The Australian Energy Regulator (AER) and the Essential Services Commission (ESC) have recently released their draft determinations for the Default Market Offer (DMO 7) and Victorian Default Offer (VDO) respectively for the 2025-26 period. These draft determinations establish important price safety nets for electricity consumers on standing offers across eastern Australia. This article examines the key features of these draft determinations, their implications for various stakeholders, and the diverse perspectives that have emerged from industry participants, consumer advocates, and government representatives.
Background and Regulatory Framework
The DMO and VDO were introduced in 2019 as price safety nets designed to protect consumers from unjustifiably high electricity prices. The DMO applies in New South Wales, South East Queensland, and South Australia, whereas the VDO operates exclusively in Victoria. Both serve as price caps for standing offer contracts and act as reference prices for market offers, enabling consumers to more easily compare electricity deals across retailers.
The regulatory frameworks governing these price determinations are established by the Competition and Consumer (Industry Code – Electricity Retail) Regulations 2019 for the DMO, while the VDO is established under section 13 of the Electricity Industry Act 2000 (Vic). Both frameworks require the respective regulators to determine prices by assessing the efficient costs of electricity supply while enabling retailers to make reasonable profits. The draft determinations represent the initial step in the annual price-setting process, with final determinations to be published in May 2025 before implementation on 1 July 2025.
Key Features of the 2025-26 Draft Determinations
AER’s Draft Determination for DMO 7
The AER’s draft determination for DMO 7 (2025-26) projects price increases for residential and small business customers. For residential customers, prices are set to increase between 2.5% and 8.9% compared with DMO 6, depending on the region. Small business customers could see rises between 4.2% and 8.2%.
These increases are attributed to higher costs across multiple components of the electricity supply chain. The AER has identified several key factors driving these increases, including higher wholesale market spot prices, network cost increases for most customers, and rising retail costs due to growing expenses reported by retailers.
Despite these cost pressures, the AER has demonstrated some consideration for consumer affordability by not applying a separate competition allowance for retailers in its draft determination. This decision reflects the regulator’s response to the current economic environment and ongoing cost-of-living pressures faced by consumers.
ESC’s Draft Determination for VDO 2025-26
The ESC has released its request for comment paper and is currently in the process of developing its draft determination for the VDO 2025-26, which is scheduled to be published in March 2025. The ESC is reviewing submissions received from stakeholders on its methodology for setting the VDO prices that will apply from 1 July 2025 to 30 June 2026.
Recent information indicates that the ESC has published its draft determination for the 2025-26 VDO. For residential customers, the draft determination proposes price increases across Victoria’s five distribution zones, while small business customers on the VDO would see annual prices increase by between $77 and $128 compared to 2024-25, averaging a 3% increase.
According to the Utility Magazine report, the main factors influencing the proposed price changes for small business customers are higher wholesale and network costs, partially offset by lower environmental costs. The ESC has maintained its commitment to setting prices based on the efficient costs of supplying electricity to Victorian consumers.
Stakeholder Perspectives
Consumer Advocacy Views
Consumer advocacy organisations have expressed concerns about the impact of electricity price increases on vulnerable consumers, particularly in the context of ongoing cost-of-living pressures. The Consumer Action Law Centre has welcomed the ESC’s draft decision but called on the Commission and energy retailers “to do more to help Victorians who are struggling with growing energy debt.”
Consumer Action’s CEO, Stephanie Tonkin, has emphasised the importance of the VDO providing an affordable offer for people who cannot engage in the market during the current cost-of-living crisis, urging the ESC to ensure the 2025-26 VDO is set as low as possible in its final determination in May.
Consumer advocates have consistently highlighted the growing demand for financial counselling services from Victorians struggling with energy hardship, including those in paid employment. This suggests that affordability challenges persist despite the regulatory protections offered by the default offers.
Retailer and Industry Perspectives
Energy retailers have engaged extensively in the consultation process for both the DMO and VDO, with numerous submissions addressing technical aspects of the price determinations. Industry participants have focused particularly on methodologies for calculating wholesale costs, network charges, and ensuring appropriate retail margins are maintained.
In the consultation process for DMO 7, retailers have participated in workshops and one-on-one meetings with the AER to discuss issues raised in the regulator’s issues paper. The AER received 15 written submissions in response to its DMO 7 issues paper released in October 2024. These submissions have informed the draft determination process alongside expert advice from consultants engaged by the regulator.
