Electricity Price Increases in Victoria

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The Essential Services Commission (ESC) has released a report on electricity prices (here). The report unsurprisingly found that higher wholesale electricity costs drove recent market offer price increases.

Over the 2021-22 financial year, the median electricity offer in Victoria increased by two per cent for residential customers and one per cent for small business customers. The market offer price trend over this period was broadly U-shaped, but with a sharper increase from January until September 2022.

During the January to September 2022 period, the median electricity offer in Victoria increased by eight per cent for residential customers and six per cent for small business customers. Given the changes that occurred to wholesale pricing in June, we can expect further interesting analysis to arise for the July to December period.

Wholesale costs were of course the main driver of increased retail tariffs. The ESC note that the average wholesale electricity cost in Victoria increasing from $60/MWh for the first three months of 2022 to $240/MWh between April and August 2022.

Small, Medium and Large Retailers

When examining price changes as between small medium and large retailers we see little difference (in figure 1 of the ESC’s report).

The ESC set the Victorian Default Offer (VDO) for the 22/23 year in May 2022 which was prior to the dramatic changes we have seen to wholesale prices. The VDO was set based on a methodology used since 2019, informed by standard hedging practises of retailers- based on an assumption that retailers look to lock in prices for 12 months in advance.

The wholesale market exposure varies on a retailer by retailer basis and there is no uniform approach. The ESC notes that A retailer hedging in a similar way to the default offer assumptions would not be immediately exposed to the full effects of recent increases in wholesale electricity prices, as their purchase costs would largely be locked in for the year. Moreover, a retailer adopting a contract profile like our assumptions for 2022-23 could benefit from net-payments when the contracts are settled.

Smaller retailers continue to play an important role in the market, the ESC note that ‘In contrast, while all retailer size groups are less active below the VDO in terms of offer counts between May and September 2022, small and medium retailers continue to offer the cheapest small business electricity offers.’

Will the VDO increase in line with market changes?

The ESC’s report indicates that there will be no forthcoming ‘reset’ of VDO. They note ‘Accordingly, recent movements in wholesale markets do not necessarily mean the commission needs to reset default offer prices within a regulatory period. Nor do the recent movements in market offers, as set out in this chapter, on their own indicate the default offer needs to be reset.

We have experienced historically low electricity prices, in part thanks to the work of the ESC with the VDO and in part thanks to diversification in the market with new entrants driving down prices. The ESC is concerned to maximise price stability and to provide a safety net for consumers, as they need to do. However, a concern by industry is that the VDO is set based on an overly simplistic (albeit transparent) assumption and that we are likely to see more and more retailers fail resulting in less competition and higher prices for consumers as we exit this chapter of the NEM. The telling period of time will be July to December 2022.

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