale costs has had a more significant impact for large business customers than for residential and small business customers.

The ACCC expects that the flow through of the reduction in wholesale electricity costs to consumer bills will continue.  The ACCC, in their report ,has highlighted the Prohibiting Energy Market Misconduct Act 2020 (PEMM Act).  The Act gives the ACCC significant powers to ensure that sustained cost reductions are passed through to consumers.  The ACCC notes, in their report, that the decrease in wholesale spot market prices is larger than the decrease in electricity wholesale costs observed so far, therefore, they expect further reductions.  Retailers commonly enter to hedging contracts over several years to manage volatility in wholesale spot market prices and this, the ACCC notes, creates a time lag between when the spot market price changes and when retailers passed through that change on to consumers.

The ACCC notes that the margin achieved by electricity retailers has continued to decrease and that this reflects a multi-year trend of gradual reductions in retail costs and margins.  This pattern has been observed across most regions for both residential and business customers.  The reduction in retail margin has resulted from a number of factors.  The ACCC considers that the most significant factor was the introduction of the default market offer and the Victorian default offer from 1 July 2019.  Furthermore, payments made by small retailers to third parties who facilitate the sale of products and services have fallen dramatically and COVID-19 has restricted activity such as door-to-door selling.  The ACCC notes that the number of active retail brands has increased and there are signs of decreasing market concentration with smaller retailers growing their customer base.  Greater competition places downward pressure on both retail costs and margins.

Finally, the ACCC notes that environmental costs have increased in the last two financial years continuing another multi-year trend.  Increases in costs for the small-scale renewable energy scheme, reflecting the unprecedented uptake of the rooftop solar was the main cause of the recent overall increase.  The small-scale renewable energy scheme runs this through to 2030.

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