For the VDO 2025-26 determination, the ESC has sought stakeholder input on several methodological aspects, including the retail operating margin framework and approaches for estimating Victorian Energy Efficiency Certificate (VEEC) prices. The current retail operating margin of 5.3% (reduced from 5.7% in previous determinations) has been a subject of ongoing discussion among stakeholders. A further reduction has been proposed by the ESC in this decision.
Regulatory Perspectives
Both the AER and ESC have emphasised their commitment to striking a balance between protecting consumers from unjustifiably high prices and allowing retailers to recover their efficient costs and make reasonable profits. The AER Chair, Clare Savage, acknowledged that it remained “a challenging time for energy consumers,” particularly those impacted by extreme weather events such as ex-Tropical Cyclone Alfred.
The regulators have also consistently highlighted the importance of consumers shopping around for better deals, noting that more competitive market offers are typically available below the default offer prices. The AER observed that by early February 2025, median market offers had fallen between 2% and 5% compared with July 2024, with the most competitive offers being 19% to 25% below the current DMO price.
Similarly, the ESC Chairperson, Gerard Brody, has described the VDO as an important consumer safeguard that provides “price protections for electricity customers who do not engage with the energy market and acts as a benchmark price to compare market offers against.” Both regulators continue to emphasise the need for consumers to actively engage with the market to secure the best available deals.
Implications for Different Consumer Segments
The draft determinations have varying implications for different consumer segments. For the customers on standing offers, the proposed price increases represent additional cost pressures in an already challenging economic environment. Approximately 13% of Victorian households (337,000) and 20% of small business customers (56,000) are currently on the VDO, with approximately 189,000 customers in embedded networks also subject to VDO price protections.
Both regulators have emphasised that the default offers are not necessarily the cheapest available, with market offers often providing more competitive rates. The AER and ESC continue to encourage consumers to use comparison tools such as Energy Made Easy and Victorian Energy Compare to find better deals.
For vulnerable consumers experiencing payment difficulties, both regulators have emphasised the protection mechanisms available through retailers. ESC Chairperson Gerard Brody advised consumers experiencing trouble paying their energy bills to “speak with your retailer – they must provide help such as payment plans and assistance applying for concessions and utility relief grants.”
Market Dynamics and Emerging Trends
Several market dynamics and trends are evident in the draft determinations. Wholesale electricity costs, which are a significant component of retail prices, have been affected by factors including high demand, coal generator and network outages, and low solar and wind output that drove high price events across DMO regions in 2024. These factors have influenced the price of wholesale electricity contracts for 2025-26.
Network costs, which are controlled by distribution companies and approved by the AER, continue to influence retail prices significantly. Multiple factors have contributed to rising network costs in various regions, including inflation and interest rates leading to higher rates of return for network providers. However, some customer types in South Australia and South East Queensland may see network costs decrease.
Environmental costs and retail operating costs comprise smaller components of the default offer prices but remain important considerations in the overall price determinations. The regulators continue to refine their methodologies for estimating these costs to ensure they accurately reflect the efficient costs faced by retailers.
Consultation Process and Next Steps
Both the AER and ESC have established comprehensive consultation processes for their draft determinations. The AER is accepting written submissions on the draft DMO until April 3, 2025, with a final decision to be published on May 26, 2025. Similarly, consultation on the ESC’s draft decision for the VDO runs until April 11, 2025, with the Commission’s final decision due by May 24, 2025.
Following these consultation periods, both regulators will consider stakeholder feedback, update their cost assessments based on the latest market data, and incorporate the final network tariffs approved by the AER in May 2025. The final determinations will establish the Default Market Offer and Victorian Default Offer prices that will apply for the 2025-26 financial year.
These final determinations will provide a price safety net for electricity consumers across eastern Australia while also serving as reference prices for market offers, enabling consumers to more easily compare electricity deals from different retailers.
Conclusion
The draft determinations for the 2025-26 Default Market Offer and Victorian Default Offer indicate modest price increases for most consumers, reflecting higher wholesale, network, and retail costs. These determinations continue to balance consumer protection with the sustainability of retail electricity markets in a challenging economic environment.
Stakeholder perspectives on the draft determinations vary considerably, with consumer advocates expressing concerns about ongoing affordability issues, retailers focusing on methodological considerations to ensure accurate cost recovery, and regulators emphasising the balance between consumer protection and market sustainability.
The consultation processes now underway provide an opportunity for these diverse stakeholders to contribute to the final determinations, which will ultimately determine the price safety nets for electricity consumers across eastern Australia in the coming financial year. Consumers are advised to actively engage with the competitive market to secure the most favourable electricity prices, while those experiencing payment difficulties are encouraged to access the various assistance mechanisms available through their retailers.
